Introduction
On 16 November 2011, the Government of Guyana, through the newly established Atlantic Hotel Inc. (AHI) entered into a contract with to SCG International (Trinidad & Tobago) Ltd., a subsidiary of Shanghai Construction Group China, for the construction of the Guyana Marriott Hotel. There was much controversy in the decision to construct the hotel and in the entering into a contract to do so just 12 days before the National Elections.
The National Communications Network hosted a debate last Wednesday on the project, involving three panelists from the Government side, one from the private sector, and one from the Opposition. Notably absent was the representative from APNU. From what has been gleaned from the debate, the following are the main contentious issues:
● need for such a hotel and the feasibility of the project;
● rationale for Government’s involvement;
● financing arrangements and the use of State funds;
● ownership and management of the hotel after completion; and
● transparency in the decision to construct the hotel and in the award of the contract.
This column takes a closer look at each of these issues to assist the general public in having a better understanding of the project.
Need for a Marriott-type hotel
Public opinion appears somewhat divided on whether there is a need for such a hotel. Those not in favour argue that the existing occupancy rates for hotels currently operating in Georgetown and environs do not justify the proposed investment. There is therefore a risk that the hotel, once built and operational, may not be a success story and that this perhaps explains why foreign investors have so far not shown an interest in the project. Concern has been expressed that Government’s proposed investment through NICIL to the tune of US$21 million would be particularly at risk, and that the mistakes made from the CLICO experience should not be repeated.
The Government disagreed with the view about the occupancy rates. However, there is no reliable data publicly available to support either claim. The Government also felt that it is necessary to have such a hotel to boost not only tourism but also to afford an opportunity for investors to be accommodated in a world-class facility. It indicated that two studies were conducted – one by Marriott Hotel Group and the other by an unnamed American firm – and that the conclusion of both studies indicates that the project is feasible. However, since some of the information contained in the related reports is of a commercially sensitive nature, it could not be made public. Opposition parties were offered the opportunity to view an in-house presentation of the results of the studies but the offer has so far not been taken up.
Reason for Government’s involvement
The sole Opposition panelist suggested that, even if there is justification for the construction of such a facility, the Government has other priorities such as the construction of a new Demerara Harbour Bridge, and the cleaning up of the city of Georgetown. If the latter is undertaken, more tourists and investors are likely to be attracted to the country. The construction of the Marriott-type hotel should be therefore left to the private sector.
The Government argued that the arrangement is one of public-private partnership that is a common practice in several countries, and that there are circumstances where the Government will have to take the lead in the long-term interest of the country. However, it did not respond to the issue of other priorities.
Financing arrangements
The project is expected to cost approximately US$54 million, broken down as follows:
US$’000
Equity participation: NICIL 4,000
Private 8,000
TOTAL EQUITY PARTICIPATION 12,000
Financing through loans: Senior
debt syndicated by Republic Bank 27,000
Subordinated loans by NICIL 15,000
TOTAL FINANCING THROUGH LOANS 42,000
TOTAL ESTIMATED COST OF THE PROJECT 54,000
The above does not include approximately US$2 million that NICIL has spent or will spend on development and design costs as well as preliminary costs prior to closure. In addition, the operators of the entertainment complex (casino, nightclub and restaurant) will fund the outfitting costs estimated at US$4 million.
It is, however, not clear whether the additional US$2 million will be a further loan from NICIL to the project. Nor is it clear how NICIL will be able to obtain US$15 million to lend to the project. An interesting feature of the loan is that the project will repay to NICIL the principal only, and there was no indication of the timeline within which the amount will be repaid. NICIL will therefore be subsidising the project to the extent of interest charges foregone while at the same time it may very well have to pay interest charges for accessing funds to provide the loan to the project. In any event, there is an opportunity cost involved, which should have been taken into account.
