Kingston Hotel: Crooked or Foolish Deal?

On Thursday the cream of the private sector would be gathering at the Kingston Marriott to celebrate what a leading private sector representative described as an impact investment, i.e. an investment in a company that not only provides a financial return to the investor but also social and environmental returns as well. One example of such a company would be one that produces solar lighting for those without access to electricity, while another would be one producing low cost mini-computers (tablets) for the needs of deprived kids.

In both economic as well as financial terms, the Marriott Hotel provides neither a financial return to the investor, in this case a Government company named Atlantic Hotel Inc., nor any social benefit to the community. Let us see what the Government has had to put into the investment:

1. Land with a market rental value of $1 US per square foot has been leased to the company at half a US cent per square foot, i.e. 1/200 of its worth.

2. The land is estimated to be worth around US$75 million but the company can buy it at any time within 99 years for US$1 million. This model practically tells the investor to rent for next to nothing for the next ninety eight years and then exercise the right to purchase in the 99th. year when the present day value of $1 million will be worth approximately US$491, using an 8% discount rate.

3. There is a concept of a negative rent and the nominal rent being paid is effectively a payment to hold an option for 99 years.

4. Investment in GT&T which has produced billions of dollars in dividends was sold for $30 million to partly finance the government investment in the Marriott. At least $20 million of this sum has been lent to AHI at zero rate of interest and not repayable until after fifteen years. In today’s value that US$20 million paid after fifteen years is worth US$6.3 million, using an 8% discount rate.

5. The Government has given a generous tax holiday to the company including ten years for taxes on income and twenty years on duty and taxes on imports.

6. The Chinese contractor, which was awarded the contract even before it registered to do business in Guyana, has paid no corporate taxes on its profits, nor as is widely suspected were its all-Chinese labour force subject to tax on their income or to NIS.

7. All the development costs including multiple but useless studies, sewage diversion, interest during construction, and administration costs have been borne by NICIL, another Government company whose chairman is Dr. Ashni Singh, the Finance Minister, and is therefore not recoverable.

8. In addition to the more than US$20 million given to the company interest free for fifteen years, the Government is putting in another US$4 million by way of equity on which no return is guaranteed.

Now, here is the kick: none of the concessions injected by the Government is given any value in how control of the company is exercised. Another Chinese investor – ACE Investments Inc. – who invests US$8 million dollars in equity is given control of the company while the government becomes a minority shareholder!

Because Brassington as the sole director of AHI has decided that details of the investment are a private, commercial matter, no one is sure that ACE is prevented from exercising its controlling interest by selling its shares at any time and capitalise on all the concessions the Government has put into the company! This is either a foolish deal or a crooked one.

No doubt the top brass of the Private Sector Commission will be at the opening to give praise to the Government and so I hope that its Chairman Ramesh Persaud who is an accountant and is in the business of finance would be willing to answer the following questions:

• Should a value not be placed on all the non-equity inputs in the company, including tax concessions, land rent concessions and costs borne by NICIL for the benefit of AHI not recorded in AHI’s books?

• Does it make financial sense that the price to be paid for a share by an investor coming in when the project is operational is the same as that paid by an original investor who has also made valuable cash and non-cash inputs?

• Is the PSC aware that that is the nature of the arrangement with ACE?

• Is the PSC aware that the Shareholders’ and Share Subscription Agreement were entered into in 2013 when the project and its financing were almost completed?

• Does the PSC agree with the decision to dispose of shares in GT&T earning hundreds of millions to be invested in ANY investment that produces no return for fifteen years?

• Would IPED of which the Chairman of the PSC is the CEO lend money or make advances to any person on the terms on which NICIL is lending AHI?

I have not heard anyone make the case that the Marriott was conceived as a social investment for the benefit of any deprived individual or class of individuals, whether economically disadvantaged, physically impaired or socially underprivileged. In fact, a five star brand does quite the opposite – it is expensive, exclusive and selective. So any suggestion of a socially impactful investment is clearly nonsense.

There has been some disingenuous attempt to make the financial case for the project using some heavily doctored projections contracted by Winston Brassington. The economic case is even weaker. Does any rational person say “international brand X operates in Guyana and I must therefore visit that country”? Or does a rational person not say “I am thinking of visiting Guyana so let me see what my hotel options are”? No investor decides against coming to Guyana because HSBC or UBS (international banks) does not have a presence here so why do we think that an international hotel is any different?

A local, actual example also undermines the economic argument. The GMSA plans to host the PPP/C presidential candidate at a forum and decided that it would be held at the Pegasus. The President and some members of the GMSA were overruled and the venue was suddenly changed to the Marriott. Is there an economic benefit to the switch from a business which pays tax to the Government to one that does not? The GMSA example is the beginning: we can expect business to be diverted to the Marriott to make the financial case for the Marriott. The economic case is at best minimal.

