PwC makes case for cruise project

The authors of a business case analysis of the controversial cruise port project say their reports show that building two piers, in economic terms, is the “preferred option” for the Cayman Islands. 

Amid differing interpretations of their reports and concern over gaps in the data, PwC, the lead consultant on the cruise project, has sought to clarify and explain its conclusions. 

The accountancy firm first produced its outline business case in November 2013. 

That analysis examined various options, including leaving the port as it is, and recommended government proceed with the construction of two new piers financed through a partnership with the cruise industry. The conclusion, at that stage, was to “immediately build two piers and if needed, relocate cargo in the future.” 

Those findings were subject to the outcome of an environmental impact assessment. In the aftermath of that report and an update on cruise passenger spending trends, PwC, produced two addendums that reevaluated the economics of the project. 

Ultimately, they say, their final verdict did not change. 

“In our view the conclusion of the original Outline Business Case, that the preferred option in terms of the financial and economic considerations is to build two piers, still remains valid,” the consultants wrote in response to questions posed by the Journal. 

PwC’s reports have at various times contemplated a vast delta of possible economic outcomes, ranging from a small economic loss, in one worst case analysis, to gains in excess of a billion dollars, in the most optimistic projections. 

Asked which figures it felt most confident about, the consultants highlighted a table in the final addendum to the business case, which projects a range of between $112 million and $439 million in economic impacts over the next 20 years. 

“The data underpinning the estimated economic impacts from the loss of George Town Harbour reefs are very limited, in particular with respect to our understanding of the scale of the impacts put at risk by the Cruise Berthing Facility and the anticipated behavior of ‘divers’ in response to loss of parts of the reefs. 

“We have sought to deal with this by assessing the potential impacts under various assumptions, in order to cover a wide spectrum of possibilities, given the unknowns and uncertainties.” 

PwC says the table showing net economic impacts of the project in the final addendum, including the latest information on current cruise passenger spending from Business Research Economic Advisors and data from the environmental impact assessment, best reflects its final view on the economic position. 

“This shows an estimated present value of the net economic benefits ranging from $439 million (after deducting Low Environmental Economic Impact) to $112 million (after deducting High Environmental Economic Impact),” the consultant stated. 

Those calculations considered 2014 data on passenger spending. The earlier draft of the outline business case had used older, lower figures, from the same consultant Business Research and Economic Associates. 

The $112 million to $439 million projection did not, however, consider more speculative projections from BREA in its latest report that the amount each passenger spends in Grand Cayman would increase if a port were built, enabling cruise visitors to spend more time on shore. 

If those estimates were factored in, the benefits from the project could rise to over $1 billion, the addendum noted.  

Throughout the business case and addendum, PwC makes numerous assumptions about future trends. This is inevitable, they say, for any business case where predicting the future is riddled with uncertainty. 

The basis for the final calculations was an assumption made at the outset, based on conversations with cruise lines and market analysis, that cruise passenger arrivals would rise by 1 percent per year with a dock, to a high of 2 million arrivals, and decline by 1 percent a year, without a dock, to a low of 1 million. 

In reality, it is unlikely to be that neat. Industry trends and geopolitics also have an influence, but PwC believe the figures reflect the likely general trends in both scenarios. 

“In practice, the most important financial and economic variable is the level of future cruise volumes, both with and without a cruise berthing facility,” the consultants told the Journal.  

“If the project progresses, government will seek to negotiate cruise volume commitments from the cruise lines, which will give them greater certainty over the future level of cruise volume with the cruise berthing facility.  

“The level of cruise volume that could be attracted to the Cayman Islands over the long term without a cruise berthing facility is estimated in the business case, but remains an uncertainty.” 

The PwC report also contemplated the possibility that cruise tourism would rise at 3 percent every year with a dock. If that happens, the economic impacts will be in the billion-dollar-plus range, it said in its original report. 

But those optimistic estimates were considered too shaky to be factored into the final calculation and were not used to come up with the $439 million upside figure in the conclusion. 

The cruise project, pegged at an estimated capital cost of $156 million and potentially rising based on design changes and mitigation measures, is being carried forward by government on the basis of PwC’s conclusions. 

Questions have been raised on whether projected economic impacts of just over $400 million are a good return on such a substantial capital investment over two decades. 

This would equate to an annual return of 5.5 percent if a total investment cost of $150 million is assumed, or 4 percent if the investment is $200 million. In other words, each dollar spent generates between $2.20 and $2.92 in economic output over 20 years. 

Asked if government had contemplated whether they could get better returns spending the money in other areas, government officials suggested the advantage of the cruise dock was that it had a direct revenue stream attached. 

Government expects to be able to transfer the current fees paid by cruise passengers to tender operators to meet some of the construction costs. The exact financing model is being hammered out with the cruise lines, who will be partners in the initiative, but Premier Alden McLaughlin has indicated government will have to satisfy the U.K. that the project is self financing. 

Tourism Minister Moses Kirkconnell said, “The decision that had to be made is are we going to take advantage of cruise tourism as part of a major pillar of our economy. 

“If we are going to do that, then we need to upgrade our infrastructure and understand how we can best participate in this growth market.” 

He said the financing structure would ensure the Cayman Islands owned the piers and that the capital costs could be paid without impacting the territory. 

“It will be an asset to the country, put us in a position for growth and create opportunity for entrepreneurs to be involved in a growing industry,” he added. 

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This illustration shows the proposed cruise berthing facility in George Town.

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The majority of respondents to a Department of Environment survey about the proposal to develop cruise ship piers in George Town oppose the measure. – PHOTO: CHRIS COURT

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Aerial view of George Town harbor. – Photo: Chris Court

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