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The Office of the Contractor General has launched an investigation into the proposed sale of the government’s interest in the hotel property at Whitehouse in Westmoreland currently under lease to Gorstew Ltd., assigned to and operated by Sandals Whitehouse Ltd. I am, by this statement today, directing all relevant government agencies to co-operate fully with the OCG in the conduct of its investigation.

There is no mystique about the proposed transaction.

By way of background, it is to be recalled that in July 2001, the UDC then chaired by Dr Vin Lawrence and the  NIBJ, whose then President was Rex James ,   entered into a joint venture with Gorstew Ltd. for the construction of the hotel. A joint venture company, Ackendown Newtown Development Company Ltd. (ANDCo), was formed with shareholding allocated UDC 37%, NIBJ 30% and Gorstew 33%. The joint venture agreement provided for the lease of the property upon completion of construction to Gorstew for a period of 20 years.

The agreement called for the construction to commence in July 2001 and to be completed in December 2002 at an estimated cost of US$60 million. The cost was subsequently revised to US$73.7 million.

The project was plagued by disputes, delays and massive cost overruns. When construction was practically completed in 2005, the costs had escalated to US$117 million, an overrun of US$43.3 million. In 2009, ANDCo undertook further expenditure of US$3 million to remedy construction defects that had subsequently been identified.

Disputes still remain unsettled as to the liability for the cost overruns. In addition, Gorstew filed suit in the Supreme Court in 2005 seeking compensation in the amount of US$28.8 million for losses it claims to have suffered as a result of the failure to complete and deliver the project on schedule. The suit also seeks unspecified compensation for brand damage. It was agreed by the parties and endorsed by Cabinet in 2008 that these issues be referred to and determined by arbitration. These proceedings and their outcome are being awaited.

A separate but no less important issue concerns the mounting losses being borne by ANDCo through its ownership of the hotel and the lease arrangements entered into in 2005. ANDCo secured loans totalling US$62.8 million from a number of entities including the Caribbean Development Bank, the OPEC Fund and the Caracas Energy Fund to finance the project. In addition, UDC and NIBJ, over and above their initial equity of US$30 million, provided shareholder loans of US$17.7 million making the total debt incurred by ANDCo US$80.5 million.

ANDCo has only been able to service US$25 million of this debt at a cost of approximately US$4 million per year with principal balance outstanding as at October 31st 2010 of US$18.5 million. Interest alone on the remaining debts of US$55.5 million is accruing charges of US$2.6 million per year. Insurance coverage, which ANDCo as landlord is required to provide, costs US$1.1 million per year. ANDCo’s real costs, therefore, excluding principal repayment of US$55.5 million are approximately US$7.7 million per year. However, the rental income under the lease agreement has averaged US$3.9 million per year, approximately one-half of its expenses. This constitutes recurring losses that would continue indefinitely into the future.

Importantly, under the terms of the ANDCo Shareholders Agreement, Gorstew is not obliged to bear any portion of the Company’s cash deficits by way of additional equity or loan contributions, and the funding of such deficits have been, and in the absence of a sale of the property, would continue to be, the responsibility of the Government shareholders alone. Such sums funded by the Government shareholders over the past 4 years have amounted to US$7.9 million (not including the US$3 million spent to remedy defects to which I earlier referred).

This also does not include the cost of periodic replacement equipment that ANDCo will be required to fund in the future under the terms of the lease agreement, and which is estimated at a cost of US$600,000 annually over the remaining life of the lease. Nor does it include any damages that may be awarded by the arbitrator. Under the joint venture agreement, Gorstew was indemnified from any cost overrun attributed to the management of the project and, therefore, the only portion of the overruns that may be recovered from Gorstew is that portion attributable to design changes that were specifically requested by Gorstew.

Having considered all the facts and circumstances, the government took the decision to cut its losses and sell its interest in the hotel property in order to extricate itself from an arrangement that has proven to be disastrous to the Jamaican taxpayers.

Because of the particular arrangements regarding this property, the normal procedures for divestment, i.e., by way of advertisement and competitive bidding, were not considered appropriate for the following reasons:

(1)  Gorstew is already a part owner of the property through its shareholding in ANDCo, and under the terms of the 2005 lease, Gorstew has a right of first refusal in the event that ANDCo disposes of the property;

(2)  The property is the subject of a long term lease to Gorstew which has 14 ½ years left to run and which would make it unattractive to a prospective third-party strategic purchaser, who would naturally wish vacant possession;

(3)  The terms of the lease and the projected rental income were unlikely to attract financial investors at a price satisfactory to the government shareholders;

(4)  Gorstew, having the right of first refusal referred to above, would be placed in an advantageous position in such a bidding process;

(5)  The location of the property “off the beaten track” would make it a “hard sell” especially in a period of economic recession.

The government, therefore, decided to enter into negotiations with Gorstew for the sale of its interest in the property. In April 2010, with the agreement of the parties, Cabinet approved the appointment of the Hon. R. Danny Williams O.J. to serve as Facilitator to negotiate the terms of sale to Gorstew.

Ernst & Young had conducted a valuation of the property in June 2009 which rendered a value of US$52.6 million. This valuation was done on a Net Present Value basis, i.e., the value to an investor of the cash flows to be generated by the investment. There were discrepancies in the assumptions which informed this valuation, namely, the omission from the calculations of the Landlord’s obligations under the lease agreement to insure the buildings and contents and fund the replacement of equipment during the life of the lease.

Ernst & Young, therefore, reviewed and adjusted its original valuation and in October 2010 submitted a revised valuation of US$40.2 million.

Following several months of negotiations, the Facilitator submitted a proposal in December for the sale of the government’s interest in the hotel to Gorstew at a price of US$40 million on the following terms:

(a)   Deposit of US$7.5 million on signing;

(b)  Vendor’s mortgage of US$32.5 million for 7 ½ years amortized over 30 equal quarterly instalments of principal and interest at a rate of 6% per annum;

(c)   Security: A first charge mortgage on the property plus the corporate guarantee of Gorstew Ltd.;

(d)  Gorstew will surrender its shares in ANDCo for an amount of US$1.00.

The Cabinet has approved the sale on the terms proposed by the Facilitator and the legal documents to effect the sale are now being prepared.

The effect of the proposed sale will be to eliminate the operational losses being incurred by ANDCo including the cost of insurance and equipment replacement. The deposit of US$7.5 million will allow for the immediate liquidation of the OPEC loan as well as cover the transaction costs. The reflows from the US$32.5 million mortgage will be used to service and retire other portions of the loans outstanding in relation to the project.

However, make no bones about it…In the final analysis, the taxpayers of Jamaica will bear a substantial portion of the more than US$120 million that has been spent on a project that was not properly conceived and very badly executed.

Even in procurement and divestment, there are peculiar situations for which the established procedures are not appropriate and would result in greater losses to the country. The Sandals Whitehouse project is one such case. The decisions and actions we have taken are in the best interest of the country and have been taken to cauterize and minimize the losses that the Jamaican people will have to bear.

Bringing an acceptable closure to this sordid ordeal has been a burden facing this government since it took office. It is not yet over. The arbitrator’s decisions are yet to come. It will be a long time before the loans that were incurred to fund the project are finally repaid. What we have done is to staunch the haemorrhaging and start the exit process.

It is not the end of the matter but it is the beginning of the end.