I do not think any Guyanese does not welcome the Marriott brand but did it have to come at such an expensive cost to the taxpayer and as an investment by the government rather than by the private sector? Scarce resources are about choices. Does the PSC really think that the Marriott is a more impactful project than an investment in University of Guyana, or a better equipped and paid police force?

Finally, there are several legal issues which the project has raised, issues of constitutional violations, illegalities and misfeasance in public office. The project and those who have been part of the improprieties will be in the news for some time to come.

There is of course a part two to all of this in the form of the proposed Casino. We will leave that for a later date.

AHI’s incorporation for the purpose of building a five-star hotel preceded every study

In his letter (‘SN should not have published Ram’s letter’ SN, April 3) Mr Winston Brassington insists that I have misrepresented the facts about the construction contract and the feasibility study for the Kingston Hotel. He persists with his “story” that a feasibility study was carried out before the signing of the construction contract and cites in support, NICIL’s Chairman and Finance Minister Dr Ashni Singh’s statement in Notice Paper No 12 of the Tenth Parliament on February 15, 2012.

That statement was made in response to a question whether there was a feasibility study done prior to agreements being signed. Dr Singh’s clever answer was: “Yes, there was a market Feasibility Study conducted by the Marriott Hotel Group and one conducted in 2010 by an independent American firm which is being updated to 2012.”

Dr Singh was asked about one thing and he answered another. A feasibility study and a market feasibility study are two very different concepts, with the latter being narrow in scope and coverage while the other is quite comprehensive. A feasibility study is a study carried out to determine the viability of a proposed project and addresses key areas such as country, political, economic, social and industry analysis, a market analysis, a technical analysis, an environmental analysis, a financial and investment analysis, analyses of production, management and supply, Porter’s Five Forces (competition) analysis, management and manpower requirements and availability, marketing and administrative expenses, and detailed financial projections with clearly articulated assumptions on cost of capital, interest, inflation and exchange rates, room occupancy by month, rack rates and discount rates for rooms. The depth of the study will be determined by the size of the investment and the risks involved.
Continue reading AHI’s incorporation for the purpose of building a five-star hotel preceded every study

The fiasco over at Kingston

Berbice Bridge Company update
In the introduction to last week’s post, I related an exchange of letters I had with the Berbice River Bridge Inc. in which I had requested access to certain public documents of the Berbice Bridge Company Inc. In response to the reply by the Company Secretary of BBCI that I provide justifiable reasons, I indicated that the law did not require me to give any and I restated my request, giving the company two working days to provide me with access. I am pleased to report that within that time, I received a letter from the Company Secretary advising me that the company had been advised that I am entitled to access and could visit the registered office within normal working hours. I commend the directors of the Bridge Company for their responsible action in this matter. 

Small as that matter may seem, it is a significant development in corporate compliance as companies, their directors and officers become increasingly aware that they are required to comply with the Companies Act to which accountability and transparency are central.  

At the time of sending my first letter to BBCI, I also sent similar letters to Mr. Winston Brassington of NICIL and Ms. Marcia Nadir-Sharma of Atlantic Hotel Inc. (AHI). Neither Brassington nor Nadir-Sharma has responded to those letters or reminders sent one week later. In the reminder letter I indicated my intention to pursue the matter as legally advised. The disregard and contempt of the law by Brassington and Nadir-Sharma can no longer be tolerated or excused on the grounds of age, inexperience, incompetence or ignorance.

NICIL and AHI have retained just about every law firm in Georgetown in the belief that they can limit the number of firms professionally free to act against them. So Brassington and Nadir-Sharma, two key officers of these entities, should know that the indemnification provisions of the Companies Act only apply to the director or officer who has acted honestly and had reasonable ground for believing their conduct was lawful.

Contempt for the law is hardly an honest act.

Introduction
Years after spending billions of dollars in clearing prime land contiguous to the Atlantic Ocean and the Demerara River, relocating sewerage lines to allow for construction on the land, and long after signing a construction contract for US$51 million, Atlantic Hotel Inc., a government company decided to have a Feasibility Study of the project done by the Miami-firm CHR Consulting Services Inc.. The report on that study was issued in September 2012. Yet one year later, and only after relentless pressure has AHI, a wholly-owned government company, has provided to the public parts of that report.

The information was released by Winston Brassington just around the same time that he finally conceded in an interview with Johann Earle of the Stabroek News what he was being warned about long before committing more than US$20 billion of public funds in the project: that the project was never as strong as Jagdeo and he had been selling like salesmen of old. In today’s piece I look at the report and discuss it against some of the statements made by Brassington on the hotel construction of which is in progress.

I have no reason to doubt that the consultant preparing the Study is anything but a highly reputable company. Which then raises the question why the (revised?) Executive Summary would fail to mention that the study was conducted in 2010 as Mr. Brassington told the Stabroek News, and refer to the key changes, if any, made to the original report. Another key omission is that no one quite knows what the Terms of Reference (ToR) of the Study are and whether this included reproducing copies of all the advertisements by Brassington to demonstrate how transparent the process has been! 
Continue reading The fiasco over at Kingston