When then-Premier Dr. Orlando Smith unveiled a partnership with BVI Airways in January 2016, he promised that government’s $7 million “investment” in the no-bid deal would bring much-needed direct flights between Miami and Beef Island.
Now police are investigating why those flights never took off, and a recently released report by the Office of the Auditor General offers a blistering assessment of the failed project.
While proceeding with the BVI Airways deal, government officials disregarded Cabinet directives and experts’ warnings in order to forge ahead with a partnership plagued by conflicts of interest and obvious financial risks, ultimately costing taxpayers $7.2 million without giving them anything in return, according to the report, which Premier Andrew Fahie tabled in the House of Assembly on May 28.
“I cannot say anything further on this matter as we have been informed by the commissioner of police that this is now under a full criminal investigation,” Mr. Fahie said after presenting the document, adding that the House could not debate the findings because of the active police case.
In the report, Auditor General Sonia Webster also detailed how BVI Airways executives allegedly threatened legal action and layoffs while pressuring government to allocate millions more dollars to the project, which ultimately failed in November 2017.
Her efforts to track down what happened to the $7.2 million, however, were unsuccessful: The office’s attempts to interview BVI Airways executives and government officials met with limited success, and the financial records provided by the airline over the years were partial and unaudited, according to the report.
In light of her findings, Ms. Webster is recommending wide-ranging measures including attempts to recover the money; investigations into why Cabinet’s requirements for giving out the funding were disregarded; and strict adherence to guidelines such as tendering requirements when government pursues big-ticket projects in the future.
‘Hugely concerning’
On Tuesday, Governor Gus Jaspert addressed some of the concerns raised in the report.
“This special report has highlighted a number of areas where there have been failures to follow proper processes: in seeking competitive options for contracts; in failing to adopt legal and other advice; in the execution of a contract; and in weakness in financial and project performance management systems,” he said. “This is all hugely concerning.”
Mr. Jaspert also pointed to previous audit reports that highlighted similar financial failures and said he believes there are “fundamental deficiencies” in the VI’s project management systems.
“I am pleased to see appropriate action is being taken forward,” he continued. “The commissioner of police has undertaken steps to launch a criminal investigation based on the contents of this report.”
The governor said he also supports Police Commissioner Michael Matthews’ request to appoint independent financial investigation experts to proceed with the probe, and praised the National Security Council for agreeing to allocate financing.
“As you would expect, the criminal investigation now needs to take its course, and we must be patient in waiting for it to come to a conclusion,” Mr. Jaspert said.
Deputy Governor David Archer, he added, will take the lead in investigating potential breaches of rules and regulations by public officers.
Introductions
The BVI Airways proposal originated in late 2013 when Lester Hyman, a long-standing legal counsel to the VI government based in Washington DC, introduced then-Premier Dr. Orlando Smith to a DC-based real estate developer named Bruce Bradley, according to the auditor general.
During these early meetings, Mr. Bradley — the owner of the DC-based real estate investment firm Castleton Holdings LLC, which apparently dissolved in September 2019 — sought support and financing for the BVIA project, the report stated.
He envisioned using two 85- seat jets capable of taking off from relatively short runways to open direct travel routes between Terrance B. Lettsome International Airport and Miami International Airport, tapping into an international hub and new tourist markets.
However, the report states, he had “no prior experience in the aviation industry” to support his plans.
Nevertheless, government signed a memorandum of understanding in June 2014 agreeing to move ahead and consider the project, and one month later Castleton and government jointly hired the Oregon-based firm Sixel Consulting Group Inc. to conduct a feasibility review.
Signing the tentative memorandum was an “expression of good faith and intent” that allowed Castleton and government to explore the project before signing a binding agreement, according to Ms. Webster’s report.
The MOU outlined Castleton’s interest in developing the proposed air service by providing experienced pilots and personnel and obtaining needed licences to operate the flights. The government, meanwhile, would be required to develop amenities at the Beef Island airport, waive certain airport fees, help with advertising, offer exclusive rights to the company to pursue the project for 12 months, establish a three-year contract — and, most importantly, provide substantial financial support. This support would come in the form of a revenue guarantee, a letter of credit covering operating costs, and a 20 percent annual return to investors.
Feasibility
Sixel reviewed the initial MOU, calculating how long it could take for government to recoup its investment.
The firm ultimately advised that the proposal could be a low-cost, low-risk solution to providing direct flight service within a year, according to the auditor general. It estimated a $2.6 million net cash flow in the first 36 months of operation.
