|The Tobago Hilton Story
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
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.
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
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
The main issues
arising here are:
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
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.
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.
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.
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.
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
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
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 email@example.com.