After years of first denying problems and then deflecting the blame for them, Premier Dr. Orlando Smith acknowledged last week that government’s $7.2 million injection into BVI Airways was a failed investment.
In a long statement during a House of Assembly sitting, Dr. Smith (R-at large) once again outlined the reasoning behind his administration’s initial interest in the non-functional airline, which has become a political football for current and aspiring lawmakers planning to run against the National Democratic Party in the upcoming general elections.
“The idea for BVI Airways was born from the same belief that has been my government’s North Star since the day we took office: that it is our duty to invest strategically today in order to build a more prosperous tomorrow,” the premier explained. “Nowhere is that more important than our tourism industry.”
The Virgin Islands has limited airlift options compared to other jurisdictions in the region, Dr. Smith explained, and a 2014 feasibility study provided by BVI Airways, which has not been provided to the public, found that the airline could increase air travel to the territory by nearly 450,000 passengers — more than double the amount at the time.
“Ladies and gentlemen, it is impossible to overstate how meaningful it would be to our economy if we could double air travel to the BVI,” he said. “It would mean tens of millions of dollars in increased tax revenues to pay for health care, education, roads and public projects. It would mean jobs for our people and profits for our local businesses. It would have been irresponsible of government not to pursue this opportunity further.”
Detractors, however, have described the deal itself as irresponsible: They say that it was undertaken without sufficient due diligence and that it involved foreigners who have a history of involvement in another questionable aviation enterprise. And ultimately, they say, it led to troubling questions about what happened to $7.2 million in taxpayers’ money.
But Dr. Smith claimed that before shutting down the company acquired two airplanes; got certification from the United Kingdom’s Air Safety Support International; secured approval from the United States’ Federal Aviation Administration, Department of Transportation and Transportation Security Administration; and hired ground crews, flight crews and an office staff.
These steps, he explained, gave the government confidence — until the company started asking for more money.
Problems
BVI Airways submitted a complaint to government in 2016 saying the government’s plans to extend the Terrance B. Lettsome International Airport’s runway had “undermined” its ability to raise capital from investors, due to the assumption of increased competition, according to the premier.
“BVI Airways still had to pay for flight and ground crews, service their debt and pay for other expenses — but had no revenue and no access to new investors,” Dr. Smith explained. “Put simply, the company was running out of money. BVI Airways came to government asking for additional money from us. Government could see no path toward responsibly increasing our commitment. The best we could do was bring forward the payment schedule of the $7 million we had committed to provide.”
‘Failed’ investment
The premier said again that government continues to work with its legal advisers to explore possibilities of recouping some or all of that $7.2 million, though he did not announce a lawsuit and noted that he could not promise success on that front.
“For now, the truthful answer to the question ‘Where is the seven million?’ is that the money was invested and the investment failed to deliver a return,” Dr. Smith said. “Now let me be perfectly clear: The money was not put into any person’s pockets. Nobody got rich off this project.”
Rather, he said, the money was spent on the progress he listed above: acquiring aircraft, paying employees, and securing regulatory approval.
“That is not to say that there is not blame to go around,” the premier said. “There is, after all, one great unanswered question about this whole saga, which is why BVI Airways began this project when they had to know that we intended to expand the runway, which would eventually mean competition from larger carriers. In all honestly, I cannot answer that question.”
Three of BVIA’s executives previously worked with a New York-based airline called Baltia, which never operated a commercial flight in 27 years of existence despite allegedly raising millions from investors.
This information was available online, but government officials have insisted that they conducted adequate due-diligence on BVI Airways before entering into the agreement.
Inaccuracy
Now, Dr. Smith’s explanation of the early payments to BVIA doesn’t appear to be a complete assessment of the situation, according to documents obtained by the Beacon and provided in previous HOA sittings.
Originally, the airline entered into an agreement with government on Dec. 7, 2015, promising to use “commercially reasonable efforts” to launch direct flights between Beef Island and Miami by Oct. 31, 2016.
In return, government would provide the company with a $7 million “investment” scheduled to be spread out over almost two years and to be refunded if BVIA were sufficiently profitable.
On June 7, 2016, however, government and BVIA signed a subsequent document agreeing that government had been tardy in delivering a letter of credit, which “hindered the ability of BVI Airways to launch service.”
A letter of credit is a bank’s guarantee that a payment will be timely and accurate. The bank is required to make up the difference should a payer fail in this regard after delivering a letter of credit. The letters are common in international transactions.
Government’s 2015 contract with BVIA required government to obtain a letter of credit from a major international bank with an office in New York City and deliver it to the company within 30 days.
Because this didn’t happen, the new agreement required government to set up an escrow account and wire an additional $200,000 — on top of the $5 million it had paid and $2 million it had yet to pay — to BVIA to cover costs associated with the delays. On top of that, government was required to pay the remaining $2 million — originally reserved for May and November 2017 disbursements after the airline was required to start flying — much earlier.
Under the original contract, those payments could have been waived had BVIA not established flights by the end of 2016, which it did not. Instead, government paid that $2 million on July 15, 2016, according to information Dr. Smith provided to the HOA in April 2017.
Risks
On Tuesday Dr. Smith downplayed the BVIA failure, pointing to other “risks” his and other VI governments have taken, which he argued were successful: the cruise ship pier, Peebles Hospital, the H. Lavity Stoutt Community College and the airport.
“Of course, not all the risks government [has] taken on have worked out,” he said. “Sometimes projects fail. Certainly, that appears to be the case with BVI Airways. But I also hope that no one takes from this experience the false lesson that risks must be avoided. On the contrary, we must continue to do so. We must be bold. We must be prepared to try new things and take on big challenges because it is the only way to secure our future.”