The Hilton Saga: Largest Fraud East Of Suez?
- Rs. 10.5 Billion Accumulated Loss As Of 31/3/2010
- Promoters Owe Rs. 15 Million And Lose Credit Line
- Hilton International’s 33% Fees ‘Inequitable’
- Hilton Hotel Owners To Publish Accounts – 20 Years Late
By Faraz Shauketaly
The Sunday Leader can exclusively reveal that the owners of the Hilton Hotel in Colombo, Hotel Developers (Lanka) PLC, are to release their first set of audited accounts – after a lapse of nearly 20 years. Minister of Economic Development, Basil Rajapaksa announced in parliament that the government has taken over the prime seven acre plot of land in Colombo, upon which the Hilton Hotel is built.
Signs of the takeover by the government surfaced early last month after media reports said that ownership of the hotel will revert back to the State as the lease rental has not been paid for the land.
The Hilton Hotel deal was signed by the Urban Development Authority (UDA) during the UNP regime in 1984. Then six acres of land at Echelon Square, Colombo 1 where the Hilton hotel stands today was leased to Cornel & Company Ltd. for Rs. 136 million.
Cornel & Company Ltd. subleased the land to Hotel Developers (Lanka) PLC (HDL) at an enhanced value of Rs. 250 million thereby making a windfall profit of Rs. 114 million almost overnight.
Cornel & Co. Ltd. was issued 51 percent shares of Hotel Developers (Lanka) PLC for the total lease premium of Rs. 250 million.
Even though the land was leased to Cornel & Company Ltd. for Rs 136 million by the UDA and Cornel & Company Ltd. subleased the land to HDL for Rs 250 million, in actual fact Cornel & Company Ltd. paid only Rs. 27 million to UDA which was only 20 percent of the value of the lease rental payable to UDA. The balance was to be paid in 33 annual interest free installments.
However, this amount was never ever paid. As the lease rental has not been paid the land has now reverted to the State.
The current Board of HDL have decided that unlike in the past they do not wish to influence various regulatory bodies and circumvent the exacting demands made on Company Directors under the 2007 Companies Act.
The accounts which are expected to be released early next week, makes for compulsive reading: it showcases what frivolous litigation can do to the finances of a flagship hotel project such as the Hilton Colombo: the accounts reveal an accumulated loss in excess of Rs. 10.5 Billion – or US$ 95.4 Million – far in excess of what assets the government has secured for itself. The value of the building – as valued by the Government Valuer late last year, is set at Rs 5.7 Billion – the only asset that the government would be left with.
In another development, the Land Commissioner General’s Department has exercised its rights over the seven acre plot of land that the Hilton stands on. The land was taken over by the Lands Commissioner on January 20, this year – exactly what Minister Basil Rajapaksa told a rapt parliament last Wednesday. In effect this leaves the Directors of HDL, with virtually no assets – and with Hobson’s choice to wind up the company as it is trading with greater liabilities than assets. The Secretary to the Treasury is the single largest shareholder in HDL with 65% of the shares.
The Hilton project was brought to the country at a time when the country had a negative impact in terms of foreign investment. Coming in the backdrop of the communal riots of 1983, it is acknowledged that Cornel Perera made a well strategised investment plan to secure Hilton International’s agreement to enter Sri Lanka.
The Hilton Project however has had a touch of Shakespearean tragedy attached to it from the outset. Plagued by litigation, counter litigation and even accusations that the completed hotel structure had two-floors missing, the Hilton Project was notorious not only for the presence of the Hilton brand but also for perhaps one of the longest running subjects of legal claim and discussion and politically led skullduggery.
The promoters of the project, have accumulated debts of over Rs. 15 million mainly due to unsettled bills: the irony being, that the promoters, did not pay the Urban Development Authority – who had title to the freehold land – anything more than the cursory initial payment of approximately Rs. 27 million, 20% of the agreed lease amount of Rs. 136 million.
Successive administrations never implemented the terms of the agreement fully. If the UDA had applied the principle of Article 28(D) of the Constitution, it would have served a quit notice on HDL many years ago.
