Island economies lack strategy plans for the future

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Island economies and their infrastructure:

KPMG’s recently published report: ‘Island economies and their infrastructure: An outlook 2010 and beyond’ provided some interesting food for thought for the Cayman Islands. Business Editor Lindsey Turnbull sits down with Cayman office management Roy McTaggart – managing partner; Kris Beighton – head of transactions and restructuring and Tully Cornick – head of corporate finance, to find out more and reports.
 
What does the team believe are the most relevant overall findings in the report to the Cayman Islands?
A number of respondents indicated that the state of the existing infrastructure is in many cases average or below average. Reasons cited included a lack of clear long term strategy and a lack of experienced project management personnel. These factors combined with the gap between the infrastructure needs and the availability of financing is exacerbating the problem, and the Cayman Islands are not immune to this.
 
Long-term strategy – almost all respondents indicated that infrastructure strategy was either not well defined or managed. Limited capital expenditure budgets are forcing the Cayman Islands Government to delay or choose between projects across key areas to focus their infrastructure spend. Without a clear strategy in place how can decisions be made as to where to focus resources? Particularly given that many infrastructure projects have mid- to long-term payback periods.
 
Financing – the short- to mid-term infrastructure needs exceed the annual capital expenditure budget in Cayman. With government borrowing being under scrutiny and the future of Government revenues being in question due to the current economic downturn, the financing gap has become exacerbated. Postponement of infrastructure projects is an option; however, one would expect that as these projects have been proposed and considered, the implication is that existing infrastructure does not meet current requirements or simply may not exist and therefore a delay in the project timetable equates to a delay in the benefits to stakeholders. Alternative financing involving the private sector such as a Public Private Partnership (PPP) or privatisation of assets is a solution for some projects but it will not be suitable for others.
 
Central management and execution – the ability to execute infrastructure projects on time or on budget varies. This is not surprising as most projects are performed on a decentralised basis with no centralised approach to strategic management of infrastructure. In addition, it seems to be a common challenge faced by governments that projects are handled by resources that may not possess the requisite project management skills. Highly publicised examples in Grand Cayman are the John Gray and Clifton Hunter high school projects that were due to be completed in September 2009 and were CI$17 million over budget as of July 2009.
 
Can the team outline any areas of best practice among the islands surveyed that are of particular interest to the Cayman Islands?

There are numerous best practices that different jurisdictions have employed. One that can be specifically applied to the Cayman Islands is the review of infrastructure strategy, procurement and management. This is accomplished by:
Establishing a clearly defined mid- to long-term infrastructure strategy;
Performing an infrastructure review to determine where efforts should be focused and prioritise projects;
Undertaking a review of the way in which infrastructure assets are managed and maintained;
Reviewing the public sector procurement process to assess changes that would need to be made to strengthen the current procurement process, the allocation of risk, contract performance and other key contractual issues;
Identifying projects that are suitable for alternative forms of infrastructure financing such as Public Private Partnerships; and
Reviewing private sector capacity and expertise to determine which areas would be better served under private sector management.
 
Were there any suggestions as to how the funding gap can be closed? Does the team have any suggestions as to alternatives to traditional means of funding?
The principal options to bridge the gap are: borrow, involve the private sector, privatise or cancel/postpone projects.
 
Borrow – debt is an option, as highlighted by the recent Cayman bond issue in December 2009. Having said that, there is a limit to how much a government can borrow and it would appear that Cayman is at or near its limit (as set by the UK).
 
Involve the private sector – this should be seriously considered as an alternative to traditional financing. However, not all infrastructure projects are suitable for PPP/PFI. The new Government accommodation and the port are examples of projects where the private sector could be involved.
 
The benefits of involving the private sector are: proven track record of bringing projects in on-budget and on-time in comparison to traditional procurement; allows the public sector to leverage up limited public sector resources; speeds up the delivery of assets; allows procuring bodies to make long-term plans for the delivery of service, with limited risk of a change in policy/Government affecting those plans; allows for transfer of risk, which provides financial and practical protection.
 
Some of the potential challenges are: if upfront due diligence is not properly performed, contracts can either give too much or too little compensation to the different players in relation to bearing of risks; procuring authorities must be diligent in the selection of private sector service providing partners; the profit motive of the private sector may conflict with the key public policy objectives; poorly structured PPP contracts can be less flexible over the long-term than traditional procurement methods.
 
Sale of assets/privatise – privatisation is another option that involves the private sector. The ‘Miller Report’ lists various infrastructure assets that could be privatised. However, the element of control that a government may want to retain over certain assets can rule out privatisation or will result in follow-on obligations such as regulation. The challenges mentioned above regarding involving the private sector apply here as well. The benefit is that the risk is almost entirely shifted to a private operator. Stakeholders will require transparency surrounding decisions and process, and a regulatory framework will need to be drafted and ratified before the transaction can complete thus often making a privatisation a lengthy process.
 
What would be the consequences for jurisdictions if the challenges are not met?
Infrastructure is a key indicator of the stage of development of a country. For industries like financial services and tourism, the level and conditions of the local infrastructure is critical to the companies that operate in them. If a country wants to remain competitive and retain as well as attract the companies that operate in these sectors then it must continue to invest in infrastructure.
 
There is also a significant social aspect to modern infrastructure. Schools, hospitals, prisons – all need to keep pace with the continuously changing demands of a country. For instance in the UK, there is a programme called Building Schools for the Future where the private sector is designing, financing, operating and maintaining schools under PFI programmes – every one of these new schools has a complete and modern ICT infrastructure and the design is creating an environment where children actually want to be and to learn, and teachers can focus on teaching rather than property management.
 
The report mentions the traditional areas that underpin the islands’ economies (namely finance, tourism & industrial). Was there any discussion among those polled as to how the economies could be widened?
The report did not explore the potential options that island economies have to widen their revenue base; rather, it looked at how infrastructure can affect the ability of an island economy to remain competitive with its existing revenue base. We will consider examining how island economies are widening their revenue base in our next report.
 
Does KPMG intend some kind of follow up report to this?
At present, we intend to produce a follow up report that would be released around the same time next year. When we began our research it was in the first half of 2009 and conditions in many island economies have deteriorated since then. We would like to hear what respondents have to say now that the consequences of actions, or inaction, will start to be visible. Based on this it will be interesting to see if respondents have changed their views.

For further information about infrastructure KPMG contact Tully Cornick on 949 4800.

The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.
© 2010 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 

Island-Tully-and-RoySM

Tully Cornick and Roy McTaggart

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