Too big to fail- Baha Mar

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

Not only do the effects of the recent decision by the developers to seek bankruptcy protection for the resort continue to spread locally, with far-reaching implications for employment and the resort's local and international creditors; but it also now touches Government, the courts, national sovereignty, domestic politics, and potentially, investor and tourism confidence, and the Bahamas relations with China.

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

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

The basic story is that after growing delays related to the completion and opening of the resort, the developers filed for Chapter 11 bankruptcy protection in Delaware in order they said, to be able to complete construction and open as soon as practical. At a around the same time Baha Mar filed a separate suit under English law against the resort's principal contractor seeking more than US$192m in damages and interest to compensate for delays, alleged substandard work and for remediation. CHEC was listed as the defendant.

In the US the court agreed to the Chapter 11 application and Baha Mar then sought an order in the Bahamian courts recognising the ruling. However, the Bahamas government challenged this noting that it would have serious and far-reaching implications for Bahamian sovereignty, and the Bahamian court denied Baha Mar's application for recognition of its Chapter 11 bankruptcy proceedings.

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

Then in a further twist following the failure of discussions in Beijing involving all of the interested parties, the Bahamas Prime minister, Perry Christie, said that the country's Attorney General would begin liquidation proceedings to ensure the resort is completed.

Consequently on July 31 the Bahamian government asked the islands' Supreme Court to bring the company's affairs under the control of the Bahamian courts and appoint a liquidator to restructure, complete and then open the resort. However, the matter was adjourned to August 19 in the hope that negotiations between the developer and the bank can resolve the issue.

Unfortunately since then there have been a number of potentially explosive developments.

Following the court adjournment Baha Mar issued a statement that said that 'the Government's entire application is misguided and without merit, and the whole process is abusive, oppressive and undertaken in bad faith'. Then, in a part of what was a largely balanced and personal interview with a local radio station, Star 106.5 FM, Baha Mar's Chief Executive was highly critical of the advice the Prime Minister was receiving; the quality of the work being done by the Chinese contractor; and about comments reportedly made by the provisional liquidator. Mr Izmirlian also said: "I don't think it's my place to comment on what other investors may think or may say. The future will dictate how they feel about the actions of the government and I think the voters of the Bahamas will decide how they feel about the actions of the government of the Bahamas and that's up to them to decide".

The response was direct. The islands' Minister of Foreign Affairs and Immigration, Fred Mitchell, quoted in the local media, said that Mr Izmirlian's criticism was "offensive, improper and incompatible with the status of someone who is not a Bahamian" and did not "conform with the mores of the conduct of those who are economic guests in our country".

Since then, Baha Mar has given legal notice that it wished to question the Chinese partners on "all communications" between themselves and the Government since the Chapter 11 bankruptcy protection case was filed in the US on June 29.

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

While the matter is essentially a commercial one for the courts, the failure to find a resolution though mediation, and the now unpredictable consequences contains messages that go far beyond what is an important national project for the Bahamas.

What is particularly apparent is that although projects of this size involving external investors and lending on a huge scale have the potential to change the fortunes of small nations, they become too big to fail. As with the situation with the international investment banks in 2007, if things go wrong and the exposure is disproportionate to that of the local economy, the fallout has the potential to seriously damage any country.

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

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

Fourthly, this was the biggest construction project outside China for CHEC. Their experience with the project may raise questions about China's future willingness to finance huge projects in the Caribbean.

And fifthly there is an implicit warning in what has happened that in small countries commercial disputes about big projects can rapidly have much larger national economic and political ramifications. It highlights too, the case for governments in their understandable desire to accelerate economic growth and create employment, to take greater notice of local concerns about the impact huge investments pose for local decision making, and for the environment

Ultimately these are all matters to be determined between the protagonists, but the issues speak about the need to resolve the contradiction between the regions heightened sense of sovereignty the requirements of huge investors, and the need for growth; and how to relate this to China's important regional role.

David Jessop is a consultant to the Caribbean Council and can be contacted at david.jessop@caribbean-council.org Previous columns can be found at www. caribbean-council.org August 6th, 2015