Richards explains airport deal rationale
Competitive tendering would not work in the bid to build a new airport, Bob Richards said yesterday.
Mr Richards, the Minister of Finance, said that putting out a tender to design and build the new airport would mean an estimated $575 million in extra debt — and hit the island's credit rating.
And he added that a competitive tender to design, build, finance, operate and maintain a new airport would lead to substantial government investment to back the project as well as guarantees.
Mr Richards was speaking as the Government prepared to release documents which will form part of the submission to the UK government on the proposed tie-up with the Canadian Government, its Crown Commercial Corporation and construction firm Aecon to develop a replacement for the airport.
The papers — expected to be available on the government website last night — said that a simple design and build tender for a new airport, estimated to cost $514 million in 2008, would raise government debt.
It added: “With inflation adjustments and engineering refinements we assume that the Government of Bermuda would need to borrow $575 million to finance the construction of the new terminal.”
The report said that would weaken the island's credit profile, which could trigger a ratings downgrade, which would increase the cost of Bermuda's borrowing, which already stands at $2.4 billion.
Mr Richards added that the DBFOM (design, build, finance, operate and maintain) option — which would require a tender — would, like the preferred government-to-government deal with CCC, be an off-balance sheet option which would not impact government debt.
But he said it would not be “a made-to-measure solution” and would probably be based on previous studies that forecast a $0.5 billion cost, with bids of around $460 million to $489 million likely.
He explained: “Therefore, the Bermuda Government would have likely had to chip in with extra money to make up the difference. We don't have the passenger traffic to support that price.
“Air traffic has been declining for 30 years, although we're trying to reverse that trend. This was a problem with that particular option.”
The report said: “This option was not considered to be viable as the Government of Bermuda would likely need to provide capital in the form of a substantial completion payment to ensure a financially viable project and successful competitive tender.
“This, combined with onerous guarantees, would also likely impair the Government of Bermuda's sovereign credit rating and therefore its cost of borrowing.”
And the report pointed out: “Internationally, over the last 30 years, there has not been any successful DBFOM tenders for airports with traffic less than one million passengers — like Bermuda's.”
Mr Richards said the preferred CCC route was similar to the DBFOM model — but with crucial differences.
He added: “First of all, it's a bespoke solution, a made-to-measure solution. We have CCC who are guaranteeing delivery on time, on budget and on specification, which is a large risk reduction.”
Mr Richards said that could come with the DBFOM option.
But he added: “We would never get the guarantee of quality we do with the Canadian government. It's a much less expensive product and also reduces the construction risk and we get something we can afford.
And Mr Richards said: “We've heard a lot of complaints about this entity running our airport for 30 years.
“When you have a situation where it's completely off balance sheet, where somebody else other than the Government is responsible for paying back that loan, that somebody is going to want to some control over how the operation goes.
“Our detractors will say we have a public/private partnership at the hospital, where the hospitals board is still operating the facility. The difference between the hospital and the airport is the Bermuda Government is responsible for the debt of the hospital. That debt is on our books.
“With the airport, that would not be. That's why we have to have the operate and maintain part.”
He added that a request for proposal in the normal tender style would cost “tens of millions” to prepare, but with the risk that either there were no qualified bids or no one would bid at all.
Mr Richards said: “This is why we have gone the route we have gone.”
He added: “The airport will continue to belong to Bermuda. The new terminal that will be built will belong to Bermuda. The asset will belong to the people of Bermuda, but there are some people who are not the people of Bermuda who will operate it.”
Mr Richards said that a quango would be formed to police the management of the new terminal and have final say on any proposed increases in fees.
He added that Aecon would be unable to sell its interest in the management company without the quango's permission.
And Mr Richards said: “The Bermuda Government will manage the manager.”
He added that continuing to patch up the existing terminal was not a realistic option.
The report said that 2013 estimates said that near-term repairs would amount to $62.3 million, with a further $104.8 million needed for improvements, as well as ongoing maintenance costs.
Mr Richards said: “It will cost us a fortune and expose Bermuda to risks that are not acceptable. On top of that we will run the risk of having the airport be offline for significant periods.
“The combination of costs and that risk means that it was an unacceptable option. Whether it's a hurricane, flooding or the roof falling in because of termites, it's just not acceptable.”