Feature & Comment
Op-ed: How to stop unscrupulous businessmen charging obscene fines for late payments
The CEO of Soneva resorts calls for a cap on penalty interest.
The Maldives is one of the world’s best places to operate a resort. And yet, the cost of borrowing the money to build one is eye-wateringly high. How do we explain this paradox?
My wife Eva and I opened our first resort, Soneva Fushi, in 1995. We continue to invest in the country, and remain enthusiasts because the economic fundamentals of the Maldivian tourism industry are so strong.
The Maldives commands some of the world’s best hotel returns. The country’s REVenue Per Available Room (REVPAR) rate, currently standing at US$434, is around four times higher than in competing tourism destinations such as Barbados, Bali, or Phuket. Last year, the Maldives’ clocked up an average daily room rate of US$648, with an occupancy of 66.9% — not far off what a top London hotel earns.
The Maldives also benefits from low operating costs. The country’s free labour market means labour costs are reasonable for South Asia. All in all, operating margins are very healthy.
The country has excellent air connections to Europe, the Middle East and the rest of Asia, and is just a short flight away from 2.5 billion people. This compares favourably with other top destinations such as France, Spain and the United States, which are within a short-haul distance of around 400 million people.
What’s more, at present, 90% of the arrivals to the Maldives are from long-haul destinations. In mature markets such as France, it is common that 90% of arrivals come from nearby countries. The Maldives’ Asian market has the potential to grow exponentially over the coming years.
Economists refer to the 21st century as the ‘Asian Century’. With the Maldives situated in the middle of the booming Asian continent, why are banks and investors demanding such high returns for building a resort here?
– The need to reduce risk –
Banks are wary of investing in the Maldives, and charge higher interest rates when they do, because of a perception of high risk. This risk premium is not caused by the fundamentals of the tourism economy, which are strong, but because of investor concern over a legal system and investment infrastructure that does not sufficiently protect lenders. In a recent article, I highlighted some of the challenges that investors have with the Maldives Inland Revenue Authority.
MIRA has the power to impose and collect taxes on behalf of the government. Originally set up as something akin to the United States’ IRS, over the years it has become both politicised and overbearing. One could sum up MIRA’s approach to taxpayers as ‘guilty until proven innocent’.
In that same article, I also touched upon the fact that banks have increased the interest rates that they charge, and lowered their country limits, because they are unable to foreclose on bad loans.
A further risk I experience as a businessman operating in the Maldives, is that suppliers sometimes charge obscenely high late payment penalties – a charge that is usually hidden in their contracts in small font type. Some unscrupulous businessmen charge late payment penalities even when their bills are paid on time.
A recent experience of mine shows how the scam works:
A legal case was recently lodged against Soneva Fushi by a supplier who claims that we owe him US$20,000. Our accounts team have proof that his invoices have been paid. However, because the interest rate that the supplier is charging for late payments is 2% per day, we are unsure how to move forward, as the interest that he is now charging stands at US$200,000, i.e. 10 times more than the original invoice!
If we do not pay the supplier what he is demanding (even though we are in the right), the interest will clock up — and up, and up.
If we risk going to court — where the proceedings can take years and a fair outcome is never guaranteed — and lose, we will owe the supplier US$20,000 for his services, and perhaps close to US$1 million in interest. This situation, faced by businesses all over the country, is madness.
The private sector is not the only victim. The government, too, has suffered. In fact, things have got so bad that the government is reportedly planning to put a cap on penalty interest on late payments from its own suppliers. This is a good idea.
Penalty interest caps are customary in most countries. In the UK, there is a cap of 5% on any late payment charge – and that is 5% of the total value of the invoice not 5% per day. Many countries have penalty interest caps of 12% or less on late payments.
The government, with the proposed cap, is preventing its own suppliers from taking it to the cleaners. But what about the private sector? I urge the government to apply this cap to all commercial transactions in the Maldives, as it is in many other countries.
If the government were to implement such a cap, it would reduce the risk of doing business in the Maldives. This would encourage banks and investors to loosen their purse strings, and charge Maldivian companies a lower rate of interest. And that is a scenario that would help turbocharge the economy, and benefit the entire nation.
By Sonu Shivdasani, CEO and co-founder of Soneva resorts.
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