The ‘Hilton Saga’ says a retired civil servant, is an outstanding example of exactly what happens when there is a serious lack of transparency when transactions involving the state and private sector are carried out without recourse to existing laws and regulations. The charge being made in this event is that the Jayewardene administration showed an abundance of flippancy when it forged ahead with the Hilton Project, granting unheard of concessions to the international brand that is the Hilton – notwithstanding the gilded economic prospects that awaited Sri Lanka in a laissez faire economy.
With the latest revelations that the current Board of the Hilton Colombo, HDL is to publish their set of annual accounts, it follows therefore that the petition in the High Court asking for a winding up order against HDL, will gain currency if not legitimacy. The wheels of justice move slowly on this island of small miracles: the winding up order was petitioned for as long ago as November 2006.
Hilton Management – A Contentious Issue
In 1984 when Hilton International Co. of the USA was invited to participate in this project to manage the Hotel, the circumstances and ground reality were quite different. The City of Colombo was subject to communal riots in 1983 and the LTTE had just got started. There were but distant prospects of commercial success for an international brand like Hilton who themselves were at that time a very much smaller brand. Hilton International commenced operations in Colombo on July 1, 1987.
The original agreement was for 20 years, expiring in 2007 with the right of renewal vested with Hilton for three periods of 10 years each making it a total of 50 years. It may have augured well for the government of the day in 1984 but in the context of the new opportunity that Sri Lanka has become, it looks distinctly disadvantageous to the country. For example, the Management Fee payable to Hilton International by HDL, owners of the Hilton Colombo, is 25% plus a further 2% of revenue, making it tantamount to a total of approximately 33% of Adjusted Gross Operating Profit (GOP). In comparison the Hilton International arrangement with JAIC Lanka (Pvt) Limited, owners of the Hilton Colombo Residence on Union Place, is a total of 12% of Adjusted Gross Operating Profit.
Legal sources familiar with “best practice” methods employed in the United States question whether the granting of such a long term also confers with it an implied right to renew the agreement on the same terms; they grant that the possibility of renewal exists but question whether the renewal can be based on an agreement carried out 20 years ago and without recourse to a study of the market conditions existing at the time of renewal. Legal sources point out that for an agreement to be legally binding, a state of mutual equality is essential.
Additionally there is a school of thought that with such an extremely high Management Fee being paid, that the US authorities need to investigate whether any aspect of strict US laws governing foreign investment and involvement has been compromised and if so whether provisions enshrined in the Foreign Corrupt Practices Act 1977 (FCPA) have been broken. One of the most famous cases that prompted the US authorities to bring into force the FCPA was the case of the so-called Lockheed scandal, when it was found that the US company had made substantial payments overseas to obtain contracts.
Hilton manages more than 3,600 hotels in 81 countries, and includes such pre-eminent hotels like the Waldorf Astoria and the Conrad and was founded 90 years ago, employing over 130,000 worldwide. We sent an e-mail to Hilton International asking them if they have secured similar Management Fee contracts elsewhere in the world from hotel owning companies.
Hilton Attempts to Have Shares in HDL
Adding further to the seemingly inequitable contract entered into with Hilton International, is the information that Hilton International attempted to make a claim on the monies received from insurance underwriters in the aftermath of the damage suffered by the Hilton Colombo during the LTTE years. The insurance was arranged by Hilton International on the basis that they receive a better premium based on their buying power. The premium however was paid by the owners of the Hilton Colombo, HDL. In the aftermath of the insurance settlement being made, there was an attempt by Hilton International to consider these monies as being “theirs” – with Hilton International seeking 7% of the shares at that time. Interestingly, had Hilton been given the shares, they would, along with the Japanese consortia been just a few percentage points short of majority, substantial and effective control of the owning company, HDL – leaving the Treasury to have funded possibly the greatest fraud ever perpetrated East of Suez. (See box)
Documents in possession of The Sunday Leader, highlight an attempt by Hilton International to secure for themselves shares in HDL – at a time when HDL’s capital was a mere Rs. 452 million — on the basis that Hilton International had negotiated the lower premium for the insurances that were in place. Hilton International’s moves were stiffly opposed by some members of the HDL Board and the insurance monies ended up as it ought to have done, with the owning company, HDL. However, had the shares been given, as per Hilton’s request, Hilton would then have acquired 49% of HDL – within easy reach of taking substantial control by purchasing a further 2% on the stock market.
