The combined Private Finance
Initiative Oversight Committee/Big Four Committee recommended to Cabinet last
week that the under-construction Government Office Accommodation Project be
sold quickly and then leased back.
After a meeting with government in
which it recommended the action on 13 April, the Committee provided an analysis
in writing outlining the various options for the new office building. The Caymanian Compass has obtained a copy of
that report, as well as another report of the committee dated 13 April.
The PFI/Big Four committee consists
of Nick Freeland as chairman, and members Carson Ebanks, Michael Ryan and
Canover Watson. The Big Four part of the
Committee consists of the senior partners of ‘big four’ accounting firms PricewaterhouseCoopers,
Ernst & Young, Deloitte and KPMG, namely Mr. Freeland, Dan Scott, Ian Wight
and Roy McTaggart.
Last week’s Committee report stated
there were three potential options for the office project: namely retention;
sale and leaseback; and sale with a lease to purchase.
Besides injecting much needed cash
into the government coffers, the sale and lease back would allow the government
to take the asset and its liabilities off the balance sheet. Removing the borrowings related to the office
project from the balance sheet would help bring the government into compliance
with the borrowing ratios prescribed by the Public Management and Finance Law.
Once in line with that law, the government could borrow more to finish other
capital projects, like the two stalled high schools.
The report stated that retaining
the office building, which is being built next to the Glass House in George
Town, would cost the government US$115 in construction, fit-out and debt
The lease to purchase option would
cost the government $242 million in lease and principle payments over a 15-year
“As both retention and lease to purchase leave
borrowing ratios the same, then if government wishes to retain the asset, it
does not seem beneficial to pursue any other option except retention,” the
Because government would not have interest
and capital repayments in a sale and lease back, it would only accumulate
US$5.4 million in net costs over the next 15 years after subtracting the lease
payments from the sales price.
The committee pointed out the
consequences of retaining the office building, and even suggested the
completion might have to be delayed if government chooses that option.
“Since GOAP is an asset of
government’s that was created through the borrowing of additional debt, should
government choose to retain it, then consequent debt will also be retained,”
the report stated. “As borrowing is required to create and retain the asset,
and current debt load is already too high to be sustainable, it would be
logical, if the asset is to be retained, to move the additional borrowing to
some later time when public finances might be in a position to support [it].”
Despite its recommending the office
project be sold, the committee did not find the sale and lease back to be a
panacea for the Cayman Islands budget woes.
“The short-term cash from the sale
lease back is, in reality, another form of borrowing and would only delay the
necessary budget adjustments needed to bring balance to the country’s finances,
possibly to a time when there is not the necessary political will to do what is
Still, the Committee saw little
“It is the intention of government
to restore balance and sustainability to public finances and to return to the
sustainable borrowing ratios set out in our current laws and regulations,” the
report stated. “To do so, the overall debt burden must be reduced. There are
not many options to achieve this and GOAP is one of the key opportunities…”
The report also pointed out that
the lower the debt burden, the lower the government’s cost of doing business.
“The lower the cost of doing
business, the more business that gets done; the more business that gets done,
the more revenue for government; the more revenue for government, the more
services and opportunities that can be offered to the people of the Cayman
The Committee recommended a
specific buyer for the project, namely a closed-end segregated portfolio
company that would be formed by local investors that could include individuals,
companies and even the local pension funds.
The concept would be to sell
100,000 to 110,000 shares in the company at US$1,000 each. Shares would be
listed and traded on the Cayman Islands Stock Exchange, with possible secondary
listings on other regional Caribbean exchanges.
The Committee’s report stated that
the lease payments would generate an approximate net return to the SPC of 6.2
The report recommended the segregated
portfolio company be Cayman owned and administered to provide the maximum
amount of Caymanian participation.
The suggested company form could
also be used to make future property acquisitions.
The SPC would engage private sector
facilities management, which would be another cost savings for government when
compared to the retention option. The Committee’s 13 April report stated that
using the private sector “know-how and efficiencies is integral to the
rationale for the sale and leaseback of the GOAP.”
The Committee’s report also
recommended the office project be sold with the option to purchase it back at
the end of a 15-year lease period.
Central to that idea are certain
restrictions on the accounting treatment necessary for moving the office
project off balance sheet. To meet Generally
Accepted Accounting Principles, for the lease liability to be off balance sheet,
it has to be considered an operating lease, as opposed to a finance lease.
With a finance lease, the
government would hold all the risks and rewards of ownership. It would also be considered a finance lease
if the option to purchase is at a price that is expected to be sufficiently
lower than fair value at the date the option becomes exercisable.
There are also several other
specific criteria that determine a finance lease, but the Committee believes
the option to purchase can be done in a way to avoid that classification.
“Based on the indicative financial
analysis conducted, and given the likely [useful economic life] of the GOAP in
excess of 50 years, the likelihood is that the sale and leaseback over a
15-year term to a SPC would qualify as an operating lease rather than a finance
lease and, as such, any lease liabilities in relation to the [building] would
not be treated as government debt.”
The Committee did point out,
however, that any government options to repurchase the building or to renew at
the end of the lease term must be based on an independently assessed market
value purchase or lease price.
“Similarly, the initial sale of the
GOAP must also be based on an independently assessed market value.”