Port head taxes, berthing fees would fund dock

To view the full special report from the Cayman Compass on the cruise dock debate, visit the Compass Data Desk. 

Construction costs of the $150 million cruise piers could be funded by a cruise line or consortium of cruise lines and repaid through passenger fees over 20 years.

The exact financial model, and who covers the up-front costs, will be determined through a competitive bidding process if the project is given the green light. But under the preferred options for a public-private partnership, already outlined, involvement from cruise lines, either through direct funding or the provision of passenger guarantees, is a key element.

“The cruise lines have to be involved on some level as they are the ones that can guarantee throughput,” Tourism Minister Moses Kirkconnell told the Compass.

In other islands, piers built by cruise lines have included retail developments to help offset costs. The PPM campaigned in its manifesto for the 2013 election on a promise of piers in George Town without any associated upland development that would compete with local retailers.

Mr. Kirkconnell said government was reluctant to discuss the details of how that could be achieved with the information gathering process on the economic and environmental impacts of the dock still under way.

He said they would be guided, if the project gets to that stage, by the outline business case, which was produced by PwC in 2013 and is being refined in the wake of the environmental impact assessment.

The business case outlined a preferred model of partnering with a cruise line or consortium of cruise lines to build the dock – currently estimated to cost around $150 million.

It states, “a cruise line or consortium of cruise lines could sign a long-term agreement (say 20 years) with the Cayman Islands Government to design, build and control the two piers.

“The proponent would pay for all works and would keep all berthage fees. Government would take back the piers at the end of the agreement. Throughout the operating period the Port Authority would provide the operating services, but the proponent would control the commercial elements, such as scheduling of berths.”

The report puts forward alternative variations on that theme, but the basis of the deal would be for construction costs to be refunded through a mixture of berthing fees (equivalent to the fees currently paid to tender operators) of around $5 per passenger, and a share of the $14 “head tax” collected by the Port Authority on every cruise passenger that comes through the terminal.

“In order to make the partnership viable, government would need to, as a minimum, contribute a portion of future head tax revenues. The cruise lines would therefore be greatly motivated to maximize the use of the piers to better profit from their investment,” it states.

Based on an estimate of 2 million cruise passengers per year, paying $19 each to use the port, the partnership could expect to pull in $38 million per year in direct revenue.

How that is split between government and its partners would have to be determined during the bid process.

The report outlined a best-case scenario where passenger numbers increase to such an extent that government was able to pay off construction costs and retain significant income from the port. It speculates that government would actually get higher revenue from the port through this method than if it did not build new piers and passenger numbers, and hence Port Authority income, dwindled.

Those estimates are based on the assumption that cruise numbers would increase to 2 million or higher with a dock, and decrease to a floor of 1 million without one.

Johann Moxam, immediate past president of the of the Cayman Islands Chamber of Commerce, said it was clear that significant amounts of current Port Authority revenue would have to be diverted to pay for the construction.

“On the matter of actual costs and value for money – it is almost impossible to comment on the affordability of this project when we don’t really know what the port will cost or what model is going to be used to procure it.

“If we are committed to build two piers at once and we expect a third party consortium to procure it, then we can count on diverting the Port Authority revenue to the project financing and we may even need to supplement the Port Authority revenue source with other types [of] government revenue in the future.”

The feasibility of the proposed funding method would be contingent on the level of interest from cruise lines, or a private sector partner that could guarantee passenger commitments from the cruise lines.

Following the publication of the business case, Senior Vice President and Chief Communications Officer for Carnival Corporation Roger Frizzell told the Cayman Compass that it was “very rare” for cruise lines to be involved in port developments without a retail element.

He described the concept of a “pier only” development as difficult, though he agreed that a share of the passenger head tax might make it a more acceptable proposition.

Mr. Frizzell did not rule out the prospect of the company getting involved in the Cayman project, but he said onshore retail was the favored structure to make piers, like the ones proposed in Cayman, financially viable.

“Traditionally, most ports around the world have a retail element to help make it financially viable,” he told the Compass at the time.

He added that the head tax payments could possibly get around that concern, saying, “there could be ways to make an attractive agreement.”

Howard Finlason, managing director of Royal Construction Ltd., which was the local partner with Florida-based construction firm GLF on a previous, aborted proposal for cruise berthing in George Town, believes the proposed funding formula could work.

He said an average of two million passengers per year would provide enough income to pay off the construction costs and still collect around $500 million in government revenue over a 25-year repayment period.

Once the construction costs are paid off, he said, it would be a money spinner for the country for several decades, contributing up to a billion dollars in revenue over the second 25-year period.

To view the full special report from the Cayman Compass on the cruise dock debate, visit the Compass Data Desk.