Performance Audit of the 1, 2, 3 Main Street Hotel Development
SHG and SHHDL have work to do to ensure they get value for money from the investment in the Hotel at 1, 2, 3 Main Street, says Chief Auditor
The attached report investigates the value for money of the Saint Helena Government’s (SHG) investment in a four star hotel at 1, 2, 3 Main Street in Jamestown (the hotel). St Helena Hotel Development Ltd. (SHHDL) was established in 2014 to build and operate the hotel, and is majority owned by SHG with ESH having a minority interest. SHHDL employed the Mantis Group to provide operation and management services for the hotel under a 10-year contract.
The hotel, while providing a highly rated service, has suffered financially since opening, as international tourist numbers have fallen below expectations and the low occupancy rate has adversely impacted financial performance. The hotel has been reliant on recurrent financial support from SHG to maintain the entity as a going concern in these early years of trading.
The report assesses the hotel development project, including SHG’s decision making at the beginning of the project, current financial and governance risks, and whether the hotel is contributing to SHG’s overall goal of making the island “altogether wealthier”. The report’s conclusions are based on interviews with officials, a review of project documents, data analysis and a review of the hotel’s finances. We do not assess SHG’s broader tourism strategy. The review took place between April 2019 and February 2020, so does not take into account events that occurred after that date.
Part one of the report finds that government’s investment in the hotel was a necessary intervention given its obligations and the unfavorable market conditions, but it relied on overoptimistic forecasts. SHG was obliged under the terms of the air access agreement to ensure there were appropriate accommodation facilities on island for mid to high-end tourist and business visitors. While SHG initiated its investment activities in a manner that should have maximised value for money, it was overoptimistic in its predictions for visitor numbers and financial performance. Unfortunately, this was the best information available to SHG at the time.
The report further finds, in part two, that the investment remains financially risky for SHG. In terms of shareholders equity, SHG has invested £2.45 million in the hotel – £1.85 million in cash and £0.6 million in property. ESH has converted loans of £0.184 million into shares. In addition BOSH has advanced loans of £2.803 million, with £1.303 million secured against property, £1.0 million with a formal guarantee by SHG and a further £0.5 million backed by a letter of intent from the Governor. It is this £0.5m loan that was recently redeemed by cash injection from SHG in exchange for additional shares.
Separate to the capital finance the hotel also received £0.4 million from SHG in financial year 2019/20 in the form of recurrent subsidy, with further subsidy of £0.2m anticipated in 2020/21 after implementation of cost-reduction measures proposed by the operator.
Part three of the report finds that the hotel is fit for purpose but a managed exit will be crucial given the financial risk exposure. Despite the financial issues, the building and quality of service provided by the hotel are consistent with what SHG desired at the outset. Now that SHG has decided to sell the hotel business along with its associated land and buildings, the report recommends that SHG develop a detailed strategy outlining its divestment goals and then pursue them actively.
Our report concludes that government is not currently getting value for money from its investment. SHG is carrying significant financial risk on the back of the investment owing to the debt financing structure, and the hotel will continue to exert pressure on SHG’s recurrent budget as Government continues to be responsible for subsidising the hotel’s losses. The hotel may provide value for money in the future, however this would depend on a continued high level of service in line with the island’s needs, as well as a careful and deliberate approach to the divestment.
Chief Auditor Phil Sharman said today: “SHG demonstrated rational evidence based decision making when pursuing this investment, however was ultimately let down by overoptimistic forecasts. My report proposes some recommendations to resolve this problem going forward. While the hotel is currently proving to be a significant burden on public finances efforts are being made to improve performance. A well-crafted exit strategy could still see SHG get value for money from this public investment providing current forecasts don’t suffer the same over optimism.”
Press release, 27 March 2020