WHAT YOU SEE IS NOT WHAT YOU GET

Oct 13, 2013 Peeping Tom

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How much did it cost whoever it was that placed that whole page advertisement in last Sunday’s Kaieteur News just to respond to a previous Peeping Tom column questioning the shareholding of the proposed Marriott Hotel?
Whoever placed that whole page ad certainly must have a great deal of money to waste, because a simple letter would have adequately made the same points contained in that advertisement. Not that it would have convinced many!
Readers will recall that this column has pointed out that a private investor  will put a mere US$4M of a total investment of US$58.5M, but will gain a 67% shareholding, while the government which will be putting in close to US$20M will enjoy a 33% shareholding in the proposed hotel.
The ad makes the implicit point that in terms of equity, the private investor is putting in US$8M out of US$12M and therefore is not hogging the shareholding since 8 out of 12 million is equal to 67%. It went on to add that this 67% shareholding is related to net assets and not gross assets.
The ad goes on to assure that the US$15.5M that is being lent to this project by the government will be repaid. But what the ad does not state is that no interest is being charged for lending this astronomical sum to Atlantic Hotel Inc (AHI). In short, Guyanese taxpayers are so rich that they can afford to lend to the hotel over three billion dollars and not demand a cent in interest. Their money is being lent for free.
Of course to smooth things over, the advertisement notes that NICIL’s rate of return of 6.2% is far higher, they say, than what is being offered by the banks. But you can bet that this 6.2% is far, appreciably far, less than what the other equity investor will obtain, and in fact, far less than what the syndicated lenders will receive.
This is where the whole shebang explodes. You see, those behind this project want the public to believe that because of the equity investment in this project, NICIL will over the life of the hotel be paid back in excess of US$34M.
Two observations should be made about this sweetener of a figure that has been thrown in. First of all, it makes little financial sense for anyone to be making a “blended”, to use a word used in the ad, investment of US$19.5M and for the life of the project all that is received back is US$34M.  Secondly, and more importantly, this idea of a return being made on the taxpayers’ investment is a pipe dream, because there will be no money to be made by the government.
The financial model of this project will end up bleeding the State. The hotel is not going to make any profits. And because of this ingenious financial model that has been devised, the taxpayers of this country will end up with useless paper.
When as anticipated this hotel goes bust, the first set of persons who have to be paid under the ingenious financial model will be the syndicated investors who are putting in US$27M. Now they have to be repaid with interest, and to pay them the hotel will have to be put up for sale.
Obviously no one is going to come forward and pay US$58M for a white elephant, more so one that has gone bust. So the hotel will have to be dumped on the market and may have to be sold for just enough to pay off the syndicated investors.
By the time all the preferred debt is paid, the US$15.5M that the government is lending to the hotel will be lost and so too will be the equity, which means that all NICIL will end up bankrupted.
Therefore, at the heart of the criticism of this project – and this is something that Kaieteur News has been saying for a long time now – is that the financial model is flawed, highly flawed, and even more, it will end up causing the government to lose every cent of the US$19.5 million that has been injected by taxpayers into the project.
Now you may say that this is a pessimistic outlook. You may ask, what happens if the hotel does not collapse as anticipated?
Well, if NICIL is so convinced that a mere US$4M in equity will bring such fine returns as it claims, why then did it not change the nature of its investment and instead of lending US$15.5M to AHI, convert this into equity and become the principal shareholder in the hotel thus allowing it to reap the massive dividends that it anticipates the hotel will yield?
If NICIL is so confident about the return on equity, why not invest all of the US$19.5M as equity. And why is it lending money free of interest to AHI?
The argument could be that the government needs to make this sort of investment just so as to attract the syndicated investors and the private equity partner. In short, the government has to “catalyze” the investment. But does it?
Did a private investor not purchase Buddy’s Hotel for a sum close to that which the government is investing in the Marriott? This defeats the argument that the government needed to make a substantial investment so as to catalyze the hotel project.
The more the apologists of this project try to sell it, the more odious it becomes.

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