Behind The Statements: Airport Development

May 26, 2015

[Opinion column written by Larry Burchall]

The Airport Itself

L F Wade International Airport is a small airport. Based on Airport Departure Tax revenues, about 393,944 people passed through in 2012/13, and 383,143 in 2013/14. Could be around 380,000 in 2014/15. These airport user numbers are much lower than the annual 550,000+ of the 1980’s.

The airport is currently handling about a dozen scheduled commercial flights per day.

Statement

The Finance Minister gives the total ‘inward direct investment’ for his proposed construction of a new L F Wade International Airport as $255 million with three to three and half years to completion. [Budget Statement February 2015.]

Behind The Statement

A large part of that $255 million will never reach Bermuda.Here’s why.

  • All new construction requires materials. Depending on design, a new construction project can have 35% – 45% of its costs spent on materials.
  • Bermuda imports 99% of all materials for all new construction projects.
  • Taking 40% as the materials cost for a new $255 million airport, about $100 million will be spent on materials.
  • So $100 million of the $255 million will be spent overseas on steel, rod, cement, lumber, pvc, tiles, windows, fittings, etc…
  • So only $155 million is likely to be spent in Bermuda on management and labour etc….
  • So the ‘inward direct investment’ that Bermuda will actually receive and that will directly impact Bermuda’s economy is $155 million – not $255 million.
  • The other $100 million goes to overseas suppliers and benefits overseas economies.

Statement

The Minister has suggested that as many as 200 jobs will be created.

Behind The Statement

Over three years, as many as 200 different people may find work on an airport project as proposed. However:

  • Not all 200 will be onsite at the same time and not all jobs will last three years.
  • The jobs will come in construction sequence.
  • Jobs could start with as few as 15 – 20 workers on layout, demolitions, and foundation works; then surge to as many as 100 when the proposed project is very near completion.
  • The average number of jobs provided – each year over three years – could be around 60/70.
  • Not all will be Bermudian. The KEMH/PPP experience was that over the life of that project, between 65% and 80% of workers were Bermudian. Not 100%. A new airport project would likely be the same. Of the 60/70 jobs, perhaps only a maximum of 50/55 will go to Bermudians.

Statement

The $155 million total in net ‘inward direct investment’ and the 50/55 Bermudian jobs created in each year will be spread over the three years [three and a half years?] of the proposed project.

Behind The Statement

50/55 new jobs for Bermudians is better than zero jobs for Bermudians. $155 million over three years works out to about $52 million per year for three years [$45 million a year for three and a half years].

  • $52/$45 million a year of new incoming money will not raise Bermuda’s GDP very far. It will have the same kind of impact that the $265 million three year KEMH/PPP project had – and that impact was minimal. GDP kept sliding downwards.

Statement

Once completed, and for the next 30 years, the Airport developer will receive the Airport Departure Tax and all other landing fee and space rental revenues from the Airport. From this, the developer will recover his $255 million plus a profit.

Behind The Statement

The basic trade-off is three years of additional jobs plus $155 million ‘direct inward investment’ for thirty years of revenue.

  • The developer will extract an annual profit from the Airport’s revenue stream.
  • The developer will determine how fast the overall investment of $255 million [of which Bermuda only receives $155 million] is recovered.
  • Bermuda is surrendering or swapping a long term thirty year total of around $900 million [or more] for a short term bundle with $155 million of investment and 165 jobs for Bermudians – spread over three years.

Summary If The Airport Project Proceeds As The Minister Proposes

  • Bermuda will receive $155 million in ‘direct inward investment’. This will come at the rate of $52 – $45 million a year for three to three and a half years.
  • The developer will recover an overall investment of $255 million – plus a profit.
  • Bermudians can anticipate 50/55 new and additional jobs per year for three to three and a half years
  • Bermuda will surrender thirty years of Airport Departure Tax, Landing Fees, and rental revenue to the developer.
  • This project’s impact on GDP will be minimal and similar to the KEMH/PPP.

In Numbers

$155m investment + 3 x 55 jobs/year > $900m paid out from transferred revenues.

