No decision on Roosevelt sale model

PC board discusses giving hotel on lease or developing it as joint venture

ISLAMABAD:

The Privatisation Commission (PC) board again could not take a decision on the privatisation mode of Roosevelt Hotel, New York as its members remained divided over the options of giving the prime property on a 99-year lease or developing it under a joint venture.

There was also no consensus whether to privatise the hotel through a competitive bidding process or through a government-to-government deal. Roosevelt Hotel is located in the heart of New York and part of the 1% most sought-after land of the metropolitan city. Federal Minister for Privatisation Abdul Aleem Khan presided over the meeting of PC board. It was for the second time in 10 days when the board met but could not approve a transaction model for final endorsement by the Cabinet Committee on Privatisation.

"Federal Minister Abdul Aleem Khan observed that in light of the recommendations of the Privatisation Commission board, final decision will be taken by the Cabinet Committee on Privatisation," said a statement issued by the Ministry of Privatisation. A majority of the board members were of the view that the government should enter into a 99-year lease agreement. Some others, including the privatisation minister, emphasised that the hotel should be developed as a joint venture and a government-to-government deal should be struck.

The financial adviser discussed three options in its report – outright sale, a joint venture deal or giving the hotel on a 99-year lease.

The adviser recommended that Pakistan should develop the prime property under a joint venture to maximise gains instead of outright sale. Pakistan had hired Jonse Lang LaSalle Americas as the financial adviser at a cost of Rs2.2 billion. According to its report on the transaction structure, Pakistan will not have to pay any additional money for the joint venture and its contribution will be in the shape of the value of hotel land.

"Based on pre-marketing, due diligence and analysis of the options, the joint venture structure nets the highest value to the government of Pakistan," the adviser recommended in its report.

Proponents of the lease agreement were of the view that Pakistan needed money and that was possible by entering into a lease agreement, which would be a constant source of earning without selling land. Under the lease model, the land value will be determined now by assuming the full potential of the property. In this scenario, Pakistan will sign a contribution agreement and a ground lease agreement in 2027.

Pakistan will get fixed payments over a period of 99 years. The government will retain ownership of the land and the time to achieve sale proceeds is the highest.

"The [lease] option has a medium risk with fairly high net proceeds to the government of Pakistan, higher than outright sale but lower than the joint venture option," the report stated.

However, some members were of the view that the hotel should be developed under a joint venture but through a negotiated government-to-government deal.

Surprisingly though, the financial adviser told the board that there were chances of cartelisation in the case of open bidding.

The adviser said that under the joint venture scenario, the government would contribute 100% of the land value to the joint venture partner and the land value would be determined on the basis of full land potential, including the 32-storey building. Both parties will sign a contribution agreement immediately but the joint venture agreement will be signed in 2027.

The development partner will make two initial deposits in this fiscal year and then in 2027 and the balance sale price will be paid in 2033. "This option has the highest risk with the highest net proceeds to Pakistan," said the adviser. However, some members argued that the joint venture would take time and Pakistan needed funds to pay off some of the PIA liabilities parked in a holding company. Roosevelt Hotel is the property of PIA.

The adviser recommended the selection of a strong development partner, having a strong balance sheet, strong market reputation and experience in managing complex zoning permissions.

There was hardly any view in favour of outright sale. The adviser also not recommended the outright sale. The financial adviser stated that on a net cash flow basis, the outright sale would be the worst option and the joint venture deal would be the best option. Likewise, the ability to retain the most pricey piece of land is beneficial only in the case of joint venture and worst in the case of outright sale.

The PC board pre-qualified seven parties for the privatisation programme. These included CitiGroup Global Market, UK, JPMorgan, Alvarez & Marsal of the UAE, EY Consulting LLC Dubai, PWC-AF Ferguson and Co, BDO Ebrahim and Co and KPMG Pakistan. Privatisation Ministry Secretary Jawad Paul told the Senate Standing Committee on Privatisation that during the past five years Pakistan paid Rs1.4 billion on account of financial advisory services for various transactions.

The money was also paid in cases where transactions could not be concluded due to the government's fault. These were Pakistan Steel Mills and two LNG power plants.