Sandals Revisited

Government’s apparent generosity to Sandals in the form of special concessions comes at a time when Government is hard pressed to reverse the trend of declining revenues and to drastically reduce spending. The concessions package takes the form of a surrender of significant future revenue flows in exchange for benefits that are not easy to […]

By Charles Skeete

December 10, 2013

Government’s apparent generosity to Sandals in the form of special concessions comes at a time when Government is hard pressed to reverse the trend of declining revenues and to drastically reduce spending. The concessions package takes the form of a surrender of significant future revenue flows in exchange for benefits that are not easy to quantify. It is little wonder then that the concessions package is the subject of debate, inquiry and criticism.

Detailed treatment of the concessions package will not be undertaken here since it has been published and has been the subject of a number of articles in the press regarding its precedent setting characteristics. What is attempted here is an attempt to identify costs and benefits in a more coherent way than is described in Government press releases, and to briefly describe why the roll out of the results of the negotiations with Sandals does not comply with best practices in the use of fiscal incentives.

I recognize that the granting of concessions to investors to influence decisions on where to locate their enterprises is practiced in countries large and small, rich and poor. Like all policies that confer unequal benefits on a sub-set of members of a wider group, the grant of special concessions is often criticized as unfair to those members of the group who have been excluded from favorable treatment.   This is especially true where concessions take the form of fiscal incentives – that is, tax incentives that confer an advantage on the beneficiary, while imposing a cost on the government and, therefore, on tax payers in general.

In spite of a number of thoughtful articles on the subject, the full details of the Sandals saga remain elusive. This is due in large part to the failure of Government to publish the two Memoranda of Understanding signed with Sandals, and the failure of Sandals to reveal either the purchase price of Couples Resort, or the extent and nature of its commitment to purchase Almond Beach.

So far, neither the pronouncements of the authorities, nor of Sandals, yield a clear and unequivocal picture of costs and benefits. For example, what is the approximate figure of the Sandals “investment”? As far as I can tell, very little of the Sandals “investment” is likely to show up in the capital account of the Barbados balance of payments any time soon. To justify this conclusion, let us examine the known benefits item by item.

One property, Sandals Barbados (formerly Casuarina/Couples Resort), was purchased for an undisclosed sum that is estimated in Barbados and Jamaican press releases at around BDS$100 million. According to a press release dated October 29, 2013, “A programme of enhancements will be launched in order to ‘Sandalise’ the property immediately.” No estimate of the costs of these enhancements was given. Since the property was bought as a going concern, it is safe to assume that no significant capital outlays are involved. And yet, Sandals Barbados enjoys the same concessions as those granted to Sandals Beach where the Minister of Tourism says outlays by Sandals could reach BDS$500 million.

The other property (Sandals Beach/Almond Beach) will be operated by Sandals with an option to purchase after refurbishment/construction by the Barbados Government. Both the refurbishment and eventual construction of a brand new hotel will be undertaken with tax payers’ money in the first instance. What is more, there is no evidence that the concessions package is conditional on a firm commitment by Sandals to “invest” a sum of any amount in addition to the purchase price of Sandals Resort.

In a Press Release published on November 14, 2013, the BHTA sated the following:

“It is interesting to note that to date SRI (Sandals Resort International) has only invested Bds$100M to purchase Casuarina Resort. The Bds$500M that is required to purchase and develop ABV (Almond Beach Village) is technically money that is being sourced by government and ultimately is the taxpayers of Barbados that will be paying for this development initially and not SRI. We are cognisant that there is an option for SRI to buy but initially the cost will be held by Barbadians.”

In his statement to Parliament on October 18, 2013, the Minister of Tourism stated as follows:

“The purchase and development of Sandals Beaches will require expenditure in excess of BDS$500 million. We are in discussion with the Government of the People’s Republic of China for the provision of concessional funding for this project. Every effort is being made to structure this financing in a way that minimizes the impact on our debt-to-GDP ratio.”

At what point will Sandals be required to purchase ABV (now Sandals Beach), if at all? And why would the government of China lend us money on concessional terms (below the going market rate for such loans) to build a luxury hotel to be operated by a firm with the marketing and financial clout of Sandals? In other words, what is in it for the Chinese? Unless they are altruistic to a fault, there has to be something in it for them. The concessions to Sandals are therefore only part of the costs this deal will impose on the public pursue and on the economy of Barbados.

The benefits to be derived from this as yet largely unrealized investment have been described by the Minister of Tourism as: (1) an amount in excess of BDS$100 million annually for the purchase of goods and services; (2) an additional 130,000 additional visitors that would protect the airlift into Barbados and reduce the millions spent by Government to support airlines now flying into the country; and (4) Sandals use of its marketing might to promote its two properties in Barbados.

Of course, we know nothing about the reliability or accuracy of the information used to arrive at these estimates of the contributions to the Barbados economy. We know even less about what leverage Government will have in ensuring that Sandals maximizes the use of local rather than imported goods and services. Also, to what extent will the concessions to Sandals divert tourist expenditures to Sandals at the expense of other hoteliers – especially those who are hurt by the grant of special concessions to Sandals? If they do, expectations regarding reduced expenditures for protecting airlift can be forgotten.

I find it difficult to avoid the conclusion that the roll out of the Sandals package of incentives violates many of the tenets of fiscal incentives best practices; chief among these are transparency and accountability.

Tax incentives are by definition discriminatory; they create inequities by favoring some taxpayers over others. As far as transparency goes, I recognize that the elements of the tax concessions package are known. The picture is muddied by the appearance that Sandals does not qualify under the announced criterion, and by the failure of Government and Sandals to be unequivocal about the investment commitment of the latter. Regarding accountability, we know nothing about the extent to which Sandals can be sanctioned if it fails to live up to its part of the bargain. Tax payers need to hear more on these questions before they can be laid to rest.

Charles Skeete

Charles Skeete is the former Executive Director and Senior Advisor, Plans and Programs, Inter-American Development Bank.

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