Rip-Off Fees to Hilton
In 2010, HDL, the owning company of the Hilton Colombo, paid the management company, Hilton International, a princely sum of Rs. 222 million; the JAIC Hilton owners by contrast paid Rs. 79 million to the Hilton brand for their management of the Union Place property.
Of course an agreement is an agreement and the Hilton Group has a water-tight agreement. However if they are to pursue their proverbial pound of flesh, their action may in the end be detrimental to their further progress in Sri Lanka’s capital. In plain speak, Hilton International may well find that they are negotiating with a company that is financially bankrupt.
An Inequitable Investment For Sri Lanka
The fact of the matter cannot be ignored: the Government of Sri Lanka has – for want of a better word – “advanced” approximately Rs.10.5 billion or US$ 94.5 million, in this venture. The gross profit that the Hilton Colombo yields is in the region of Rs. 665 million. The interest alone, to the Treasury amounts to at least Rs. 1,500 million (Rs 1.5 billion). These figures relate to Gross Profit for the period January to December 2010.
The Government of Sri Lanka was obliged to pay out against sovereign guarantees granted in favour of the Japanese contractors, Mitsui, Taisei and Takashimaya. The guarantees kicked in when HDL defaulted on the agreed payment schedule forcing the Japanese to look to the Treasury for settlement.
On this alone HDL is unable to service the loan, making the entire proposition of HDL continuing to operate the Hilton with its management partners, Hilton, an inequitable and loss making proposition, which falls foul of the new Companies Act of 2007.
The government has a stark choice to make: either capitalise their monies expended thus far of Rs 10.5 Billion, inject fresh capital of approximately a further Rs. 1 billion ( US$ 10 million) to upgrade the hotel and carry on or to wind up HDL – which is a loss making institution and which is constantly seeking handouts from the Treasury.
Winding up HDL would arguably be the most equitable proposition for the people of this country. A new company would then be formed, as a Government Owned Business Undertaking (GOBU) with the Treasury in control of the company in exchange for its funding of over US$ 94.5 Million.
Unlike other government ventures like for instance, SriLankan Airlines, Mihin Lanka and Sri Lanka Insurance, the Hilton Colombo offers the Treasury an opportunity which is almost without match in terms of outlay.
As a result of non-payment of its dues, the UDA returned the land – all seven acres of it – to the State. On January 20, 2010, the Land Commissioner General’s Department took over the land on which the Hilton Colombo is built. The Treasury is owed Rs. 10.5 billion and the only asset is indeed, the actual contentious building itself. The building was valued at approximately Rs. 5 billion.
The mathematics is quite elementary: for a total outlay of Rs. 10.5 billion, the Treasury has an asset under its control worth at least Rs. 5 billion. Swift moves need to be made immediately, with the Treasury acting fast to take control.
Prince Waleed bin Talal
Under a new company, the contract with Hilton would also be renegotiated in full. It would then be possible for the government to strike a realistic deal with any one of a number of international brand name hotel managers including the Kingdom Group, the holding company for Prince Waleed bin Talal, the Saudi Arabian Prince who has the Four Seasons brand under his belt. Some years ago Prince Waleed made a brief stop in Sri Lanka and expressed a desire in the Hilton property but was reportedly put off by the extent of the various legal issues surrounding the Hilton Project. It is thought that the Prince was keen on rebranding the hotel.
Cancelling Power of Attorney
In yet another twist in this tale, is the news that the current Hilton Board of Directors has written to Hilton International and had discussions with them in Sri Lanka and elsewhere in the region centred on the relatively new legislation which affects all corporates in Sri Lanka.
The Companies Act 2007 confers upon directors enormous new and onerous obligations and responsibilities, making directors more accountable and in specific instances, personally liable for the way in which a company conducts its affairs.
