This series on T&T’s State-owned hotels has shown the lack of transparency and accountability which is all too common in the other State-owned enterprises. These hotels are some of the largest Public Private Partnerships in which our Public Money is invested, so these are important in this era of declining energy revenues.
This article will examine the prospects for privatisation of those PPPs and make the link to the Tobago Sandals MoU.
Privatisations fit readily within the ambit of the Public Procurement and Disposal of Public Property Act.
In this period of ongoing budget deficits, it is likely that apart from ‘downsizing’, the government will have to consider disposing of various assets to raise cash and reduce its expenditure. That was the underlying rationale for the significant staff cuts at TSTT and the closure/restructuring of PETROTRIN.
The recent confirmation of taxes paid by the State-owned hotels was useful, but those taxes do not in any way represent a return on our heavy investments of Public Money.
Also, even though the State owns the land and buildings which are used by these hotels, only a nominal rent is usually received. The entire property is leased to the hotel, so there are only very limited, if any, prospects for re-development or use of surplus land.
The serious cash-flows and benefits happen within the ‘Underlying Commercial Arrangements‘ for these State-owned hotels. Those arrangements have been intentionally concealed by the responsible Public Officials. As a result, we have little idea as to the basis for, far less the returns on, those huge investments of Public Money.
If the State sold its stake in these PPPs, the new private owners would be buying the right to receive the same payments now made to the State under those Management Agreements.
The bids for those stakes would be conditioned on the hotel market, with the decisive aspects of any such assessment being the terms of the Management Agreements and the actual cashflows paid by the hotelier. The Underlying Commercial Arrangements are therefore critical in assessing both the performance of these large-scale State investments as well as the prospects for disposal.
A proper prospectus must therefore include the audited accounts and Management Agreement so that investors can give serious consideration to those offerings. The very elements we have been denied all this time.
That hotel was described by Minister Gopee-Scoon as having lost $276M in the 11 years between 2008 to 2018. I would therefore expect the recent proposal for new management of this hotel from Canadian-based Sunwing Airlines to be a modest one.
One would hope that fundamental lessons were learned from the Tobago Sandals fiasco in terms of accountability and good governance to the extent that these new arrangements at Magdalena Grand would proceed with far less secrecy.
In this case a far closer examination is possible since both the Management Agreement and the taxes paid from 2015 to 2018 were disclosed.
According to the Management Agreement, Hilton must pay e TecK 76% of the Adjusted Gross Operating Profit (AGOP) each year. The AGOP is defined in the Agreement as “…All revenues and income of any kind…” less “…the entire cost and expense of maintaining, conducting and supervising the operation of the Hotel…” (pg 6). That is is virtually identical to the common definition of Net Profit.
Estimated Net Profits (before tax)
Note – Estimated from reported Corporation Taxes paid, as stated in Senate by
Minister Paula Gopee-Scoon on 19th March 2019.
Under the terms of the Management Agreement the cashflow payable by the hotelier at those modest levels of profit would be quite limited, so offers for this stake would also be limited. That Management Agreement expires in 2023 and its terms are up for renegotiation, which offers some scope for an enhanced offer.
According to Minister Paula Gopee-Scoon’s statement of 1st May 2018, these were its profits from its audited accounts.
Estimated Net Profits (after tax)
|$75.7 M||$76.0 M||$66.3 M||$51.0 M||$60.0 M||$329.0 M|
The average profit over the five reported years was $65.8M and of course we have no idea what is the State’s share of that or the other terms of that Management Agreement, such as its duration etc. Without that kind of detail it is literally impossible to even guess what the State’s stake could be worth.
The Tobago Sandals MoU contained provisions dealing with these privatisation issues. Those clauses when read together gave such advantages to Sandals that I actually started telling myself that no one working for the T&T government could have actually written that MoU.
On my previous analysis, the returns to the State from the proposed Tobago Sandals Management Agreement would have been very modest. Any move to privatise that asset would have had modest returns, if any.
At clause 3, on its first page, the MoU states that the Government intends to grant “…a right of first refusal to purchase in favour of Sandals should the Government decide to sell any of their interest…”. So, if the State decided to sell, Sandals would have the first rights.
What is more, the concessions granted to Sandals were intended to remain intact even if the State’s interest were sold to them. Clause G at pg 7, states that,
“…This MoU is premised on the status of Sandals as a Management Company and should that status change to that of legal owner of the freehold…the Government agrees that the terms…will be amended as necessary to reflect such change of status and that the incentives and tax reliefs granted to Sandals will be no less favourable…”.
Well I tell you.
These are a few considerations on the prospects for privatisation of these State assets.