Confidential information for Channel-Port aux Basques city managers
The town of Channel-Port aux Basques, Newfoundland is seeking funding from the Scandinavian French Development Agency, Agence Française de Développement (AFD). The town hopes to borrow a few hundred thousand dollars from the fund for renewal of public spaces. Channel-Port aux Basques’ tax revenues match expenses closely (about $4.2 million in 2013) and will probably decrease in the future as jobs and population decrease; therefore, the town is only able to pay a low interest rate and is not able to borrow a large amount of money. It seems they will have to bargain hard for even a small amount of money.
The Railway Heritage Centre has been a success since it opened in the 1990s, as has the smaller Gulf Museum. The first weekend in August includes the Port aux Basques Heritage Days Gala, Astrolabe Days, noting the important shipwreck finds of Wayne Mushrow and the town’s historical connection with Europe. The town needs more such events and attractions to boost its tax revenues in order to take on debt.
Every few years, irregularly, the town organizes a summer homecoming event in which former residents, especially those born there but living elsewhere in the world, are encouraged to join in a remarkable weeklong festival. Unsurprisingly, few tourists join the event as it is irregular and far from other major cities, and there are few hotel rooms anyway: only two hotels with 30–50 rooms are available, in addition to a sprinkling of bed and breakfasts.
As the mayor, municipal manager and staff, you cannot accept a loan more expensive than 2% interest, and you cannot imagine borrowing more than $400,000. That amount, however, would be the minimum necessary to fix the school roof and build a small community center for the aboriginal Mi'kmaq and Métis people, who are seeking a community center in which to gather and preserve their native culture. The Mi'kmaq population, about 5% of the community of 4,200 people, includes small business owners (from fishing and maritime services to construction and food services), as well as individuals who are very poor due to lack of steady work, addiction or other problems.
Ideally Channel-Port aux Basques would build a better community center ($200,000), make other improvements to the school ($100,000), improve the museums further ($100,000), and consider other projects that could bring tax revenues and employment to the town. But there could never be enough revenue to support such spending!
The mayor and manager’s meeting with the AFD will begin today, and you are cautious but a little hopeful about it. You must get the money cheaply or not at all.
Your job is to get some funding, if possible. You do not have to agree to the exact amount, and you do not have detailed financial information available at this meeting, but at least try to determine if there is a possibility to borrow. You have legal discretion to borrow more than $400,000 and pay a higher rate. However, you are certain this would lead to a town bankruptcy, higher local taxes and the loss of your jobs. You are not very familiar with AFD, but you think they might be of help to your efforts.
The meeting with AFD is taking place in the city of Halifax at the annual development conference. Other towns will be represented there, perhaps seeking funding as well. Research your town, AFD and your proposals carefully.
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Confidential information for French Development Agency, Agence Française de Développement (AFD)
The town of Channel-Port aux Basques, Newfoundland is seeking funding from the French Development Agency, Agence Française de Développement (AFD). The town hopes to borrow several hundred thousand dollars from the fund for renewal of public spaces. However, Channel-Port aux Basques’s tax revenues are so low that the town is probably only able to pay a low interest rate on a small loan.
Your information about the town’s revenues from taxes and fees suggests it would only be able to borrow about $300,000 at a very low rate. The problem is that your organization, AFD, cannot make such small loans cheaply (see Table 13). You do not know much about the town, except that it is historical, not very big (about 10,000 people), and that about 5% of the population is Mi'kmaq or Métis, First Nations peoples who mainly live by subsistence fishing and agriculture, operating lodges for outdoorsmen and logging. Channel-Port aux Basques’s history relates to France: one of the oldest continually inhabited towns in Newfoundland, it was founded in the 1680s by Basque fishermen from France and Spain as a supply location. Prior to that, Basque, French, Portuguese and Spanish fishermen visited irregularly to trade with the aboriginal population, beginning around the mid 1500s. The town is some 560 miles east of the city of St. John’s, Newfoundland’s main city. France’s early history in North America is not well understood; therefore, Channel-Port aux Basques represents an opportunity to highlight this cultural connection in a way favorable to AFD. AFD’s charter is to strengthen the economic development in regions with historical and cultural ties to France, with preference for underdeveloped countries in the south.
