Over the last six years government has published a slew of reports analysing the potential pros and cons of a cruise berthing facility in George Town harbour. Cayman Compass business editor Michael Klein waded through the documents to provide a comprehensive analysis of the available data about the case for and against the piers.
Trying to conduct a cost-benefit analysis of the proposed cruise berthing facility is a thankless task. Even PwC, who produced the Outline Business Case for the new piers in George Town harbour, stated that the lack of reliable data was making precise predictions difficult.
In their various analyses, the consultants looked at the expected economic benefit of the cruise piers after factoring in the economic damage which the construction would cause to the reef in George Town harbour and the businesses that depend on it.
In their first addendum to the Outline Business Case, the consultants assessed the economic impact of the cruise berthing facility for a period of 20 years after construction and compared it with the alternative scenario of maintaining the port as it is.
The economic justification for the project is that with cruise berthing piers more passengers would visit the Cayman Islands in the long term and spend more money in the local economy, leading to more growth and the creation of new jobs.
Cruise lines have indicated that they would still come to Grand Cayman, even if no dock is built, but in the long run with fewer, smaller ships they say there would be fewer passengers. Larger ships with higher-spending passengers, the cruise operators say, have so far shunned Cayman because of the cumbersome tendering process.
The economic analysis takes both scenarios into account.
The arguments against the cruise dock are that its construction would cause business interruption, eliminate certain existing marine services, such as tendering, and destroy a section of the reef that some businesses depend on. This comes in addition to concerns about wider environmental damage and the preservation of the reef as a natural habitat for future generations.
Neither viewpoint can be dismissed offhand: A section of the reef will undoubtedly be destroyed and certain cruise tender jobs will be made redundant, whereas an investment into the port infrastructure will have a beneficial economic effect. The question is: Which argument outweighs the other?
To answer the question, the PwC consultants first had to make basic assumptions about the economic impacts and then use available data to assign a comparable total dollar value to each scenario.
Assumptions x Data = $$$
The basic assumptions made to determine the economic benefit of the dock are as follows:
After construction of the cruise piers, passenger numbers in the Cayman Islands would grow by 1% annually, whereas they would fall 1% each year without the facilities.
Because it is easier to disembark using a pier rather than tender boats, 92% of passengers would leave the ship in Cayman compared with 90% currently. The share of crew members who disembark in Cayman would rise even more significantly – from 37% to 44%.
Another assumption is that of this increasing number of passengers who go ashore in Cayman, a larger share – 65% – would participate in the tours that are offered on island compared with 54% today without a cruise berthing facility. This is in part due to the faster embarkation and disembarkation times, which would result in more time spent on island.
In short, the economic case for the cruise berthing facility is that more passengers would arrive, more tourists and crew would disembark in Cayman, and all who go ashore would, on average, spend more time and money on island.
Direct economic impact is negative
According to the PwC analysis, there are four types of economic impact the cruise berthing facility would generate: the direct impact of the construction itself; the purchasing of goods and services of companies involved in the construction or operation of the dock (indirect impact); the amount of money spent by the employees of these businesses in the local economy (induced impact); and additional money spent by tourists (wider impact).
The first important observation is that, when comparing the direct economic impact of the construction and operation of the cruise berthing facility with maintaining the status quo of tendering cruise passengers, the analysis concluded a net loss of $67 million over the 20-year life of the project.
This is mainly because the loss of the tendering business, even at reduced passenger numbers, is greater than the direct benefit of operating the cruise berthing facility, if it were to be built.
In an interview with the Cayman Compass, the tender boat operators stated unequivocally that whatever remained in terms of third-party tendering after the construction of a cruise berthing facility would not be enough to support the business. The approximately 50 employees, most of them Caymanians, would ultimately lose their jobs.
Wider economic impact is positive
The combined indirect and induced impacts of $11 million over 20 years, concluded by the analysis, are tiny compared with the wider economic benefit of tourist spending, which would add $242 million over the life of the project.
