EARLIER this week, the government indicated that it will be going ahead with the deal that will see its majority stake in Sandals Whitehouse being sold to the Gordon ‘Butch’ Stewart-controlled Gorstew Limited much to the chagrin of the Contractor General Greg Christie, who wants the sale halted, a new bid process initiated and a full investigation into the government’s decision to go with Gorstew.

It must be made unequivocally clear here, that the contractor general is absolutely right when he says his office, the Office of the Contractor General, is an independent anti-corruption commission of Parliament which is authorised by law to conduct investigations into the award of government awards and to ensure that everything is above board. He is right again when he says that it is unlawful for a contractor general in the exercise of his powers, to be subject to the dictates, direction or control of any person or authority. He must be totally satisfied that the Gorstew deal is in the best interest of the country and complies with all the necessary protocols and rules. Christie is a man with a reputation for vigilance and remains above all, non-partisan.

A closer examination of the Whitehouse deal should put not only his mind but the entire country at rest with what transpired and how it translates into a good deal for the government, ensuring cash flow for years to come and extricating it from continuous losses while seeing the hotel being owned and operated by arguably the most reputable Caribbean hotel chain whose brand is already well established on the property and has managed the hotel since its inception.

The sale of the embattled Whitehouse hotel in Westmoreland to Gorstew has elicited much commentary with some quarters labouring under the misapprehension that it is a sweetheart deal that is detrimental to taxpayers.

Quite the contary. The deal saw Gorstew acquire the hotel at a premium with the company paying over the odds for a hotel that came in at US$43 million over budget, was three years over the initial deadline and was beset by fixture and fittings problems.

The government negotiated a deal that will see Gorstew paying the Government of Jamaica US$40 million for the hotel. Gorstew will make a down payment of US$7.5 million and acquire a vendor’s mortgage from the government which is the majority shareholder of the hotel, for the remaining US$32.5 million at six per cent per annum over seven years amortised over 30 equal quarterly instalments.

Gorstew tends to borrow internationally and at tenors that do not exceed seven years. Gordon ‘Butch’ Stewart has gone to great lengths not to over-leverage his group of companies and not saddle them with excessive debt that threatens their very viability.

Its last two major lending transactions, which took place in the last quarter of the calendar year 2010, saw it borrowing US$25 million at a fixed rate of four per cent over five years and another loan at a floating rate of a little above three per cent over five years with both loans held with Bank of Nova Scotia (BNS) in Canada.

Sandals was founded almost thirty years ago and during that time has garnered a reputation as the leading resort hotel chain in the Caribbean which enjoys a stellar reputation with banking houses who are more than willing to do business with it. They are prone to offer advantageous rates to it, knowing that the hotels serve as prized assets for collateral purposes.

One of the country’s leading corporate bankers with extensive experience at JP Morgan pointed out that LIBOR for United States and Canadian banks is .50 basis points for six months and that commercial loans will come in at around two to three per cent but that there were many facts to consider. As far as Jamaica is concerned there is the country risk (particularly in light of the financial meltdown that took place in the ’90s). The banker stressed that rates of funds for a Jamaican company would attract a premium because of the country risk, and may well come in the four to five per cent range. What also has to be considered is whether that company had global insurance or its assets are located in Jamaica. Then there is the question of whether the loan is underwritten in Jamaica or Canada. By and large the cost of funds in North America will see a lower interest rate.

A cursory look at Bloomberg’s global commercial lending rates to see what currently prevails between AAA financial institutions and AAA companies is most insightful. After such an exercise one must conclude that there is no possible way that the Government of Jamaica could with this deal attempt to loan Gorstew money at anywhere near 15 per cent or above. It is Sandals’ good credit rating that allows the company to get good lending rates from international banks.

This deal has to be placed in its proper context. The government as the landlord and majority shareholder of the hotel is bankrupt. With a total debt of J$1.5 trillion, Jamaica is one of the most indebted countries in the world. Its debt is four times the taxes collected by the government. It has a fiscal deficit of 11.3 per cent of GDP (J$124 billion) and a budget deficit of 6.7 per cent of GDP. The current account deficit is expected to widen this year to 12 per cent of GDP. Last year saw the government spending J$95 billion more than it earned. As of the end of 2009, 40 per cent of the domestic debt matures in less than 24 months with interest payments accounting for 24 per cent of GDP. What led to the Jamaica Debt Exchange (JDX) was the worrying fact that interest payments accounted for 60 per cent of government revenues.