In addition, the NICIL loan of US$15 million is subordinate to that of the syndicated loan facilitated by the Republic Bank of Trinidad and Tobago. This means that should the project run into financial difficulties, the latter gets preference over the former in terms of the repayment of the loans.
With 22 per cent financing through equity and 78 per cent through loans, debt servicing will be a major factor. Assuming an interest rate of 10 per cent, debt servicing over the three-year period of construction will amount to approximately US$6.3 million if the loan resources of US$42 million are drawn evenly during the construction phase.
The Government indicated that “NICIL and the majority shareholder(s) will have to stand behind certain risks – cost overruns and any debt servicing shortfall until the debt service ratios are achieved”. It further stated that these risks are considered minimal given the feasibility studies and the deal structure, among others.
Ownership and management of the hotel
AHI was formed to own and manage the Guyana Marriott Hotel, with NICIL currently being the sole shareholder of the company. One issue appears to be that both the Executive Director of NICIL and his Deputy are also the Head and Deputy Head respectively of AHI. Given the heavy workload of NICIL, these two officials may very well be over-extending themselves. It would therefore have been more appropriate for two other persons to serve as the Head and Deputy Head of AHI. This apart, these two officials may find it difficult to decide whose interest they should serve first – NICIL or AHI? – bearing in mind that AHI will be the owner of the hotel, with NICIL owning 33 per cent of AHI’s equity as well as 36 per cent loan stock. We have already seen how NICIL will be placed in a position of disadvantage through the grant of an interest free loan to AHI as well as being given subordinate status vis-à-vis the syndicated loan to be organized by the Republic Bank.
The consideration as to whether transactions between NICIL and AHI, for example, the payment of dividends and the repayment of loans, are not likely to place these two individuals in a position of conflict of interest, needs to be carefully thought out. There are also detailed accounting rules governing related-party transactions that need to be strictly observed.
Issues of transparency
The Opposition panelist also expressed the view that the estimated cost of the hotel is too high and that based on research carried out by his Party, it would cost about US$100,000 per room for a Marriott-type hotel. This works out to US$19.7 million for the proposed 197-room hotel, compared with the estimated price tag of US$54 million. The government, while not disputing the figure, pointed out that the costs relating to landscaping, the entertainment complex and a boardwalk need to be added. As indicated above, the entertainment complex is expected to cost US$4 million. It appears therefore that some more information is needed to arrive at a figure close to the US$54 million.
The government further stated that in response to a public advertisement, 23 expressions of interest were received for the construction of the hotel. Five were shortlisted of which two submitted bids. The lower of the two bids was accepted. It is not clear whether there was an Engineer’s Estimate against which the two bids were benchmarked. Nor is it clear to what extent the National Procurement and Tender Administration Board or AHI was involved in assessing the bids, bearing in mind that the Procurement Act 2003 provides for the following:
Public corporations and other bodies in which controlling interest vests in the State may, subject to the approval of the National Board, conduct procurement according to their own rules and regulations, except to the extent that such rules and regulations conflict with this Act or the regulations, this Act and the regulations shall prevail.
If funds are received from the Treasury for a specific procurement, then the corporation or other body shall be obliged to follow the procedure set out in this Act and the regulations.
Conclusion
The NCN’s debate on the proposed Marriott hotel was indeed very enlightening. It has shed some light on a project that has so far been mired in controversy. However, many issues and concerns remain. These need to be resolved as quickly as possible.
It is unfortunate that the Executive took all decisions relating to the project without the involvement of the highest decision-making body, the National Assembly, including the use of public funds over which Parliament has jurisdiction. It is also regrettable that the Assembly did not have an opportunity to review the results of feasibility studies. Perhaps, redacted versions of the reports could be made available in the interest of transparency.
It may not be too late for the project to be placed on the order paper of the National Assembly so that a full debate can take place to resolve all outstanding and contentious issues. While television debates on matters of public interest are welcome, they should not be to the exclusion of where such debates truly and legitimately belong.
