Published Thursday 24th April, 2008

Hilton Tobago is a 198-room complex on a 20-acre site alongside the Nicklaus-designed 18-hole golf course forming part of the 750-acre Lowlands complex, now known as Tobago Plantations. It is owned by Vanguard Hotel Ltd—whose shareholders are reported to be the State (which owns 47 per cent, held via eTeck), Guardian Holdings Ltd, Angostura Ltd (these two companies being the developers of Tobago Plantations)—and Hilton International Ltd.

The hotel was opened in November 2000 and it is therefore the most recent major hotel constructed in Tobago. In that respect, it could be considered a test case for the viability of the high-end tourism model which has so far eluded us in T&T.

The hotel’s location on the windward side of Tobago is a fundamental challenge due to the lack of a calm beach for casual swimming and the constant sea blast which is well known to inflict high maintenance costs onto windward properties.

The construction of the project was financed by Citigroup Merchant Bank via a ten-year bond for US$16.75 million (about $105.5 million). In 2006, the financiers put Hilton Tobago up for sale with the Miami-based Hotel Investor Services at an asking price of US$22 million (about $139 million). It was reported at the time that Vanguard defaulted on the loan because they were unable to generate sufficient revenues.

The Minister of Trade and Industry, Dr Keith Rowley, announced at the post-Cabinet press briefing on March 27, that the State was taking several initiatives to increase its investment in the hotel. The two main expenditures being the allocation of $45 million for urgently required renovations and the purchase of the 53 per cent private-sector shareholding, so that the hotel would be wholly State-owned.

There have been two Newsday reports referring to a price for the hotel of approximately $200 million.

The main issues arising here are:

Competence and moral hazard: quite apart from repairs and maintenance aspects, one is bound to wonder what, if any, is the value added by private sector participation in this project. Dr Rowley’s statement made it clear that Hilton International was virtually “handing back” its shares for a nominal sum and further, reducing its annual management charges significantly. No such assurances were heard from our home-grown private shareholders.

Instead, we were told that eTeck is engaged in negotiations to settle terms for the acquisition of the remaining private shares. It is common wisdom these days that the private sector is better than the public sector at assessing risks and allocating resources. The Hilton episode should give us all cause to pause and reconsider those beliefs.

This project was conceived in the mid-1990s and built at the end of that decade, with two of the private shareholders being Guardian Holdings Ltd—a leading financial group—and Angostura Ltd—owned by CL Financial—arguably the region’s leading financial group. The other private shareholder was of course Hilton International Ltd, a premium international hotel brand.

We are therefore considering a major hotel project which, despite the windfall in tourist arrivals, was unable to pay its financiers within five years of its opening. Please note that the original loan for construction was to be repaid in a ten-year period.

What was the quality of the feasibility studies done for this project? How reasonable were the underlying assumptions? Do we now understand the reason/s for the project’s failure? If yes, what were these? If not, why are we investing further? This episode leaves a cloud of doubt over the superior competence of the private sector to conceive, implement and manage complex investments.

Hilton International appears to be taking the responsible position that, as a part of the team that failed, there is no entitlement to compensation for their shares. That is tangible recognition that some investments work and some do not. The local private sector shareholders in Hilton Tobago appear to be taking a different position. The burning issue here is one of moral hazard. One of the corrective mechanisms in the free-market system is said to be the fact that poor business decisions are punished and good ones rewarded, by losses or profits, respectively.

To what extent should taxpayers’ monies be used to rescue private investors whose projects go awry? The absence of consequence is inimical to real development—personal or national.

Hilton as managers: The complex was originally leased to Hilton for 30 years with an option for a further 20 years, so that they would manage the hotel as part of their premier chain. We are now being told that they are going to surrender the original lease and take a five-year lease with an option to renew for a further five years.

Hilton is reducing the duration of its exposure in Tobago, but the confusing part is that we were also told that their management charges would be reduced, if they stay on. Despite the ambiguity, it seems that Hilton is pulling out and that would be a serious blow to the high-end tourism project.

Repairs and renovations

Dr Rowley made it clear that the private sector partners had not fulfilled their responsibilities insofar as contributing to the ongoing maintenance of the hotel itself. Those lapses had made it necessary for the State to undertake urgent repairs in the reported sum of $45million. The appropriate adjustments should be made to ensure that the shareholders do not benefit from their inaction in terms of repairs and maintenance.

Designers and builders

Given that this is a seven-year-old complex, it seems unlikely that all this disrepair could have arisen solely from the lack of maintenance. It is staggering that a modern, well-designed and constructed complex, worth between $100-120 million, would need to have $45 million spent on its repair. So we must consider the quality of the work of the designers and builders. Properly-executed contracts for design or construction on this scale are usually under seal, giving the owner the option of suing for up to 12 years. Is litigation being contemplated against either the designers or builders? If not, why not? One can only hope that this is not an example of how the State will handle the repair and maintenance of the new buildings now being erected.

The pricing model

Occupancy rates for Tobago hotels have been static at about 60-65 per cent for the past five years. We need to know how the Hilton was performing in comparison to those norms. The fabric has been seriously affected by poor maintenance. Against this background, what is the real value of the shares in what is clearly a failed enterprise?

The hotel was unable to pay the bank which financed the construction with US$16.75 million (about $105 million), that signifies performance way below the anticipated levels.

The property was offered for sale at $139 million and no sale was closed, so it seems reasonable to assume that its value is less than that asking price.

Afra Raymond is a director of Raymond & Pierre Limited. Feedback can be directed to afra@raymondandpierre.com.