- Larry Burchall

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Comments (33)

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  1. Jeremy Deacon says:

    Could not agree more with this analysis. Just on one point – I personally have never been a fan of PPPs, in the long run they cost so much more and if revenues fall, it is the average man on the street who suffers through increased charges.

    • Black Soil says:

      If revenues fall, the taxpayer does NOT get hurt Jeremy. You clearly don’t understand how the framework operates. Under this deal, there is iron clad CONTROL that Bermuda gets a new airport it can AFFORD, with NO nasty contingencies as we have seen with practically ALL the WASTEFULL govt projects in recent years.

      • Jeremy Deacon says:

        i did not mention taxpayer. if revenue falls to the point it cannot service the debt or provide the desired profit margin then charges for things like concessions will increase with that increase passed onto the consumer.

        • Jeremy Deacon says:

          i also have a very good idea of how ppp projects work and if you google pfi (the uk equivalent) you will quickly realise why i am sceptical about their so~called benefits

  2. Ed Case says:

    Cue the People’s Complainers – issue statement saying you will do anything you can to NOT have these jobs created.

  3. Trulytruly says:

    I would like to know where Larry got his reference to 200 jobs. I have heard Bob Richards say in my presence that up to 600 jobs could be created with close to 75% of those Bermudian. Where has Larry heard the 200 number mentioned. The difference is significant and totally changes the scope of the project.

    • Sickofantz says:

      I have only heard Minister Richards talk about 200 jobs.

      • Trulytruly says:

        When did you hear him say 200? I have heard him say up to 600 jobs at at the OBA town hall meeting in st George’s. At least 100 other people heard that too and Bernews and ZBM were there with cameras. I also heard him say similar at least once in the House during the debate on the airport. Do you really think this fuss would be happening over 200 jobs? This is all about the significant amount of jobs that the OBA are trying to get out of this project. If they achieve their objective there will be a big chunk of now unemployed Bermudians with jobs. That is the underlying point.

  4. clearasmud says:

    This scenario assumes that the 155 million gets spent here on wages etc. but many of those workers will be Canadian specialist and thus much of that 155m will end up in Canada not in our economy!
    I note that the 900mil plus is not far off the 1 billion that the shadow minister has claimed.

    • spongebob says:

      Let me take the time and pull some numbers together.

      The airport makes a profit of 3 million a year. That is money over and above what it takes to run the airport. So being generous, lets assume the 3 million is guaranteed for 35 years (being generous). By my math, that is 105,000,000. It will cost money to get new vendors in and if none come in or they don’t fill all the venues, that means the developer has to pay (lost revenue) or lower prices to attract new vendors.

      Lets assume that there are 400,000 passengers per year for the departure tax at 40 per person. That adds up to 560,000,000 over 35 years. By everyone’s own admission, the profit they stand to make is 105,000,000 because the departure tax will go to service the debt that is taken on to build this project. Because the money is coming from somewhere and if they spend 250 million that leaves 310 million left from the departure tax. Any cost overrun is assumed by the developer.

      Looking at the hospital, how much was it over budget? Since I am generous, lets assume at least 100,000,000. Now we are down to 210 million plus the 105 million in non guaranteed profits.

      You know what, lets just all suck it up and accept 1 billion of new debt because we can all afford it or do nothing, keep patching up the present airport (because it is quaint) until it will cost 500 million to develop a new terminal. By that time, we can approach the Chinese and they will do it but no one will have a job because they can fly in Chinese workers for a ton less. But alas, at least it is a better deal.

    • Double D says:

      Revenue is different from net income.

      There are expenses attached to the revenue figure quoted by Mr. Burchall and the PLP.

      To not include the expenses, which are significant given the fact that the airport is barely profitable, is misleading at best.

  5. Encyclopedia says:

    Excellent Analysis.

    Is the new airport project necessary?

    If necessary, is this the best deal?
    An RFP could have at least shown if there was a better deal than this one.