The study determined that the volume of passengers is by far the most important factor for the wider economic impact, followed by more time and money spent ashore and the higher assumed disembarkation rate for passengers and crew.
“The incremental economic benefit of the [cruise berthing facility] is estimated to be an increase in value added of $245 million when expressed in [net present value] terms over the lifetime of the investment (20 years post construction),” the economic impact assessment concluded.
Arriving at a dollar value for each scenario may give the erroneous impression that it is possible to determine the exact economic impact. It is not.
For instance, according to the study, extra tax revenue for government would contribute almost a quarter, $59 million, to the $245 million net benefit.
But this information is no longer accurate. The higher tax revenue in the economic impact study is based on a head tax of $11.25 charged in both scenarios. Under the financing plan for the cruise berthing facility, government would contribute US$2.32 per passenger to the project, making extra tax revenue unlikely.
In fact, the financing period has to be extended to 25 years, from 20 years used in the economic impact study, to recoup the initial head tax loss through higher passenger arrivals in the future.
This means the $59 million tax benefit should be excluded from the analysis, leaving a net benefit of gross value added to the economy of $186 million in 20 years.
Environmental damage is certain but impact unclear
Another cost that is not included in the initial economic impact study is the cost to the environment.
After an environmental impact assessment highlighted the economic cost to water sports businesses that rely on the section of the reef that is going to be destroyed, PwC was asked by government to update its analysis.
The reefs in George Town harbour are accessible from the shore and popular for diving and snorkelling, as well as boat and submersible tours. The loss of these activities in George Town will have a negative economic effect but to what extent is not clear.
PwC noted that the environmental impact assessment suffered from significant uncertainties and unreliable assumptions, because neither the number of divers and snorkellers in George Town nor their average spend is known.
Ultimately the consultants arrived at an environmental cost in terms of gross economic value added, rather than money spent which would be higher, of between -$42 million and -$327 million over the life of the 20-year project.
In combination with the base case of the economic impact study this means the net economic impact of the cruise berthing facility was estimated to range from a $203 million benefit to a $72 million loss.
As a reminder, this base case compares a 1% annual passenger increase with a 1% passenger decline. It also includes a $59 million tax benefit that no longer applies and would have to be eliminated from the calculation. This results in an economic impact ranging anywhere from a $144 million benefit to a loss of $131 million.
In their conclusion, the analysts wrote: “If the rate of growth of cruise passengers increases to 3% per annum with the cruise berthing facility, then the economic benefits would more than outweigh the economic impact of the loss of the reef. However, the poor quality of the data currently available means that this upside scenario should not be relied upon for the overall assessment of the costs and benefits of the cruise berthing facility.”
As such the current data which underpin the economic and environmental impacts “are inconclusive and do not provide the basis for drawing a definitive conclusion about whether or not to proceed with the cruise berthing facility”, the consultants said.
New assumptions about assumptions and new data
Naturally, that was not the outcome that anyone wanted to hear.
Armed with new, “more up-to-date” data on cruise passenger spending and onshore visits from a report commissioned by the Ministry of Tourism in 2015, the consultants added a supplement to the analysis on the economic impact study and made new assumptions about the underlying assumptions.
The analysis by consulting firm BREA, which also carries out the cruise passenger spending analysis on behalf of the Florida Caribbean Cruise Association, revised passenger numbers for the Cayman Islands.
It found that the 1.61 million passengers visiting Cayman in 2014 was lower than the figure used in the outline business case (1.82 million). The average amount spent by each passenger meanwhile was 23% higher than in the baseline scenario.
If these spending figures are considered, PwC said, “the estimated economic benefits of the cruise berthing facility now exceed the environmental costs associated with the damage to the reef”.
It should be noted, however, that the spending figures cited by BREA for 2014/15 and used by PwC to update the results – $115.60 per passenger compared with $93.70 used previously – are higher than the most recent spending estimates. In 2018, BREA’s cruise destination report noted the spending figure per passenger in Cayman was $105.17, more than $10 less than in the updated wider impact figures. (See chart)
The report states that Cayman trails the other jurisdictions in passenger growth, average spending per passenger and average time spent ashore and lays the blame for each squarely at the lack of a cruise berthing facility.