However, government was not convinced by the Sixel report, Ms. Webster explained.
“Concerns about the reliability of the information on which the projections were based (seating percentages and growth rates) led to scepticism on the part of the government parties,” her report states.
That scepticism, she suggested, was warranted. Based on the estimate that government would pay $3.6 million in the first year to cover the operating loss, Sixel found the venture would turn a profit by the end of the three years, according to the report.
However, the auditor general said Sixel’s projections didn’t take into consideration the estimated $6 million needed for start-up costs. That would bring government’s first-year investment cost to $9.6 million.
Even if the airline turned a projected profit of $6.22 million in years two and three, the profit wouldn’t be enough to cover government’s initial investment, especially because the partners insisted on getting a return on their investment first, Ms. Webster’s report explained.
The projected profits, she added, were also based on the assumption that the airline would be able to fill 80 percent of its seats early on.
Additionally, the Sixel report stressed the importance of interairline agreements to the overall success of the new routes. By working with established airlines, BVI Airways could build a bigger clientele, make flights more affordable, and more easily facilitate connecting flights, according to the auditor general’s summary of Sixel’s findings.
Without those agreements and the boost in growth they could give to the fledging airline, government worried that it would need to continue subsidising BVI Airways for years after it started operating, Ms. Webster’s report stated.
Other red flags
After reviewing the Sixel report and identifying red flags about the financial risks of the project, government officials initially rejected the proposal, according to the auditor.
“With the persistent uncertainty on the above key issues, the government was unwilling to commit to a potential ongoing liability,” the report states.
Then-Governor William Boyd McCleary also shared early concern that the project wasn’t well enough developed to properly consider, according to the auditor general. He called for government to exercise due diligence in confirming the partners’ technical experience and record of sound business management.
“This suggestion was unheeded,” the report stated.
The auditor general also claimed that government made a misstep by not financing the Sixel assessment on its own rather than sharing the cost with its partners. Because Sixel was considering the interests of all involved parties instead of just the government’s, the company didn’t provide information about other options, such as negotiating with established airlines, improving ferry access, developing existing VI carriers, or putting the project to tender, she stated.
The BVI Airways project, in fact, never did go to tender. Government didn’t seek competitive submission, “nor was there any comprehensive examination of alternatives such as cost of improving the ferry system or pursuing an established airline to undertake the route. This venture was unsolicited and unplanned.”
Insisting
With government officials reluctant to proceed with the project after reviewing the Sixel report, about a month passed. But Mr. Hyman pushed them to reconsider, arranging an urgent meeting between the premier and BVI Airways representatives to “allow the parties to meet in isolation with a view to ironing out the issues of interline agreements and capping the government’s financial exposure,” according to the auditor general.
In January 2015, government commissioned another review of the project from the accounting firm BDO, which has been serving VI clients since 1993. Its study of the agreement warned about several financial issues with the MOU, and provided wide-ranging advice that largely went unheeded, Ms. Webster found.
“The BDO study concluded that the proposal outlined in the MOU was inequitable, because it required the government to bear the costs and risks while the operator parties were guaranteed returns,” according to the report.
The firm made specific recommendations about how to even the playing field. BDO, for example, said the 20 percent revenue guarantee was “aggressively” high and instead suggested reducing it to between five and eight percent.
BDO also warned that government would take on a “significant liability risk” by guaranteeing its partners’ revenue when they “apparently lacked relevant operational experience.”
Additionally, the accounting firm suggested that government get an official agreement that BVI Airways would secure the interline agreements that would help the company grow.
Finally, BDO recommended considering leasing more modern aircraft than the 20-year-old planes the partners had in mind. Newer planes, the firm noted, likely wouldn’t be as expensive to maintain.
But government did not adopt those suggestions, and much of BDO’s advice never even made it to Cabinet, according to the auditor general’s report.
“The BDO financial assessment report that recommended changes for a more equitable arrangement was not included among the papers presented to Cabinet,” the report states.
Premature payments
On Sept. 23, 2015, Cabinet approved the basic conditions of the deal, including an agreement that Castleton would invest at least $6 million of its own money into the project, according to the auditor general.
“However, Bradley suggested that his intention was to use the government’s letter of credit to secure financing for the project, suggesting that from the beginning there was no intention to inject personal resources but rather to use the government as the primary (and possibly sole) source,” according to the auditor general’s report.
