Too big to fail – Baha Mar

Hardly aday passes without a new twist in the increasingly tense and acrimonious legal battleover the unfinished US$3.5 billion Baha Mar resort on New Providence in the Bahamas.

Not onlydo the effects of the recent decisionby the developers to seek bankruptcy protection for the resort continue tospread locally, with far-reaching implications for employment and the resort’slocal and international creditors; but it also now touches Government, thecourts, national sovereignty, domestic politics, and potentially, investor andtourism confidence, and the Bahamas relations with China.

So enveloping and complex has the issue become that the implications of projects on a scaleso large as to dwarf or skew a national economy, deserves widerreflection.

In theBahamas there are four main protagonists: Baha Mar and its CEO,Sarkis Izmirlian; the Export-Import Bank of China (CEXIM) which is financingthe resort; China Construction Americas (CCA)and its state-linked parent The China State Construction EngineeringCorporation (CHEC); and the Government of the Bahamas.

Thebasic story is that after growing delaysrelated to the completion and opening of the resort, the developers filedfor Chapter 11 bankruptcy protection in Delaware in order they said, to be ableto complete construction and open as soon as practical. At a around the same time Baha Mar filed a separatesuit under English law against the resort’s principal contractor seeking morethan US$192m in damages and interest to compensate for delays, allegedsubstandard work and for remediation. CHEC was listed as the defendant.

In the US the court agreed to the Chapter 11 applicationand Baha Mar then sought an order in the Bahamian courts recognising theruling. However, the Bahamas government challenged this notingthat it would have serious and far-reaching implications for Bahamiansovereignty, and the Bahamian court denied Baha Mar’s application forrecognition of its Chapter 11 bankruptcy proceedings.

Separately, the Chinese company and the bank sought tohave the US court dismiss the bankruptcy case arguing that it belonged in thecourts of the Bahamas.

Then ina further twist following the failure of discussions in Beijing involving all ofthe interested parties, the Bahamas Prime minister, Perry Christie, said thatthe country’s Attorney General would begin liquidation proceedings to ensurethe resort is completed.

Consequentlyon July 31 the Bahamian government asked the islands’ Supreme Court to bring thecompany’s affairs under the control of the Bahamian courts and appoint aliquidator to restructure, complete and then open theresort. However, the matter was adjourned to August 19 in the hope that negotiations betweenthe developer and the bank can resolve the issue.

Unfortunately since then there have been a number of potentially explosivedevelopments.

Following the court adjournment Baha Mar issued astatement that said that ‘the Government’s entire application is misguided andwithout merit, and the whole process is abusive, oppressive and undertaken inbad faith’. Then, in apart of what was a largely balanced and personal interview with a local radio station, Star106.5 FM, Baha Mar’s Chief Executive was highly critical of the advicethe Prime Minister was receiving; the quality of the work being done by theChinese contractor; and about comments reportedly made by the provisionalliquidator. Mr Izmirlian also said: “I don’t think it’s my place to comment on what otherinvestors may think or may say. The future will dictate how they feel about theactions of the government and I think the voters of the Bahamas will decide howthey feel about the actions of the government of the Bahamas and that’s up tothem to decide”.

Theresponse was direct. The islands’ Ministerof Foreign Affairs and Immigration, Fred Mitchell, quoted in thelocal media, said that Mr Izmirlian’s criticism was“offensive, improper and incompatible with the status of someone who is not aBahamian” and did not “conform with the mores of the conduct of those who areeconomic guests in our country”.

Since then, Baha Mar has given legalnotice that it wished to question the Chinese partners on “all communications”between themselves and the Government since the Chapter 11 bankruptcyprotection case was filed in the US on June 29.

It is nowhard to imagine that any of this is going to end well.

While thematter is essentially a commercial one for the courts, the failure to find aresolution though mediation, and the now unpredictable consequences containsmessages that go far beyond what is an important national project for theBahamas.

What isparticularly apparent is that although projects of this size involving externalinvestors and lending on a huge scale have the potential to change the fortunesof small nations, they become too big to fail. As with the situation with the internationalinvestment banks in 2007, if things go wrong and the exposure is disproportionateto that of the local economy, the fallout has the potential to seriously damageany country.

In afirst demonstration of this the international credit rating agency Standard& Poor’s has said that as a result of Baha Mar’s decision to file forbankruptcy, it is placing the long-term and short-term foreign and localcurrency sovereign credit ratings for The Bahamas on CreditWatch.

Secondly,projects of this magnitude require a huge degree of continuity and trustbetween governments, developers and contractors and a recognition that failurewill result in economic and reputational damage to all parties. At a time whenthe Bahamas is the regional destination most likely to be impacted by theopening of Cuba to US visitors, it cannot afford to see damaged the strong destinationimage Baha Mar was intended to promote.

Fourthly,this was the biggest construction project outside China for CHEC. Their experiencewith the project may raise questions about China’s future willingness tofinance huge projects in the Caribbean.

And fifthlythere is an implicit warning in what has happened that in small countries commercialdisputes about big projects can rapidly have much larger national economic and politicalramifications. It highlights too, the case for governments in theirunderstandable desire to accelerate economic growth and create employment, to takegreater notice of local concerns about the impact huge investments pose for localdecision making, and for the environment

Ultimatelythese are all matters to be determined between the protagonists, but the issuesspeak about the need to resolve the contradiction between the regionsheightened sense of sovereignty the requirements of huge investors, and theneed for growth; and how to relate this to China’s important regional role.

DavidJessop is a consultant to the Caribbean Council and can be contacted at

david.jessop@caribbean-council.org

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