Baha Mar—Too Big to Fail or to Succeed

by Larry Smith

The Baha Mar resort has been in the works so long that it is easy to forget the way we felt about this massive development at different points along its ponderous trajectory.

The 1,000-acre project was announced in November 2005 -  almost a decade ago - as “the largest single-phase development in Caribbean history”. The initial investment was put at $1.6 billion, but it has more than doubled since then.

The original opening was set for 2010, but five years later it has still not opened. Financing and construction delays keep pushing an opening further and further into the unknowable future.

The story goes way back to the 1990s, when Perry Christie was the lawyer for American investor Phil Ruffin. Christie helped Ruffin buy up a large portion of Cable Beach, including the Nassau Beach and Crystal Palace hotels. In the early 2000s, when Christie became prime minister for the first time, he persuaded Ruffin to sell out to new investors headed by Lyford Cay financier Sarkis Izmirlian.

As Izmirlian said in a television interview several years ago, “I saw a real opportunity to create something special here. Cable Beach had a lot of potential, but it needed a big vision to create a great destination which would complement Atlantis and be big enough to compete against places like Orlando."

So in April 2005, Izmirlian's newly formed Baha Mar Development Company acquired three aging hotels on the Cable Beach strip with a $200 million loan from the Bank of Nova Scotia. The venerable Nassau Beach was subsequently closed, while the Crystal Palace and Cable Beach Hotels were renovated and re-branded.

That same year Izmirlian reached agreement with the Christie administration on a $1 billion-plus development, including several hotels, a casino, retail village, convention centre, expanded golf course, and beach and pool amenities. 

 

Side letters to the agreement included deferred taxes, a $20 million contribution from the Ministry of Tourism, and a commitment to upgrade Nassau's airport and other infrastructure. There was also an agreement to transfer hundreds of acres of public land worth an estimated $150 million.

However, the developers proved unable to raise $400 million in capital, show evidence of further financing, produce detailed plans, or attract world class partners by the agreement's stated deadline of October 2006. The great “visionary” project stalled, and appeared doomed.

With an election approaching, Christie scrambled to save it. And by early 2007 Baha Mar had been reformulated as a joint venture with Harrah's Entertainment of Las Vegas. The planned capital spend had risen to $2.6 billion (along with more than a quarter billion dollars in government concessions), and promoters were once again hailing the project as unprecedented in scope and character.

But despite "vigorous negotiations" a deal could not be finalised before the May 2007 general election. After the political dust had settled, Christie was replaced as prime minister by Hubert Ingraham, who launched an immediate project review. 

Although the new government eventually decided to abide by the 2005 terms, Baha Mar wanted further negotiations, and by February 2008 Ingraham unveiled a supplemental agreement that trimmed some of the concessions given three years earlier. But skepticism about the project’s viability lingered.

"There is high expectation by the Bahamian public about the Baha Mar project," Ingraham acknowledged in March, 2008. "We will do all we can to facilitate it, but I do not want to oversell it."

March 2009 was the new deadline for a final deal. But long before that could happen, Harrah’s got cold feet, due to the global economic meltdown, and pulled out of the partnership - putting the whole project in jeopardy again. 

As financial consultant Richard Coulson put it at the time: "You could pin it on Perry, who dilly-dallied too long. Or on Hubert, who shot his mouth off. Or the U.S. recession – tight money and fewer tourists everywhere. Or the private buy-out of Harrah’s, when the new owners loaded the company with a mountain of debt. Or the usual fate of a minnow like Baha Mar swimming with a shark like Harrah’s."

Whatever the cause, this ’too big to fail' project was on the ropes again - in a very uncertain economic climate. Unable to obtain regular financing in the capital markets, Baha Mar turned to the cash-rich Chinese government to save the day.

After a suspenseful interval, China's Export-Import Bank agreed to arrange $2.5 billion in financing, and Beijing's state-owned construction corporation was recruited to build the resort, which would now feature six hotels and add 3,500 hotel rooms and condos to the country's inventory of 15,000.

Ingraham jetted off to China to firm up the details, and - putting political differences aside - parliament unanimously approved the revised project. But the deal included thousands of work permits for Chinese construction workers, which led to much public resentment, as well as complaints from Sol Kerzner’s Atlantis Resort that more favourable terms had been given to Baha Mar.

"Among the many requirements that the government imposed (on us) was a strict rule that at least 70 per cent of the total construction labour force would be Bahamian. However, this new (Baha Mar) deal will constitute a complete reversal of (that) standard," Kerzner said angrily. 

The question of whether the Bahamas’ existing infrastructure could accommodate thousands of new hotel rooms opening at the same time was another issue presented by Atlantis.

These disagreements eventually subsided, and Baha Mar officials broke ground on Cable Beach in February 2011. Money began flowing, subcontractors were hired, and the resort launched a high-profile employee recruitment and training programme. A much-heralded opening was planned for late 2014, and the future looked bright.

So the resort’s publicists began working overtime. Baha Mar had now become "the largest single-phase resort development in the western hemisphere”, and a powerful driver of the Bahamian economy. "Once the $3.5 billion integrated gaming resort is up and running, it is expected to account for 12.8 per cent of Bahamian annual GDP,” the resort’s website said.

New Providence residents suffered through years of traffic disruption as a multi-million-dollar, island-wide roadworks programme went ahead at the same time as the Baha Mar construction - which included an unprecedented diversion of West Bay Street and the demolition of several government buildings - including the prime minister’s office. But the resort’s publicists kept up the momentum, and the new hotel towers rising from Cable Beach convinced most people that Baha Mar would soon be a reality.

