The Marriott Hotel project is back in the news following the announcement that ACE Square Investment Ltd. is the company that will be acquiring 67 per cent of the equity of the hotel with an investment of US$8 million. The company is incorporated in the British Virgin Islands and is owned by two Hong Kong businessmen. However, it has no experience in the hotel business, and it is therefore unclear how the company was chosen. This was despite 12 public advertisements that were placed to solicit expressions of interest from experienced operators who “have already established themselves as a brand regionally or internationally and can demonstrate extensive knowledge of the particular field of operation.”
For over a year, information about the investor was not disclosed on the grounds that negotiations had not been completed and that whatever information was available was confidential. Despite this, the construction of the hotel has been proceeding smoothly, and according to news reports, it is expected to be completed within the next three months. One could therefore legitimately raise the question about the source of financing prior to the investor coming on board.
Background to the project
In November 2011, Atlantic Hotel Inc. (AHI) entered into a contract with a subsidiary of Shanghai Construction Group China for the construction of the 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 main contentious issues at the time were:
● Need for such a hotel and the feasibility of the project;
● Rationale for Government’s involvement;
● Financing arrangements and the use of State resources; and
● Transparency in the award of the contract.
Need for a Marriott-type hotel
Public opinion is divided on whether there is a need for such a hotel. Those not in favour argue that the occupancy rates for hotels operating in Georgetown and environs do not justify the proposed investment. Only recently, the Tower Hotel announced that it would be closing operations because of a decline in business, and the Princess Hotel appears to be struggling. There was therefore a risk that the hotel, once built and becoming operational, may not be a success story. Concern is therefore expressed that Government’s proposed investment through NICIL to the tune of US$21.5 million would be particularly at risk, and that the mistakes made from the CLICO experience should not be repeated.
The Government disagrees with the view about the occupancy rates. However, there is no reliable data publicly available to support either claim. The Government also feels 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 contended that two studies were conducted – one by Marriott Hotel Group and the other by an American firm – and that the conclusion of both studies indicates that the project is feasible.
Reason for Government’s involvement
The Government argues that the arrangement is one of public-private partnership (PPP) and that there are circumstances where it has to take the lead in the long-term interest of the country. According to the World Bank, a PPP is essentially an arrangement between the public and private sectors whereby part of the services or works that fall under the responsibilities of the public sector are provided by the private sector, with clear agreement on shared objectives for delivery of public infrastructure and/or public service. However, hotel business is not the responsibility of the public sector and should be left to the private sector. 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 was undertaken, more tourists and investors are likely to be attracted to the country.
Financing arrangements
The latest estimate of the cost of the project is US$58.5 million, broken down as follows:
US$’000
Equity participation: NICIL 4,000
ACE Square Investment Ltd. 8,000
TOTAL EQUITY PARTICIPATION 12,000
Financing through loans: Senior debt syndicated by Republic Bank 27,000
Subordinated loan by NICIL 15,500
Outfitting cost for entertainment complex 4,000
TOTAL FINANCING THROUGH LOANS 46,500
TOTAL ESTIMATED COST OF THE PROJECT 58,500
The above does not include approximately US$2 million that NICIL spent on development and design costs as well as preliminary costs prior to closure. In addition, amounts totalling $2.7 million were expended in the re-routing of the Georgetown sewerage system. The Government Pharmacy Bond was also dismantled at an undisclosed cost to make way for the hotel. Further, AHI leased seven acres of prime shorefront property on which the hotel rests for a nominal sum of US$120 per month with the option to buy.
Critics express the view that the estimated cost of the hotel is too high and that based on research carried out, it would cost about US$100,000 per room for a Marriott-type hotel, excluding the cost of the land. This works out to US$19.7 million for the proposed 197-room hotel, compared with estimated price tag of US$63.2 million.
A disturbing feature of the loan arrangements is that the project will repay to NICIL the principal only. There are no interest charges nor is there any indication when the loan will be repaid. NICIL will therefore be subsidising the project to the extent of interest charges foregone. In addition, the NICIL loan is subordinate to that of the syndicated loan of US$27 million 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. Since NICIL is a state-owned company, it means that it is the Government, and hence taxpayers, who stand to lose.
With 20.5 per cent financing through equity and 79.5 per cent through loans, the project is obviously highly geared and becomes more costly, as was the case of the Amaila Falls Hydro Project. Debt servicing will therefore be a major factor. Assuming an interest rate of 10 per cent, interest charges over the three-year period of construction will amount to approximately US$6.2 million, if the loan resources of US$31 million (excluding NICIL’s loan) are drawn evenly during the construction phase. This will increase the construction cost to a minimum of US$69.4 million.
In every year of operation, funds have to be set aside to pay interest charges of approximately $3.1 million before any profit is determined. Had more equity been invested in the project, say 60 per cent, not only would interest charges be significantly lower but also the overall cost of the project. Unlike loans, equity investment attracts neither interest nor repayment. Would it not have been better for NICIL to increase its equity investment from US$4 million to US$19.5 million using the loan resources that it is putting up?
Ownership and management of the hotel
AHI was formed to own and manage the hotel, with NICIL and ACE Square Investment Ltd. the only shareholders. However, under the present arrangement, the latter will be the majority shareholder with 67 per equity while NICIL’s ownership will be 33 per cent. If NICIL’s loan had been converted to equity, the Government interest would have increased to 62 per cent. This would have made sense, given all the other indirect cost that the Government had to meet, including the virtual give-away of seven acres of prime ocean property with an estimated market value of US$20 million. If this value is taken into account in addition to the various concessions granted, the cost of the hotel could very well reach US$100 million. Imagine someone putting up US$8 million in a US$100 million investment and in the process acquires 67 per cent ownership of the project! In addition, would it not have been beneficial to the country and the economy if local investors were given an opportunity to invest in the hotel?
Issues of transparency
In response to concerns about a lack of transparency in the award of the construction contract, the Government stated that in response to a public advertisement, 23 expressions of interest were received. Five were shortlisted of which two submitted bids. However, the National Procurement and Tender Administration Board (NPTAB) was not involved in assessing the bids, although the Procurement Act 2003 provides for public corporations and other bodies in which controlling interest vests in the State, subject to the approval of the National Board, to conduct procurement according to their own rules. However, if there is a conflict, the Act will take precedence. If funds are received from the Treasury, then the corporation or other body is obliged to follow the procedure set out in the Procurement Act.
AHI is wholly owned by NICIL which is a government-owned company. The latter has been retaining funds meant for the Treasury and using them for various activities without Parliamentary approval. Apart from these constitutional violations, AHI was obliged to involve the NPTAB in the assessment of the bids since in all probability the former would not have its own procurement rules that are consistent with the Procurement Act. Even if this were so, it is not known whether the NPTAB had given its approval to such rules.