    • spongebob says:

      I understand everyone questioning the deal and looking for a better deal. They should disclose the details of the deal (financials) so that everyone can understand what is at stake vs all the guess work that is being compiled by people who don’t know how the deal is structured.

      Maybe, just maybe the reason they did not do the RFP is that they got some quotes informally and this is actually the best deal.

      End of the day, full disclosure so that everyone can put their minds to rest and move forward. Enough with the he said she said or us against them. End of the day, ALL on this island will carry the burden. not just Us or Them!

  6. Jadon says:

    Great Idea ! Not !

  7. The Big Picture says:

    This opinion piece put forth by Mr. Burchall is easy to follow logically. I respect his considerations but have one difference of opinion. Pink Beach, Morgan’s Point, America’s Cup and Aerial Sands are in the works during the same time and must be added to this thought process. I believe that all abled persons in the Construction sector will have the opportunity to work. The problem with this scenario is that the sector will heat up at once. Recent history shows us that lots of parallel development drives up the number of non-Bermudians that are brought in to help with construction. Without careful planning we will have everyone working for a short period of time, the foreigners will leave and then unemployment will rise again. THAT…is the big picture that we must avoid and make our politicians consider.

    • Vote for Me says:

      @ The Big Picture
      Yor comments prove Larry’s point. The OBA reported amount of inward investment is financially inaccurate.

      We have to reduce the amount by material costs which have to be imported, any non Bermudians that will have to be employed (this will be necessary due to specialist skills or simply because of the numerous simultaneous construction jobs) and the profit amount.

      Yes there will be a benefit if the projects proceed but we have to be more realistic (and honest) about the real impact on the local economy.

      • Them that will be coming to work on this “project” will need a place to sleep, eat and, well you all know what I’m saying… They’ll have to pay for food shelter and entertainment etc. nothing come to anyone for free!
        Therefore my point is, we will be making monies on that 1/3 of the numbers employed at this site while the other 2/3 will be supporting their Bermudian families. Now may I add, this will be at no expense to you or I nor our Government who will inherit the refurbished airport facilities that C.C.C. will be up-keeping for x amount of years…Where is there a problem?

  8. alsys says:

    Where did the 900 million come from? That appears to be the only number above not explained. The current revenue of the airport are approximately 3 million a year.

    • alsys says:

      And why does nobody add expenses to these numbers? I’d really like like to see a straightforward analysis with no leaving things out (which it seems like both sides may be doing this).

  9. Pastor Syl says:

    I have much respect for Mr. Larry Burchall and his ability to analyze situations and explain them so that the average person can easily understand.
    That being said, there is a glaring omission from this piece – how the figure of $900 million profit for the developer is arrived at. It could be a valid figure, but there is no way to tell because his working for this figure is not shown, although the working for his other estimates are included in the article.

    Airport departure tax is $35 per head, gross. I do not have the figures for landing fees and rental revenues, nor do I have the figures for payroll, utilities and other costs, but my simple math tells me that to arrive at a $900 million profit over 35 years would mean about $26+ million profit ($900,000,000 /35 years) each year or about $67+ PROFIT per head ($26,000,000/380,000 air arrivals). Is this a realistic figure?
    According to some financial experts, payroll alone should be about a third of revenue – which would indicate that Mr. Burchall is working on an expected revenue of much more than $203 per person ($67+ X 3) as the cost of utilities etc. needs to be accounted for before arriving at a profit. That figure seems a bit high to me.
    Of course, my math could be totally screwy.
    I’d appreciate very much if Mr. Burchall could do an addendum to this piece showing how the figure of $900 million going to the developer was arrived at.

    • Chris Famous says:

      Departure tax has been raised 43%

      it is now $50

  10. David Sullivan says:

    Another classic case of pick your own numbers and build your own story. Most of the numbers and scenario’s relating too them are fictional. For example “Once completed, and for the next 30 years, the Airport developer will receive the Airport Departure Tax and all other landing fee and space rental revenues from the Airport. From this, the developer will recover his $255 million plus a profit” Where in this statement, lifted from the PLP playbook, is the Developers expenses for running the airport accounted for? Or are we too assume there will be no labour, electricity, services, building, repairs, maintenance and all other related expenses to running an airport for thirty years. Typical voodoo economic analysis – talk only of the some presupposed revenue….who’s got time to pay bills! SMH. Burchall is usually a lot more detailed than this overly simplistic analysis.