Government officially signed a “Framework Agreement” with the other parties on Dec. 7, 2015. The agreement outlined in more detail how BVI Airways would proceed with launching a commercial air service by October 2016, and how government would provide support and a letter of credit for $7 million, with the funds to be delivered on a payment schedule over the course of three years.
The agreement also required that government appoint a special liaison “to ensure timely responses and resolution of issues.” Government appointed then-Financial Secretary Neil Smith.
The government’s first direct payment, of $500,000, was made on Jan. 22, 2016 as a stopgap measure when it failed to secure a letter of credit from an international bank because of a crackdown in the Caribbean banking industry on risky investments, according to the report.
Government paid the next $2.4 million two months ahead of schedule on March 11.
“This, according to the then-financial secretary, was needed to allow the operator parties to lease the aircraft,” according to the report.
The partners acquired two BAe Avro RJ 100 jets that were more than two decades old and recently retired from Swiss Air’s fleet. Though the partners never revealed how much they paid for the jets — and it was unclear whether they were leased or purchased outright — assessments placed their market value at $4.9 million each, according to the report.
On May 5, 2016, government wired a total of $2.1 million to BVI Airways, five months before the deadline stipulated in the Framework Agreement. As for the last $2 million, government was supposed to pay it after BVI Airways successfully launched its air service to Miami, with $1.2 million to be paid in May 2017 and $800,000 to be paid that November.
But Mr. Smith, the financial secretary and project liaison, acted without Cabinet approval and gave the go-ahead to release the money from escrow on Jan. 11, 2017 even though the company had not commenced flights, according to the auditor general.
Even though government met its contractual obligation to pay the full $7 million, the partners also requested an immediate payment of an additional $200,000 to cover costs related to government’s earlier failure to secure a line of credit. The failure was a material breach of the Framework Agreement, but the partners had signed an addendum on June 7, 2016 that forgave the default, according to the auditor general.
Government made the additional $200,000 payment on Aug. 26, 2017. Asked by the Beacon about the release of funds, Mr. Smith declined to comment on the subject, noting that the HOA’s Public Accounts Committee is likely to consider the matter. He expressed concern about potentially compromising due process by speaking out before the committee has a chance to request more information from the involved parties and offer its recommendations on how to proceed.
Mr. Smith didn’t know how long the process might take, but he expressed hope that the committee would consider it quickly.
Inexperience?
Besides the financial issues of the deal, the attorney general probed the past experience of BVI Airways stakeholders.
To oversee the project, CEO Jerry Willoughby, Executive Vice President Pauline Jones and Safety Director Joseph Pampalone were brought in as BVI Airways executives based on their purported expertise in aviation, according to the report.
However, their main apparent experience was with New York-based Baltia Airlines, which never operated flights or generated revenue despite allegedly raising millions of dollars from investors since it launched in 1989.
Mr. Willoughby “served as director of flight operations for the beleaguered Baltia Airlines Inc, and used this association to bring in two of his former colleagues,” the audit report explained, adding, “The parties were instrumental in assisting with the [Air Safety Support International] and [US Department of Transportation] approvals but, as with Baltia, fell short of securing a viable commercial airline service.”
Mr. Willoughby, Ms. Webster noted, also worked with Colchester Aviation, which acquired BVI Airways from Luke Smith in 2015 after the airline lost its air operating certificate.
“The government pursued the arrangement with parties who had no prior experience in starting and operating a similar venture,” according to the report. “The parties spearheading the proposal in 2013 brought promises and a proposal but no experience in establishing or operating an airline.”
As the BVI Airways deal began to fall apart, Colchester Aviation partner and BVI Airways board chairman Scott Weisman, a lawyer of 30 years with no apparent experience in commercial aviation, repeatedly refused to provide sufficient details to government on how its $7.2 million had been spent, according to the auditor general’s report.
Ms. Webster also faced difficulties of her own as she tried to obtain financial reports from BVI Airways and Colchester executives.
“No information was provided by the operator parties on their alleged investment, and aside from the unaudited summary financial statements released for BVI Airways, no details provided on how the funds were applied,” the report states.
The limited financial information that was provided sometimes raised more questions than it answered. A review of the incomplete financial statements from Colchester showed that in 2016 it received zero income, and zero investments and had a loan balance of $7 million, according to the auditor general. The company spent $3.3 million in “undefined expenses” and just over $1 million on transportation equipment, the report states.
