From America, a warning over port deals turned sour
Empty and abandoned cruise terminals, gated ports that marginalize local businesses, struggling Caribbean islands counting the cost of lost tourist revenues: Hard luck stories of port deals turned sour span the Atlantic from the United States to Antigua.
In Houston, Texas, in Mobile, Alabama, and across the water in Falmouth, Jamaica, doubts have quickly emerged about the wisdom of building expensive new facilities, with well-meaning politicians finding themselves on the wrong side of deals they assumed would bring riches to their communities.
Today, two established cruise industry critics – both expert witnesses at U.S. Congressional hearings on regulating the industry – warn Cayman Islands’ politicians they must tread carefully to avoid a similar fate.
In crafting a business case soliciting partners to build two new piers in George Town, the Cayman Islands government has seemed eager to avoid many of the pitfalls that have plagued other port deals.
By targeting a public/private partnership that involves a cruise line investing between US$100 million and US$200 million up front, the government hopes to avoid the struggles of Houston and Mobile, where taxpayers footed the bill for piers that have hardly been used.
By insisting on a port that involves no shore-side retail development and retaining Port Authority control of the facility, the Cayman Islands government hopes to prevent local businesses from being shut out – a common complaint in Falmouth.
Tourism Minister Moses Kirkconnell said Cayman’s location and its reputation as a sophisticated, low-crime destination makes it an attractive location for cruise travel. He believes a deal involving cruise lines paying for the piers will be possible without compromising Caymanian business interests. “We do hold some cards here,” he added.
A favorable deal for Cayman is possible, but far from inevitable, even with the safeguards built in to the business case, say experts who reviewed the proposed business plan for Cayman at the request of the Caymanian Compass. Jim Walker, a Miami-based maritime lawyer and founder of the website Cruise Law News, said there are numerous cautionary tales of U.S. states and Caribbean countries that had expected an economic stimulus and found a white elephant.
“There seems to be a lot of assumptions in the business case. They are saying the worst scenario is to do nothing. Those ports all found that doing something was worse than doing nothing,” he said.
Ross Klein, the author of four books on the cruise industry and founder of Cruise Junkie website, said there is “no reliable basis” for the business case’s key assumption that the Cayman Islands will see a 1 percent loss in tourist numbers every year if it does not build new berthing facilities and a similar increase in passengers if it does build.
“The report did not factor in regional factors that will likely impact cruise numbers more than whether it is a fixed pier or tenders,” he said.
“Cuba is a major issue and should be a major concern. Will they go to George Town when they can go to Cayo Largo? That is the elephant in the room that is not being considered,” he added.
Mr. Klein also cautioned that the statistics used to make a case for new facilities, including figures on how much cruise passengers spend on shore, often came from the cruise lines themselves.
“Sadly, most ports depend on the cruise industry itself for intelligence about the economics of cruise tourism. They don’t recognize that the cruise corporation has self interest in what they choose to share and what they don’t choose to share,” he said.
Simon Conway, the PWC consultant who presented the business case for the Cayman piers at a public meeting in November, appeared to acknowledge this, accepting that cruise lines had not shared statistics on how many passengers actually get off the boat in George Town.
Mr. Walker said what was being proposed in Cayman had some merit in comparison to port deals in the U.S., where city planners had built terminals “on a wish and a prayer.”
In those cases, ports were built without any contractual commitment or financial involvement from the industry.
Houston’s Bayport Cruise Terminal, built in 2009 at a cost of US$108 million, had to wait until earlier this month for the first ship to sail from the terminal. Officials in Alabama were left “shocked” and “bewildered”, according to news reports in the U.S., when Carnival Cruise Lines pulled out of the city in 2011, leaving it with no direct revenue to pay the millions of dollars in debt remaining on the terminal.
Jimmy Lyons, chief executive officer of the Alabama State Port Authority, told the Compass that what was being proposed in Cayman was a better formula, with the level of up-front investment from the cruise industry being an incentive to keep coming to the island.
Mr. Klein is not so sure. He cautions that cruise industry heavyweights, whose annual turnover typically dwarfs the GDP of the small island nations they deal with, tend to get the better of any contract.
“Negotiations are not entered as equals – the cruise corporation is dominant and the port is reverent and normally forced to make concessions in response to threats that ‘we’ll go somewhere else if you don’t do what we want.’”
He said the devil would be in the details of the contract, and Cayman would be wise to protect itself by insisting on such measures as potentially including a net minimum annual income or a bond to cover gaps between targets and reality. He said Cayman should not be afraid to walk away from the table if the deal became too one-sided.
At public meetings held last month, several business owners raised concerns that they were already missing out as the cruise lines directed tourists to the lines’ commission-paying partners.
Mr. Walker said this was a big issue in Jamaica, where relatively few local traders had profited from the building of the Falmouth port.
“They have built a wall around the Falmouth port. They have a few approved vendors inside and on the other side of the wall the people are in a state of crisis.”
Mr. Klein said ports do not necessarily need their own shore-side retail development to control shopping patterns in port destinations.
And he cautioned that the business model proposed in Cayman lacked a clear revenue stream that would do anything more than cover the cost over a lengthy period, meaning the cruise line would seek other sources of income beyond port fees, “likely at the expense of local businesses.”
He said shopping incentive schemes, where stores paid commission to have tourists in their stores, charging for vendors or taxi operators to be on the dock and increasing commissions on tours booked aboard the ship, were common methods.
Tourism Minister Kirkconnell said the business case had been carefully prepared to prevent a one-sided deal. He said the Port Authority would retain control of the dock, including the licensing of vendors, taxi drivers and tour operators. And he believes the lack of shore-side retail will prevent a Falmouth-type situation from developing.
He said around 70 percent of cruise tourists arriving in Cayman currently book tours directly with operators in Cayman, avoiding the issue of hefty commissions. He said the relatively low crime rate and sophistication of Cayman as a destination mean that people were happy to do that, rather than book on board the ship.
He added that Cuba opening up may hurt destinations in the eastern Caribbean but would probably benefit Cayman by giving the crui
se lines more diverse itinerary options.
“Our geographic location, close to Cuba and close to Falmouth, makes us an ideal destination for stopovers on either route,” he said.
Roger Frizzell, of Carnival Corp., said: “We have a strong track record of creating real economic value to cities throughout the world. Two weeks ago, for instance, the state of Florida issued an official report on the cruise industry that reiterated the value of the cruise industry to the state’s economy. The same is true of our efforts around the globe.”