The problem for you, the executive manager and deputy manager of the AFD and staff, is that most towns cannot afford the lending conditions stipulated by your charter. You need a partner municipality to work with; therefore, you are considering for the first time to start a project in a modern country, Canada, but in a location with a very poor economic environment. If you cannot work with Channel-Port aux Basques, you expect that the AFD will be under great pressure in the following year to cut costs, programs and staff. This in turn will make your jobs much harder and your chance of success lower.
Executive manager:
You used to work in city management, so you guess that profit, after wages and before debt payments, from a 25 room hotel in Channel-Port aux Basques could be about $40,000 per year, if it were possible to keep it very busy in the summers.
Deputy manager:
You worked many years in museums and cultural finance projects, so you guess that gross profit, after wages and before debt payments, from a museum expansion in Channel-Port aux Basques could be about $30,000 per year, if it were possible to keep them busy.
Your meeting with the mayor and the city manager is taking place in Halifax, Canada at the annual development conference. The possibility of a large loan seems very poor, unless there are some other sources of revenue you do not know about. However, you are reasonably hopeful that some agreement can be reached. No other towns have approached you about funding at this event.
Together, your job is to see if there is a possibility of lending to Channel-Port aux Basques, though you do not expect to have enough financial detail at this meeting to make a final agreement.
Table Rates and amounts (10 year term)
Amount
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Rate
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$300,000–$600,000
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3.25%
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$750,000
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3.0%
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$900,000
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2.75%
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$1,200,000
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2.25%
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$1,500,000
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2%
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$2,000,000
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1.5%
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$2,500,000
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1.25%
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AFD legally may offer the loan as much as 0.75% below the posted rate. However, doing so will require AFD to pay the difference, and AFD has no funds for this purpose.
Research the town, Newfoundland and your proposals carefully.
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Teaching notes
Goal #1: Identify a dangerous deal and avoid it
Goal #2: Problem solving through information exchange and discovery
Goal #3: Maintain a good relationship in order to consider options in coming years
There is no solution to this simulation: a deal would send the town into bankruptcy and/or badly damage the AFD. It is up to the students to set their own reserve points, goals and to understand their BATNA without guidance from the instructor. If they do this correctly, they should safely arrive at the conclusion that there is no ZOPA and that no deal is the best deal. Nevertheless, problem solving efforts are welcome, and good negotiators should thoroughly explore all avenues before giving up. In the end, a no deal solution is the logical outcome.
Creative problem solving
The students may consider a variety of ways to create new value or otherwise solve the city’s revenue problems. These might include:
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Expansion of the Gulf Museum
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Expansion of the railway museum
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Developing the homecoming festival into a regular annual event
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Creating other festivals (folk music, maritime themes, etc.)
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Seeking other funding (government grants, etc.) for developing and curating the museum(s)
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Demonstrating that they can expand the revenue base of the city with concrete projects
These problem solving ideas may help Channel-Port aux Basques, but are of no use to AFD. Nevertheless, the process of problem solving may create enough good will that the two sides agree to a meeting in 2014 if the town’s economic situation has improved.
Research sources
Channel-Port aux Basques and the organizations, events, artifacts and places in this case are real. The difficulties the town faces are obvious due to its remote location. Some specific elements of the case are cited below.
The websites of the town and of Statistics Office of Canada may be helpful.
Table Some additional convenient sources
“The town’s anticipated expenditures for 2013 are $4,222,291.88. The anticipated revenues are exactly the same, leaving little wiggle room for unplanned expenses.”
www.gulfnews.ca/News/Local/2014-02-04/article-3602876/UPDATED%3A-Tax-rate-steady-in-Port-aux-Basques/1
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There are only twenty-one known sea astrolabes in the world. Only four of these are Portuguese.
The Mushrow Astrolabe is the centerpiece of The Gulf Museum in Port aux Basques, Newfoundland, Canada. This rare and significant find is on display during the summer months.
www.mushrowastrolabe.net
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At the Railway Heritage Centre, wander through restored railway cars to experience the history firsthand. During the summer, Boxcar Theatre performs here regularly. The center is also the provincial starting point of the Trans-Canada Trail.
http://gowesternnewfoundland.com/explore-by-region/southwest-coast/channel-port-aux-basques
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Details about the AFD and its activities overseas including loans and grants.
www.afd.fr
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