A government financial analysis on the airport project contains “significant and unacceptable errors and omissions” and used a flawed methodology to assess options for the airport, the Public Accounts Committee has heard.
On Thursday, Craig Mayor, a retired accountant who spent the last 20 years of his career handling credit facilities and guarantees for a $3 billion company, presented the PAC with his own analysis of the finance ministry’s airport financial comparisons report issued in August. His report was dated October 19 and is a separate analysis from a lengthier 38 page report which was also referred to the PAC.
He argues that the financial methodology used in the government’s analysis is flawed and cannot be credible.
Referring to the deal with the Canadian Commercial Corporation as “G2G” (Government to Government), Mayor says:
A few months before GoB is expected to commence construction, MoF has issued a Comparison Report as a part of its efforts to retroactively demonstrate that G2G is the best and only option for Bermuda. The widespread errors in MoF’s basic finance raise very serious concerns about the accuracy and integrity of its analysis throughout its negotiations with CCC/Aecon. Justification of G2G lacks credibility.
The finance ministry’s financial comparison’s report compares the CCC deal with three alternative options for the airport – “expensive band-aid” (EBA), procuring a new airport through conventional design and build (DB) or through competitive tender to design, build, finance, operate and maintain (DBFOM).
The EBA option – maintaining and operating the existing terminal – was not viable because the facility was susceptible to storm surges and could be damaged “beyond repair” by a major hurricane, and because much of the airport infrastructure was near or beyond the end of its life span.
The risks associated with continuing to operate the existing terminal are exceedingly large and cannot be accurately quantified.
But the finance ministry’s analysis goes on to estimate that the EBA option would cost $490 million or $258 million in today’s money, over the 30 year period. It assumes zero revenue growth over the period and estimates that government would have to borrow $184 million for maintenance costs in the first two years but it would have no impact on sovereign debt ratings.
The DB option had already been explored by a third party firm in 2008 and the cost was estimated at $514 m. Government’s analysis noted that it would cost $575 today and it was not considered viable because of the additional debt involved which would likely result in a downgrade of Bermuda’s credit rating.
Further, the government analysis goes, while Bermuda would retain the airport revenues, there would be about a $5 m annual cost to maintain the new facility. The overall cost of the DB option would be $1,369 m or $707 net present value.
The DBFOM competitive tender option would have a similar impact on the cost of borrowing and Bermuda’s credit rating and would likely incur higher construction costs as bidders use the 2008 study as a benchmark. Government would also have to contribute capital to the deal and provide substantial guarantees.
Mayor’s critique of the government’s analysis noted that the finance ministry had understated by $810 million the true cost of the airport deal with the Canadian Commercial Corporation by not taking into account the loss of current revenues ($27 million per year). That would make the cost of the proposed deal around $1.4 billion.
“Errors of this magnitude are inexcusable,” Mayor wrote.
Government’s analysis estimates the total costs of the CCC option at $585 m or $322 m in net present value dollars.
“Errors of this magnitude are inexcusable,” Mayor wrote.
Further, the analysis contains no evaluation of the impact of un-discounted cash flows on Bermuda’s deficit, debt and credit ratings, a failure which has already been highlighted by the independent 2015 report by Deloitte, Mayor says.
And it incorrectly prioritizes net present value to compare options for the airport, over a review of debt metrics which he says is more appropriate to determine the project’s affordability.
This article belongs to Politica ! The original article can be found here: Government used flawed methodology to assess airport options – Craig Mayor
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