But last year - as the planned opening date approached - things began to sour again. In April, the Morgans Hotel Group, which had signed a 20-year hotel management deal, terminated its agreement. And in July, disgruntled Chinese workers marched on the Chinese Embassy to protest working conditions and claims they had not been paid in six months. Baha Mar officials said it was a matter for China State Construction.

Then, in August, the resort delayed its opening - from December 2014 to March of this year - and top executives began circling the wagons. Despite the $400 million redevelopment of Nassau’s airport, international experts began questioning whether the new rooms at Baha Mar would be supported by a comparable increase in the number of airline seats.

As the time came for the resort’s soft opening in March, Baha Mar officials began back-pedalling: “We relied in good faith on the representations of the resort’s construction manager and lead contractor,” a statement said. ”Subsequently, it has become clear that the contractor has not completed the work with an attention to detail consistent with Baha Mar standards of excellence.”

There were rumours of safety codes not being met, and local contractors began complaining about payment delays. Although the opening remained set for the first week of May, it was eventually called off, and guest bookings were summarily cancelled, causing much negative comment on travel websites. As one site put it: "It’s another month, another delay for the $3.5 billion Baha Mar mega-resort project."

Izmirlian began a sort of shuttle diplomacy between the Bahamas and China, without divulging any details on his talks. Earlier, he had complained about “unfulfilled promises” from the Christie administration - especially in the reliable supply and cost of power. He also began downplaying the resort's impact; warning that the development "in and of itself cannot solve the ills of this country.”

Amidst all of this, Perry Christie - who claimed to have initiated the project and who is counting on the jobs it will provide to save his political skin - has maintained an uncharacteristically low profile. In his 2013 budget address Christie said Baha Mar would “usher in a new dimension in Bahamian and regional tourism and is expected to provide 8,000 permanent jobs and 430,000 stopover visitors."

But since the cancellation of the resort’s May opening, Christie has had little to say other than that the government is concerned about the effect the delay will have on the 2,000 Bahamians already employed there. The prime minister says assuringly that he has spoken to the parties involved and expects a resolution.

Recently, the Wall Street Journal wrote that China wanted to use Baha Mar as a "showpiece to drum up more business in the region and in the US for its construction industry. Longer term, it hopes to establish a reputation as a purveyor of luxury resorts to burnish its cachet and economic clout...A black eye here could make it harder for the world's second-largest economy to win contracts in other markets where it hopes to gain a foothold."

So the developer, the contractor, the financier and the government are all facing a huge blow if things don’t work out. At Baha Mar, executives are in a state of lockdown and no information is reaching the press. It seems that the project is either too big to fail or too big to succeed, but either way, no-one can suggest a resolution to the current impasse.

Comments

[Pierre]

Another...Coral Harbour...Such huge devlopments have no place in the Bahamas. It ruins ecology and arr sources of energy/ water/ transports problems.This is just a total absurdity( guess why..$$$$$)
Meanwhile,Cuba is opening...
Why all this just for the benefit of some investor$$$$$ I sincerely hope they will lose a lot of money!

[William]

The sheer number of big and small development projects that get into trouble in the Bahamas appear to indicate that the government lacks the technical expertise to sort out the speculators, fantasists, charlatans, and other hopefuls who lack the experience, skills, and financial backing to have a high chance of doing what they say that they will do.
This may well be an inherent problem of a small country where not all the many facets of government can be adequately capable because of budgetary limitations. However, considering the national importance of these development projects maybe this is an area that needs to be beefed up at the cost of less critical departments. The lack of sufficient, competent technocrats to evaluate and oversee development projects inevitably means that the politicians have to take the strain with equally inevitable results.

[keith Scanlon]

Sad, yet another bit of USA bad taste, overdone, oversized & making the place look like other distasteful resorts that go up in the world. A shame, Nassau in the 70's was gentle tasteful architecture without the 'show - off ' syndrome. I ABSOLUTELY AGREE WITH PIERRE but greed rules the world & the poor will get more desperate.

[Linda J Thomson]

I certainly do not want anyone to lose a lot of money - as Pierre commented. I think all Bahamains want it to succeed, except Pierre. But it is scary at this time. Thank you Larry for keeping us posted as well as can be.

[Patrick H Thomson]

Sad as said and it Does appear the Bahamas Government lacks the ability to organize a project of this size. The Chinese may have lots of money but if you do not understand how they operate you get "taken". I think neither Christie nor Izmirlian understand the Chinese and it seems from Larry's article that they were a last ditch attempt to save the project. I hope Christie has figured into the equation whether the Bahamas infrastructure and transport system can cope with the hoped increase in tourists otherwise the Bahamas will get more egg on its face and the tourist industry will be given another blow - Cuba here we come. Does anyone other than the people trying to get jobs really care about the future of the Bahamas as all the Politicians do is posture and fight In the Assembly. Larry keep them on their toes somehow and I do feel sorry for the Izmirlians- great article.

[Rochelle]

It seemed illogical to place a project of that magnitude in Nassau from the onset. I believe the project would have been successful had it been branded as an opportunity to develop another island, create jobs but shift the attention from an already crime infested capital.

[Joe]

http://www.economist.com/node/18586448

I'll just leave this right here...

[Ivy]

I agree with Rochelle; this development should have been on Grand Bahama. I never could understand why the tiny island of New Providence should have both Atlantis and Baha Mar.