Between 2009 and 2014, the number of cruise passengers increased only 6% in Cayman compared with 32% in the US Virgin Islands, 53% in Cozumel and 65% in St. Maarten.
The BREA report notes that the average time spent by each passenger in Cayman of four hours is lower than in the other three destinations where passengers spend between 4.32 and 4.77 hours on shore.
It states that this time difference was “consistent with the time it takes to tender back and forth between the ship and the tender pier under the best of conditions”.
It also finds that the average passenger spends $115.60 in Cayman, lower than in the other three destinations, where spending ranges from $119.89 (Cozumel) to $191.26 (St. Maarten).
The analysis then concludes “the data on the attributes of cruise passenger visits and expenditures clearly show that the lack of a berthing pier in Grand Cayman has had several negative impacts”.
There is, however, no “clear” connection at all between this data and a lack of a cruise berthing facility.
First off, since 2014, cruise passenger numbers increased 37% in Cayman without a cruise berthing facility. In St. Maarten, on the other hand, cruise numbers peaked in 2014. The destination suffered a decline of 16.6% by 2016, even before Hurricane Irma hit in 2017.
The report does also not contain an analysis of the average time cruise ships spend in each of the four ports. Port schedules show that in November of this year, cruise ships spent between 1.3 hours and 1.66 hours less in port in Cayman than in the other destinations.
These figures are much more likely to explain the differences in average time spent ashore than the time it takes to tender.
The situation around average customer spending is even more complex. The latest BREA figures from 2017/18 show that the higher passenger spend in St. Maarten than in Cayman comes almost exclusively from the sales of perfumes, cosmetics and jewellery, which also make up significantly more than half of all purchases. Spending on tours which are expected to benefit under the economic impact base case scenario is already higher in Cayman.
While it is conceivable that 35 more minutes spent ashore on average are a small factor contributing to higher average spend, it is difficult to see that in the comparison with St. Maarten it would be more significant than other factors such as choice and, most importantly, price which were not analysed.
Still the BREA report claims that by simply constructing berthing piers the average cruise passenger spending could rise by 15% to 74% over the baseline.
If this is factored into the calculations, PwC said, the economic benefits of the cruise berthing facility would be rising sharply. A 15% increase in passenger spend would increase the total economic impact to about $749 million while a 74% increase would push the total economic impact to around $2,105 million.
But the consultants also highlighted the limitations of the BREA analysis as it does not take into account “how cruise passengers would change their spending in response to the cruise berthing facility’s impact on the reef” or “the potential effects on non-cruise visitors to the Cayman Islands”.
For these reasons the assumptions on boosted passenger spending were disregarded.
The question how many cruise passengers Cayman can absorb, while maintaining an enjoyable holiday experience for all tourists, is partially addressed by setting a maximum of 2.3 million cruise passengers per year in the original economic impact study. Government has since argued that this limit should effectively be 2.5 million.
Small changes in these underlying assumptions and data have a significant effect on overall economic impact, especially when assumptions about passenger growth and spending behaviour are layered on top of each other.
When comparing the effects of the cruise berthing facility and its long-term economic impact, it is important to note that the negative factors are certain and immediate, whereas the positive impact is hypothetical and would only take effect in the future.
The expansion of the port is going to destroy a section of the reef, tender boat operations are going to be out of business with a direct negative economic effect recognised by the economic impact study and government is going to receive US$2.32 less head tax per passenger under the financing plan.
In the long term, the assumption is that more passengers are going to come to Cayman and on average spend more time and money on island. Over time this could indeed outweigh the negative impact. Under certain conditions it could potentially outweigh it by a lot. The fact that this economic effect is only theoretical does not mean it is invalid or even unlikely.
But it is worth remembering that there is a risk that the underlying assumptions about cruise passenger growth or decline and spending behaviour, as well as the underlying data, could turn out to be wrong.