Despite apparently having $3.2 million in cash at the end of 2016, when BVI Airways direct flights were supposed to commence, the company disclosed a negative shareholders’ equity of $2.8 million, “which serves as a red flag of the company’s ability to repay its obligations,” according to the auditor general.
Of Colchester, the report states, “The role of this BVI company in the venture has not been made clear as neither it nor BVI Airways made any public offering of shares in the BVI during the course of the venture.”
Conflicts of interest
The auditor general also identified multiple conflicts of interest throughout the lifetime of the project, including Mr. Hyman’s role in launching the partnership.
“Correspondence indicates that he played a significant role in navigating the parties towards an agreement,” the report states. “Hyman’s long-standing relationship with the government created high-level access and an implicit level of trust.”
But the attorney reportedly served both as a representative for government and as a director on the BVI Airways board.
“In assuming dual roles in the BVI Airways venture, Mr. Hyman operated in conflict of interest as his fiduciary obligations to the BVI government appeared to be superseded by his personal interests in the project,” according to the report.
Mr. Hyman’s lawyer, Barry Pollack, said in an email that Mr. Hyman had good intentions regardless of how the deal eventually crumbled.
“As the report notes, all parties recognised that establishing direct air service to Tortola from the United States would provide a significant economic boost to BVI tourism and economic growth,” Mr. Pollack wrote. “Mr. Hyman at all times acted in good faith, endeavouring to help the parties to attain this worthy goal.”
He added that the project’s failure was unfortunate, but Mr. Hyman worked diligently with Dr. Smith in the attempt.
“No amount of Monday morning quarterbacking or revisionist history can change the fundamental fact that Mr. Hyman’s motivations and efforts related to this project were admirable,” he wrote.
Financial secretary
The auditor general also questioned why Mr. Smith, the financial secretary, doled out money for the BVI Airways project earlier than scheduled.
Mr. Smith, she noted, served both as financial secretary and as the official project liaison appointed by government to ensure the Framework Agreement requirements were met.
“This allowed the operator parties to have ongoing high-level access and support from within the government but created foreseeable issues,” the report stated.
Ms. Webster said this arrangement created a conflict of interest because Mr. Smith was both the custodian of government funding and the liaison with an interest in seeing the project succeed, eliminating a necessary check between the project’s execution and financing.
The report continued, “The acute level of scrutiny that should have been applied to the financial and other issues of risk presented by the operator parties was replaced with insistent action to accommodate their requests.”
Glenroy Forbes replaced Mr. Smith as financial secretary in June 2017.
Deal fails
Despite receiving the promised $7 million and previously pledging to nearly match the government’s investment with its own funds, Castleton claimed it ran into financial trouble as the projected date for launching the Miami flights approached, according to the auditor general.
“Towards the end, the operator parties’ tone shifted to accusatory and uncooperative even as they solicited additional public financing from the government,” the report states.
Partners complained about the government’s plans to expand the airport’s runway, though they initially lauded the expansion in their pitch and said it proved that customers wanted direct flight services, according to the report.
The partners blamed their failure to get outside funding on the expansion, which they said ultimately led to the total failure of the airway, Ms. Webster added.
BVI Airways officials also complained about not having exclusive rights to operate at the Beef Island airport; about alleged breaches in confidentiality agreements; and about needing further financial support, according to the auditor general.
The airline did make a charter flight to Curacao in April 2017 and signed a lease agreement with Air Sunshine for service flights between Haiti and Cuba, but it never offered service between Beef Island and Miami.
That summer, BVI Airways began seeking additional funding, and unsuccessfully attempted to use the planes as collateral to obtain $6.5 million of revolving credit from the government, the auditor general said.
Despite the reported financial issues, it looked like the project might get off the ground when Miami-Dade’s Aviation Director Emilio González promised the direct flights would begin on July 22 with twice-weekly round-trip flights. However, Mr. Willoughby disputed the announcement, calling it premature. Four weeks later, BVI Airways suspended operations and laid off staff, citing financial issues.
Government officially terminated the contract in November 2017.
Communication
The auditor general also examined how well government and BVI Airways upheld their responsibilities under the Framework Agreement.
The government mostly upheld its end of the deal, she found, while BVI Airways fell short in many respects.
Besides paying over $7.2 million, government granted BVI Airways the right to operate as long as it desired; reimbursed the airway for start-up costs; appointed BDO Deputy Managing Director Ryan Geluk as its representative to the airway’s board of directors; and terminated the agreement with appropriate notice, the report states.