Sections 187-190 and 219, 220 and 375 deals specifically on how a director should act when the company’s capital base is eroded, where the company is unable to pay its bills when it becomes due for payment and specifically that a director may not act in contravention of the Act.
The new Act goes as far as recognising that in certain cases “Shadow Directors” will be held responsible for their acts even though they may not formally be on the Board. Section 529 of the Companies Act deals more comprehensively on this matter. In essence however it recognises the fact that at times, even if a person is not formally a director, through other controlling methods including being a shareholder, that person may in fact be instructing the Board of Directors to act in a particular direction.
A good example of this would be Dr. P.B. Jayasundera, who in his capacity as Treasury Secretary, holds government shares and thus nominates directors on to various boards like SriLankan Airlines, Hotel Developers Ltd., (HDL) and Sri Lanka Insurance. All these directors sit on these Boards by proxy and will act as its shareholder wishes them to. Dr Jayasundera could, in these circumstances be considered a “shadow director” and under the new Companies Act 2007, be held as responsible as a person who sits formally as a member of the Board of Directors including being personally liable in certain instances.
Within the ambience of these compelling new circumstances, it is established as fact that the law of the land supersedes all other agreements. Consequently the Power of Attorney granted to Hilton International to carry out the Management Agreement has become in effect null and void when the full implications of the 2007 Act is considered.
The HDL Board has in discussions with Hilton International advised their management partners that to comply with the provisions of the Companies Act 2007, the Power of Attorney granted to Hilton forms part of the Management Agreement signed with the Hilton. In 2007 when the Management Agreement was extended, the Power of Attorney was also extended as it forms part and parcel of the Management Agreement. A dilemma that presents itself is that the 2007 Act does not permit as much delegated authority as the previous Act under which the Hilton Power of Attorney was granted in 1984.
Whilst there is an understanding of the legal ramifications on the part of Hilton International, there is a lack of any written acknowledgement from Hilton. The present Board of the owning company, HDL, in turn feels that they are being pushed into a very hard corner indeed. It is within this theatre of frustration and delays and the implications of an “avalanche” of litigation which has afflicted the Hilton Project that the Board of HDL has decided to immediately revoke the Power of Attorney citing the new legal implications as contained in the Companies Act 2007.
To withdraw the Affidavit, a mere advertisement in the national press with appropriate notification to Hilton Headquarters and or its Singaporean offices would suffice; however, that very act would forever afflict the otherwise civil and cordial arrangements both parties enjoy – despite differences of opinion on key matters. It would be, insiders say, far better to reach a mutual understanding, indeed a consensual agreement.
An Inequitable Management Contract
Adding to the veritable imbroglio that the Hilton Project has become, is the claim that the Hilton Management Agreement is iniquitous at best. The initial contract runs out in 2014 when the 20 years comes to an end. At issue is whether the renewal which is vested within the Hilton ambit, can be renewed on the same terms. The Sri Lankan owners of the property — HDL, of which 65% is held by the Government of Sri Lanka, strongly feel that the agreement needs to be renegotiated to fully demonstrate equality to the stakeholders. They feel that with a total fee approaching 33% of GOP, Hilton needs to negotiate substantially downwards – so as to make the investment on the part of the owners far more palatable.
The entire process of renegotiation will be rendered void if the Sri Lanka Treasury decides to allow the winding up petition to proceed without challenge. That option is one that the present Board of HDL is actively giving serious consideration and thought to.
“Govt. Must Step In” — Chairman, HDL, T.N. Nadesan
Chairman, Hotel Developers PLC, businessman, Thirukumar Nadesan commenting on the process said that the government had spent a substantial amount of money and it was time that the Treasury created a new entity through which they can secure the monies already spent. ‘The government needs to step in, take charge and look to the future with a development plan to ensure growth prospects for this flagship project.’
Tough Questions For Cornel Perera Unanswered
We contacted the Promoter Of The Project, Cornel Perera for his comments. We asked him a number of questions relating to the project and his non-payment of the UDA lease rental, which precipitated the government taking over the land. But up to the time of going to press, Perera had not responded.