    • Carlton Smith says:

      Ahhh hahaha…. Voodoo vs prestidigition extraodinaire.

      You can’t tell by now that the old call to arms propaganda tactics don’t work anymore David J.Sullivan?

      Enough with the card tricks…. learn how to sing or something.

  11. alsys says:

    Why is it that expenses has not been added to this “simplistic” look behind the numbers? The airport only makes 10m in profit a year so how do we get to 900m? I’d like to see a project when expenses miraculously disappeared in RL calculations but I doubt it will be this one.

    • Carlton Smith says:

      Speaking of forgetful, did you not remember that the $10 million is not static, but fluctuates?

      Does it have cap/ceiling?

      Can charges be increased to accomodate profit growth?

      Maintenance…. folk mentioned it.
      Have they remembered that maintainence can be trimmed/curtailed to reduce costs?

      Who is doing this maintenance currently? How much local employment will be secure when the SENIOR PARTNER (AECON/CCC) decides to mitigate their costs by replacing the current companies with cheaper foreign labour?

    • Double D says:

      Actually the airport’s most recent profit was between $3 and $4mn.

      But I do agree with that the constant referring to revenues as if they are no expenses attached is misleading at best.

  12. Alvin Williams says:

    Since the Canadians are slated to take over the running of the airport and control of the revenue; questions that are not been asked; who will pay for the up keep of the runways over the next 35 years? Will the Bermuda government continue to subsidize airliners flying to Bermuda? Nothing is been said about the development of a new causeway or bridge; what are the changes of that one and only link to the airport; not to mention the east end of the country been knocked out of commission as a result of a hurricane striking Bermuda. How many do you think could strike Bermuda over the next 35 years? What will they do with the old airport site? Will the private jet port be displace to make way for the new airport and if not who will control it; will it be in Bermudian hands or Canadian hands? Is this some of these fuzzy economics the finance minister was speaking off? Some more questions that have not been asked?

  13. Chris Famous says:

    “Bermuda will surrender thirty years of Airport Departure Tax, Landing Fees, and rental revenue to the developer.”

    Actually it is Thirty Five (35)years Mr. Burchall

  14. Bermuda123 says:

    Assuming we needed a new airport, what were the alternatives? It may be interesting (and politically inflammatory) to do this analysis, but exactly what were the options without taking on more debt or taxing the population? I like Larry’s articles, but this one has a big hole in it.

  15. Jeremy Deacon says:

    why not just spend the money on something that will attract tourists and actually make it necessary to build a new airport …..

    • Trulytruly says:

      The money is only available because the airport has potential revenue. We can safely assume people will travel in and out of Bermuda. To suggest the money be spent on something that attracts tourists, tells me that you misunderstand the nature of the financing of the airport project. What you are actually referring to our the numerous hotel projects coming online, that the private sector are investing in and hopefully will attract tourists as you say.

  16. campervan says:

    Larry,
    in your summary you fail to mention the huge plus that Bermuda will receive a spanky new airport.
    The current one is falling to pieces and will increasingly be a money-pit for repairs etc.
    Picture the condition of the current airport in ten years time.
    Sometimes its a false economy to keep a busted old car running, and its ultimately cheaper to bite the bullet, get a loan and buy a new trouble free car.

  17. Matthew Sousa says:

    Last time I checked Bermuda makes it’s own cement of course we import the materials for this but we do make it. Last time I checked we also make our own concrete blocks. Two thing that will need possible make more employment to be able to produce enough for projects such as this. So to say we import all our material is misleading. we make our own sand again not importing meaning that there will be a need for a quarry. Also we have the concrete trucks for pouring the floors so again more money invested in our economy. Things like rod and other are imported but we have local venders that will sell them to the company. Again money in the economy.