It is against this backdrop that the government is moving to reduce its fiscal deficit by removing a number of public entities from its budget and only partially funding others. It has already divested Air Jamaica, a number of sugar estates and now the Whitehouse hotel. In doing so it will continue to receive revenues from the sale of the Whitehouse hotel over the next seven years.

Sandals Whitehouse is owned by a joint venture company called Ackendown Newtown Development Company Limited (ANDCo) with the Urban Development Corporation (UDC), headed at the time by Dr Vincent Lawrence, owning 37 per cent, Gorstew 33 per cent and the NIBJ owning the remaining 30 per cent. The property was leased to Gorstew for a period of 20 years.

The project commenced in July 2001 and was supposed to be completed in December 2002 at an initial cost of US$60 million, later revised to US$73.7 million. The hotel was not completed until 2005 and came in at US$120 million — US$43 million over budget.

Ineptitude, shoddy workmanship and poor planning plagued the project, with Gorstew left in the dark as to what was happening.

A Gorstew executive recalls that the dates for the completion of the hotel kept changing. “First it was November 2005 and then Vin Lawrence said it would be ready by February 2006. When we got it the hotel was never properly finished and had bad electrical infrastructure with the underground cabling disturbingly lax. The window fittings were a disgrace. To this day no one can say where all the missing money went. The entire project sullied Sandals’ good name.”

Speaking earlier this month in Parliament on the Whitehouse project, Prime Minister Bruce Golding was most sanguine in saying: “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.”

There are those who say that the taxpayers will have to pick up the tab if Gorstew is successful in its lawsuit against the government for damage to its brand reputation and liability for the cost overruns with a completion date in mind, Sandals had already booked guests into the hotel and announced that the hotel would be opened for business at a prescribed date, but had to renege on that promise because of construction delays and poor workmanship, which must be laid at the feet of the UDC and Alston Stewart’s Nevalco, the company the UDC contracted to do the construction work.

Those who say that Gorstew is culpable in this fiasco and must have been aware of what was going on should bear this in mind: 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. Once completed, the property would be leased to Gorstew to manage as a hotel.

With the hotel proving to be an almighty mess, the joint-venture company had to pump in a further US$3 million to help correct the heinous mistakes that were made in the construction of the hotel. However, a gross error was made when one of Gorstew’s financial executives signed a document absolving the Government of any further repairs.

The Whitehouse hotel has proven to be a tremendous loss-making exercise for the government, one that it would continue to bear for years to come if it did not make a smart move to sell it quickly and get it off its books to an entity with vast experience in the Caribbean hotel business.

The debt owed on the hotel stands at some US$80.5 million, with the government only able to service US$25 million of this at a cost of US$4 million a year. The principal repayment alone is US$55.5 million. The rental income on the property comes to just US$4 million a year, hardly enough to cover expenses that come close to US$10 million a year.

And there are the loans the government had to secure to get the project completed, including the Caracas Energy Fund and the OPEC fund. These loans would total US$63 million which the government would have to make good on. It could hardly do that on the losses it racked up on this enterprise.

In the early summer of 2009 the reputable auditors Ernst & Young were brought in to do a valuation of the hotel and took six months to come up with the figure of US$52.6 million. However, their determinants and assessments were way off the mark. They placed the occupancy at 80 per cent with the room rate at US$410 a night. Now consider these figures in the midst of a global recession not seen since the Great Depression, a recession that has lasted for a number of years. Mind you, Sandals is perhaps the only hotel chain in Jamaica that can command room rates in excess of US$300, with many of the Spanish hotels only able to get around US$120 a night.

Ernst & Young erroneously used cash flow over the next 20 years, on a net present value basis. Also the renowned auditors omitted to factor in insurance obligations and its contents and the cost of maintaining the property and its equipment over the life of the agreement.

This meant that in October 2010, Ernst & Young had to revise its initial figure reducing it to US$40.2 million.

R Danny Williams, the founder of insurance giant Life of Jamaica and now the chairman of Sagicor Life Jamaica, was brought in as a facilitator to negotiate the sale of Whitehouse to Gorstew. Williams is a man of impeccable character and is well respected in the business community. Gorstew offered US$20 million for the property, but Williams insisted that US$40 million was a more equitable price and indeed was in keeping with Ernst & Young’s valuation. The way Williams saw it, if Butch Stewart wanted the hotel it would be better to secure it by paying more for it than he thought it was worth and get on with refurbishing it while at the same time maintaining peace with the government and allowing it to have cash flow for the next seven years. In short, a win-win for all parties concerned. Here Williams displayed Solomonesque wisdom.