Additionally, upgrades were made to the airport as required by the agreement, including a new security machine, in-flight display systems, renovated counter spaces, new office space at the terminal, air conditioning and more, according to the report.
For its part, BVI Airways did pursue necessary certifications from the VI, US and UK as required by the Framework Agreement, but it failed to secure interline agreements, publicise flight schedules, offer 10 percent of investment opportunities to VI residents, launch the Miami service, or repay government from operating profits, Ms. Webster found.
As the deal was falling apart, the airline asked government to replace the leadership of the BVI Airports Authority, Customs and Immigration departments, and the BVI Tourist Board to accommodate the private venture, according to the report.
Communication reportedly deteriorated around that time, particularly as government sought due-diligence information regarding the ownership and control of the aircraft and involved companies.
The report states that Mr. Weisman provided some certification information but “ignored requests for evidence of ownership for the two aircraft, registers of beneficial owners, and directors for the relevant companies and financial information for the company.”
Follow-up requests “drew a response that was defiant and accusatory with flagrant refusals to provide much of the information,” according to the auditor general.
Government engaged the VI law firm Conyers Dill and Pearman in June 2017 to handle communication with the airline, but when the firm requested information about how the $7 million was spent, Colchester responded with a non-disclosure agreement, the report states.
Mr. Weisman, the report adds, called the request for information “more of the same crap.”
Future action
Moving forward, the report recommends that a firm of independent accountants perform audits of BVI Airways and Colchester “to provide accurate information on their expenditure activity and afford assurance on how the government’s monies were applied.”
Ms. Webster also noted that the airline’s management accounts appeared to be inconsistent with its level of operations. The report recommended that an audit be requested during the ongoing arbitration process that began last June when BVI Airways representatives launched private arbitration proceedings against the VI government in a New York City court.
The auditor general also supported government’s ongoing efforts to reclaim the funds paid to the airline, noting that BVI Airways never properly accounted for how they were spent. Though the Framework Agreement required the BVIA partners to submit quarterly financial reports, the report says they failed to do so.
“The one set of statements received by the government for the pre-operational period appears to be inflated and misleading,” the report states, adding, “If accurate, the submitted statements show disproportionate spending on salaries and professional fees and indicate a misrepresentation of the information submitted to the Inland Revenue Department.”
The report also recommends that government seek competitive options when pursuing “major spending” projects in the future. Government, it adds, should also contract important project studies independently.
Addressing conflicts of interest, the report states, “Senior public managers are government’s gatekeepers and should not assume roles that can create a conflict with their public fiduciary roles.”
Call for explanation
Additionally, the report called for an explanation from Mr. Smith.
“The former financial secretary, who served as the government’s liaison on this project, should be required to provide answers for his apparent excesses of authority beyond Cabinet’s authorisations, including his release of $2 million in January 2017 to the operator parties, which may also amount to a breach of trust,” the report states. “Explanations are also needed for the absence of financial oversight and failure to insist on accountability from the operator parties with respect to how the government’s funds were applied — especially as financial transparency was a specific requirement of the Framework Agreement.”
Expressing scepticism about the partners’ intentions from the beginning, the report concludes, “The manner in which the project was introduced and progressed suggests that the operator parties were attempting to take advantage of the territory’s existing airlift issues by providing a solution that would guarantee them above-market returns without the financial risk.”
No comment
Messrs. Bradley and Weisman did not comply with requests for information from the Office of the Auditor General, according to the report.
The report notes that Mr. Bradley made contact through a brief phone interview that was interrupted by a poor connection, but he did not respond to an emailed questionnaire.
Former BVI Tourist Board Chairman Russell Harrigan — who publicly stressed the importance of the direct flights when the BVI Airways deal was announced — also did not comply with the auditor general’s requests for an interview, according to the report.
The report noted that Mr. Geluk, government’s nominee on the airline’s board of directors, said that he and Messrs. Harrigan and Smith met with BVI Airways representatives in Miami in September 2016. At the time, the airline was seeking approval from regulatory authorities while dealing with paperwork delays from Air Support Safety International, the auditor general stated.
“Apart from the Miami meeting, [Mr. Geluk] reported that he was not provided with information regarding the airline’s operations and the only set of financial statements received were unaudited and for the 15 months pre-operational period from commencement of the venture to [March 31, 2017],” the report explained.
Mr. Harrigan, who is the publisher and majority owner of this newspaper, declined to comment for this article. Attempts to contact Dr. Smith and Messrs. Willoughby and Weisman were not immediately successful.