In view of the recent Barbados Sandals/Beaches deal, we travel to Grenada where S. Brian Samuel presents…
A Case Study of Hotel Investment in Grenada
by S. Brian Samuel
I recently published an article entitled “Attracting Foreign Investment to Grenada” in which I noted some of the pitfalls to investing in Grenada. In the article I briefly mentioned the case of LaSource resort, to illustrate the use of fiscal incentives as a way of securing the Sandals chain investment in Grenada.
On reflection, the story of La Source is worthy of a deeper look. The LaSource saga, for indeed it is a saga; with ups, downs and plot twists worthy of any soap opera; is a classic illustration of what that can go right — and wrong — with hotel investments in small Caribbean islands. I guess I am qualified to write the story; for I was there from before the beginning; until after the end.
2. Before the Beginning
In 1990 I was working in Barbados for the Caribbean Project Development Facility, an offshoot of the World Bank. My job was to raise financing for Caribbean businesses, and one of my earliest (successful!) projects was La Source hotel in Grenada, which was being promoted by a local developer called Leon Taylor.
The first time I met Taylor, he wasn’t in a particularly good mood, as he had become frustrated from having to deal with the financing agencies, one of them being the agency I worked for. He fixed his good eye on me and growled “What the f___ do you want?” or words to that effect! But things went steadily upwards from there, and I ultimately ended up raising US$15 million for LaSource, in debt and equity financing from a consortium of development banks. That in itself was a long and winding road; including one memorable day when I finally cornered Leon into going over the final Business Plan for the resort, line by painstaking line – under a coconut tree on Sandy Island, during Carriacou Regatta!
In all my 20 years at the World Bank, LaSource remains my all-time proudest project — and there were quite a few contenders. For a start it reconnected me to Grenada, my home I never knew; and that feeling carried over into a sense of pride in a job well done, when I stood side-by-side with Leon Taylor on the gala opening night of LaSource in December 1993. When I retired from the World Bank and returned home in 2008, I worked as Executive Director of LaSource from its reopening in February 2008 until October 2010. So I know where a few skeletons are buried.
LaSource’s experience with its hurricane Ivan claim demonstrates two major impediments to investing in Grenada. There is no procedure for resolving disputes between an insurer and insured in Grenada. An insurer simply has to deny liability, and the insured has no recourse to the Arbitration clause of the policy, because the insured repudiates the entire policy and just says “sue me”. The only recourse is through litigation, and in a case like LaSource, which is not unique, the insured is placed at the mercy of Grenada’s lethargic legal system.
Contracts are normally enforced by the country’s legal system, which in Grenada appears to be in a state of near collapse. There is currently a backlog of some 200 cases, with only two sitting judges to handle the current cases and deal with the backlog. This explains why Grenada ranks so poorly in the World Bank’s Doing Business Ratings; in enforcing contracts, Grenada ranks 162 of 180 countries.
Concessions are designed to protect investors, and once granted would be sacred. This was not the experience of LaSource in 2010, when one of the principal concessions listed in its CQCL, freedom from VAT, was taken away from the resort, causing significant increases in operating expense and decreases in net revenue. VAT was not a new tax. It was in force up to April 1995 when it was replaced by the GCT – neither of which LaSource had previously paid.
It is ironic that, to accommodate the acquisition of LaSource by Sandals, the government gave Sandals the very same concessions it had recently taken away from LaSource: freedom from VAT. In fact, the government was so desperate for Sandals to come to Grenada that they dug deep and gave them “something special”, as described by Finance Minister Nazim Burke. The fiscal incentives eventually granted to Sandals LaSource included, inter alia:
- 29-year waiver of corporate taxes
- 25-year waiver of property taxes
- 25-year waiver of customs duties on capital goods
- 25-year waiver of customs duty on consumables
- 15 year waiver of Value Added Tax
Local investors who built “small” hotels like LaSource, at one time could count on financing from development finance institutions, such as EIB, GDB, CDC and CFSC, whose role was to finance private businesses in the OECS, and beyond. Sadly, the volume of development finance has declined over the years; and this needs to be rectified. LaSource’s experience with commercial banks, in the post-Ivan period, was markedly different from its experience with development banks, prior to Ivan — particularly when the going got tough.
Read the entire article at Now Grenada: The LaSource Saga