Sep 11, 2015 03:19 PM

Updated: Chinese Contractor Finds Project in Bahamas Is No Day at Beach

(Beijing) – A giant luxury resort planned on a beach outside the Bahamas' capital, Nassau, that was supposed to be a showpiece to help China's largest construction company tap the U.S. market has become a headache for both its builder and a lender.

The resort was advertised as the largest of its kind in the Western Hemisphere. Work started in 2011 and the resort was to open in December 2014. It includes four luxury hotels, a casino, a convention center and an 18-hole golf course. The project being built by the U.S. subsidiary of China State Construction Engineering Corp. (CSCEC) is believed to be the biggest overseas commercial real estate project that China has ever attempted.

But the project has been derailed since late June, when its owner, the Bahamas-based Baha Mar Ltd., filed for bankruptcy protection in a court in the U.S. state of Delaware. Sarkis Izmirlian, the head of Baha Mar, said in a statement that the Chinese contractor was to blame for "repeatedly missing construction deadlines," resulting in lost revenue. On June 30, Baha Mar filed another lawsuit against CSCEC in London, seeking US$ 192 million in compensation.

The CSCEC fired back, saying in a statement that Baha Mar was to blame for a "failure to secure adequate financing and its mismanagement of the design of the project." The contractor said it had invested more than US$ 220 million in the project, including some of payments made on behalf of the developer.

The bankruptcy filing and bitter clash between the developer and contractor have raised a host of questions for the project, not the least is how creditors will be repaid. China Export-Import Bank, a policy bank, would like to know the answer to that because it lent US$ 2.34 billion to the project.

The Bahamas government attached great importance to the project because it was expected to employ 1.5 percent of the island nation's population of 380,000 and represent 12 percent of its GDP, Baha Mar documents show. Bahamian officials have held meetings with all the parties involved to try to handle the issue, but no deal has been reached.

On September 15, the U.S. court dismissed the bankruptcy filing of Baha Mar citing since most stakeholders in the case are based in Bahamas. The court said the case should be handled by Bahamian courts. On September 7, the Bahamas Supreme Court appointed a provisional liquidator to help oversee the project and mediate talks between the parties. The court said it will review the situation in November.

According to data from Baha Mar, 97 percent of the work on the Nassau resort was completed as of July, but another US$ 400 million is needed for completion.

On August 25, U.S. rating agency Standard & Poor's downgraded Bahamas credit rating, saying the country's economy had a negative outlook, partly due to the Baha Mar controversy. "We do not believe that the parties involved will manage to resolve their differences in time for the resort to open for the high season beginning in December," Standard & Poor's said.

Too Much Trust

Planning for the Nassau resort started in 2005 and involved the Swiss-born Izmirlian and Bahamian officials. In February 2008, CSCEC won the bidding for part of the building work, said an employee of Baha Mar who asked not to be named. The project ran into problems when its original partner, the U.S. casino operator Harrah's Entertainment, withdrew due to the financial crisis.

In March 2009, the CSCEC's U.S. branch, China Construction America (CCA), became the general contractor. The CSCEC helped Baha Mar secure loans from Exim Bank, a Baha Mar spokesperson said. Baha Mar's filing with the Delaware court shows Exim Bank signed an agreement with Baha Mar on March 30, 2010, to provide a loan of US$ 2.45 billion to the US$ 3.5 billion project. Baha Mar used most of its assets as collateral.

State-owned CSCEC has built many landmark projects in China, including the Beijing National Aquatics Center, also known as the Water Cube, for the 2008 Olympic Games. The company's overseas expansion started 40 years ago in Kuwait, and CCA was established in 1985.

Tiger Wu, the former vice president of CCA, told media in Nassau in 2011 that "the project is crucial for us to expand our business in the Caribbean and the U.S. market … The successful completion of the project will bring us more opportunities."

Under the partnership, CCA invested US$ 150 million in the project as a preferred shareholder, but it would not participate in the resort's operations. Baha Mar invested US$ 850 million in the project, and the Bahamian government chipped in US$ 50 million.

The CCA shipped building materials and thousands of Chinese workers to Bahamas for the work. The Bahamian government exempted the materials from import duties and offered preferential visa treatment to the workers.

CSCEC officials applauded its cooperation with Exim Bank in the Nassau project, and cited the deal as a model for Chinese companies' efforts to expand overseas.

Yang Zhuang, a management professor at the National School of Development at Peking University, said the support of policy banks has benefited state companies in overseas businesses, but the arrangements come with risks. "Such a partnership requires a clear understanding of the targeted project in terms of strategy, organization and operation in order to prevent risks," Yang said.

Policy banks tend to trust state-owned enterprises too much, but the firms are usually weak at performing feasibility studies and risk control, he said.

Devilish Details

Conflicts between the developer and contractor arose as Baha Mar said CCA showed a lack of experience and mismanaged some work. CCA shot back that Baha Mar delayed payment.

Thomas Dunlup, vice president of Baha Mar, told the Delaware court that although CSCEC is the one of the world's largest contractors, it lacked the experience needed for such a large and complicated project.

Baha Mar said in a document submitted to the U.S. court that CCA agreed to invite one or more experienced contractors into the project, but that never happened. It said CCA's lack of experience in managing the shipping of materials and a labor force delayed work.

However, CCA said the developer's frequent changes to the project and inadequate financing were the main reasons work was behind schedule. The contractor also said Baha Mar replaced the principal architect after work started and made more than 1,300 orders to change design during the construction. Those changes led to US$ 50 million in cost overruns that the developer refused to pay, CCA said in a statement. Wu Taizhong, a vice president of CCA, said his company has faced difficulties paying subcontractors because Baha Mar refused to pay for the cost overruns.

Fu Chun, general manager of international business division of Suzhou Gold Mantis Building Decoration Co., said his company was a subcontractor for internal decoration work on the resort from 2013 to late 2014, and has not been paid for some of its work.

Robert Myers, the president of Caribbean Landscape Ltd, said he is still owed US$ 50,000 for work on the resort. The project had very low efficiency compared to other projects he has worked on, he said.

On July 9, dozens of Chinese workers hired by CCA demonstrated in front of the Chinese embassy in Bahamas to complain they had not been paid in six months.

Baha Mar said in the documents submitted to the U.S. court that it refused to pay bills over suspicions CCA had exaggerated its spending. Baha Mar said CCA asked for US$ 344 million between February and May, but the company believes actual spending was only US$ 76 million.

The conflict caused the completion date of November last year to be missed. Baha Mar and CCA changed the deadline to March, but that goal was also missed.

Baha Mar said it had paid more than US$ 6 million to clients for cancelled reservations. It also spent US$ 4 million to hire more than 2,000 idle hotel and casino staff. At the end of March, Exim Bank refused to give Baha Mar the remaining US$ 112 million in loans it had agreed to.

While the future of Baha Mar remains uncertain, the conflict between the partners has escalated. Media reports in Nassau on June 30 said CCA employees complained they had been prevented by Baha Mar from entering their offices at the resort and that the Chinese companies' computers and documents had been taken away. CCA apparently responded by cutting electricity to the resort, then turned it back on when Baha Mar returned some items.

The failure of the project is expected to have a broad impact on the economy of the Bahamas, which had GDP of US$ 8.5 billion last year. Many companies in the small country have not received payments, and others that made investments for businesses related to the large resort will see no return, said Myers, the head of the landscaping firm who is also the former chairman Bahamas Chamber of Commerce and Employers Confederation.

He summed up the mess this way: "The bank lent too much money to an unqualified developer for a project constructed by a contractor with little experience in similar projects."

(Rewritten by Han Wei)

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