Background

In this hypothetical scenario, you are the Chief Executive Officer (CEO), of a company, Island Ports Limited. Your business, is a global business, with shipping ports in all of the major English speaking Caribbean countries. On January 7, 2020, you signed a Heads of Agreement with the Government of The Bahamas to invest $120 million during the Phase I to develop a cruise port on the island of New Providence. As you can appreciate, the signing and the commitment of your shareholders to this project, preceded any information available to your company and its shareholders with respect to the potential impact of the coronavirus, i.e. COVID-19.

Concessions granted to Island Ports (hypothetical scenario)

The following were the concessions granted to Island Ports during the signing of the Heads of Agreement:

i.A twenty (20) year tax holidays in relation to the payment of any real property tax for this project. Island Ports, Chief Financial Officer, has estimated that the tax forgiveness by the Government of The Bahamas is equivalent to $1.01 million annually.

ii.A ten (10) year tax waiver on the payment of Value Added Tax on all goods imported for the construction of the ports, goods sold to the public, once the port is operational and all related materials used within the confines of the port. The CFO estimates that the gain to Island Ports as a result of this tax concession, is conservatively estimated at $5.4 million annually.

iii.A ten (10) year waiver of import duties on all inputs needed in the construction of the port. The CFO has estimated that this import tax waiver amounts to $10 million annually during the first three (3) years of the project and on average $2 million annually for the ensuing seven (7) years.

iv.A land grant of ten (10) acres for the construction of the port. This is land that is owned by the Government of The Bahamas and will be given to Island Ports for a nominal price of $10. The land has a market value of $15.5 million.

Commitments from Island Ports to the Government and People of The Bahamas

In light of the concessions granted to Island Ports as listed above, the company has committed the following to the Government and people of The Bahamas:

i.Five hundred (500) direct jobs during the Phase I construction of the port. During the initial signing of the Heads of Agreement, in January, 2020, there was a commitment for the construction to start September, 2021, with the first phase completed May, 2022.

ii.Phase I of the project was estimated to cost $60 million. The entire sum, i.e. $60 million needed for the construction of this phase, will be sourced from external investors. These investors had pledged the financing prior to the COVID-19 pandemic.

iii.Some local ownership by offering shares to the general public. The public is expected to have a 40% stake in the project. It is estimated that this 40% stake will provide a net benefit to the domestic economy of $40 million over the next 5-7 years.

iv.By way of the added economic activity created as a result of Island Ports, the government is expected to get an added $15 million in revenues in head tax revenues from cruise passengers to the new port. This additional $15 million in revenues is predicated on the port being operational August 1, 2022, which means that construction must begin September, 2021.

The following is the outlook for The Bahamas, based on baseline data (as at 2019) taken from the Central Bank Quarterly Digest at www.centralbankbahamas.com and projections for 2020 based on these baseline numbers [Hint: You may also wish to update these numbers to reflect numbers for 2021]:

Table I: Key Metrics for The Bahamas

Key Metrics

As at 2019 (Pre COVID-19)

Impact - Projected 2020

National Debt as at December, 2019 ($mils.)

$8,749

$10,413

Debt in Foreign Currency ($mils.)

$2,618

$4,282

Foreign Reserves as at Feb., 2020 ($mils.)

$2,001

$900

Gross Domestic Product (2019) ($mils.)

$12,900

$10,900

National Debt as % of GDP

67.8%

95.5%

Tourism Expenditure as at 2019 ($mils.)*

$2,817

$1,665

Unemployment as at November, 2019

11.0%

24.8%

Government GFS Deficit ($mils.)[1]

($377.6)

($1,664)

The tourism expenditure of $1.665 billion does not take into account seasonal adjustments/variations, which may result in even a lower level of receipts from tourism.

Just by way of some background on the Chief Executive Officer (CEO) of Island Ports. As CEO of Island Ports, you have over twenty years of experience advising CEOs and Board Directors of a number of companies managing port facilities globally, on strategic decisions. In addition to your experience as an advisor on strategy, you are accomplished academically. You were a graduate of the University of The Bahamas and later pursued your Masters at Yale in Analytics and Strategy. Needless to say, there is high expectations from your office, in helping the company, Island Ports on the way forward.

Decision

The Board of Directors based on the advice that it has received from its Chief Executive Officer, Mr. Dale Brown has decided to postpone the construction of the port to September, 2022. The Government of The Bahamas following the decision of Island Porta has now made the decision to reverse its course in relation to the crown grant of the land for $10, but now has decided to force the company to pay the market price of $15 million for the land. The Government of The Bahamas has also decided to claw back the Value Added Tax waiver, you would recall that amounted to $5.4 million annually.

The Company in deciding to postpone the construction of the port was not taken lightly, albeit, the Government of The Bahamas is not sympathetic to the company's position at thus time. There is a pending election and the jobs created with have provided an added boost to the domestic economy.

The Company's decision was predicated on the following:

i.Inability to source the materials to start the construction by September 2021. As a result of the pandemic and the string demand in Europe, the United States and other developed countries, it is difficult sourcing the raw materials needed for the construction. Delays in shipping are as much as six (6) months, jeopardizing the start date of September, 2021.

ii.Construction materials have gone up by as much as 25% for 2021, ad is not expected to decrease fir the next nine (9) months, we are now at the end of March, 2021. This increase in material costs would have added another $18 million to the cost, including shipping and other logistics, if the Company decided to look at alternative or circumvent the process fort sourcing the material, i.e. going through an intermediary in the United States, rather than going directly to the manufacturers and suppliers. This additional $18 million would have to be absorbed by the Company.

iii.The wariness of investors at thus time. The original investors are now a bit jittery and a lot have pulled out and asked for refunds in light of COJVID-19 and the potential impact for the tourism industry. The Company needs the added time to find replacement investors as well.

QUESTIONS:

In light of the new development(s), you are asked to decide on the following:

i.Should Island Ports still move ahead with the project with a revised start date of second quarter, 2022, i.e. May, 2022? Bearing in mind that moving forward with the proposed timeline, the Government of The Bahamas has remained steadfast on taking back the concessions. Also, stopping the project would require refunds in whole and or in part to the investors.

ii.If a decision is made to go forward, how can the project remain viable? Explore and discuss some of the options available to the Company.

iii.If a decision is made to terminate the project, explore and discuss the ramifications for the Company and the domestic economy of taking this part. Bearing in mind that your primary objective is the impact on the Company.

iv.From the perspective of the Government of The Bahamas, is this an appropriate course of action, i.e. withdrawing some of the concessions previously granted, in light of the failed attempt to get started as agreed, September 2021, with the construction of the Port.

v.What are your recommendations from the perspective of (a) Island Ports;(b) the Government of The Bahamas; and (c) the shareholders of the Company in light of this new development.

vi.Any other thoughts.