Kempinski Hotel Project
- Reference: P-GH-BC0-003
- Approval date: 27/09/2010
- Start date: 26/01/2011
- Appraisal Date: 20/03/2010
- Status: OngoingOnGo
- Implementing Agency: GCC Resorts Limited
- Location: ACCRA
Construction and operation of a 267-room 5-star hotel in Accra. The hotel will use 8.5 acres of prime land located at the heart of the city, adjacent to the Accra International Conference Center (AICC). The sponsors have secured a 15-year Management Agreement with Kempinski to operate the hotel. The hotel is currently under construction, completion being expected in December 2011. Project re-appraisal took place in March 2010 (initial appraisal took place in September 2007).
3.12 Strategic AlignmentThe Bank's strategy for private sector development (PSD) is twofold:
(i) to enhance Africa's business-enabling environment; and
(ii) to support a few catalytic transactions with a strong demonstration effect. The proposed project to create a new hotel as part of a mixed-use conference/hospitality facility in Ghana will support both elements of the Bank's PSD strategy by simultaneously creating new infrastructure to support business development and demonstrating the benefits of public-private partnerships as a viable project financing model. It is expected that the project will be the catalyst for other PPPs in Ghana and the PPP financing structure will create a strong demonstration effect for other countries that are considering similar development projects. The project is line with the sector priorities of the Medium Term Ghana Poverty Reduction Strategy and the Bank's Country Strategy Paper, which supports reduction of poverty through improvement of the investment climate and facilitating public private partnerships. The project fits perfectly with the Bank's partnership strategy to leverage its financing capacity and technical expertise by working with top-tier African commercial banks.
Analysis of Additionality and Complementarity
3.26 As a part of its private sector project selection strategy, the Bank seeks to ensure that its participation in a project adds specific value that cannot be provided from other sources. The Bank also seeks to demonstrate that it is not duplicating efforts of other development partners and therefore its assistance is complementary.
3.27 KAH will be the first public-private partnership financed by the AfDB in Ghana, and the Bank's fifth non-sovereign guaranteed operation in the country (BMK Particleboard project in 1994, Sheraton rehabilitation project in 1996, Salt-mill project in 1996, GOPDC expansion project in 2002, and CAL Merchant Bank line of credit in 2002). Although Ghana has earned a reputation for stability and predictability, the Bank's participation in the project provides important comfort to ABSA which has provided a substantial loan with a longer tenor to KAH. In addition to the financing impact, the Bank has played an important role in the review of the environmental impact assessment. This has given comfort to the GOG, the lender and the sponsors that the environmental and social impact analysis and the management plan will conform to the highest international standards.
3.28 Although the Bank's presence in the financing of KAH is helping to catalyze resources from the private lenders, the real innovation in this project is the initiative to enhance linkages to local SMEs . For the first time in its lending to the hospitality sector, the Bank intends to increase the economic benefits to local community by working with the sponsor and hotel operator to enhance:
(i) the local content in the supply chain; and
(ii) local skill development. A number of leading hotel chains are today developing initiatives that support the local economy or generate more 'inclusive business', such as Accor, Starwood, Serena, and Hilton. Kempinski exhibits a good neighbour and good corporate citizen policy in all that it does, but does not have a specific policy for SME mentoring or support. Thus discussions between the Bank, the sponsor and hotel operator will seek to explore how the purchasing power and business competence of the hotel can be leveraged to boost SME linkage in a way that fits with the global corporate standing and image of Kempinski. Experience elsewhere with linkage programmes has shown that action needs to simultaneously tackle supply side weaknesses in the local economy, and demand side factors, such as procedures or information gaps that pose obstacles to smaller suppliers.
3.29 An innovative ingredient of the proposed approach would be a 30 bps reduction of the lending margin charged by the Bank that would be used by the sponsors through a community fund to finance specific local initiatives implemented in coordination with the hotel operator . The Bank is using the expertise of an experienced consultant to design the local programs and develop discussions with the sponsor and Kempinski. The modalities of the proposed partnership will be finalized before disbursement and a side agreement will be signed with the sponsor prior to completion. Examples of some of the initiatives being discussed for finance under this program include: "Development of a mechanism for assisting a market garden cooperative of local women to produce herbs, garden vegetables and fruit that will be purchased and used by the hotel. Every one percentage point increase in the share of food spending that reaches poor producers will deliver an extra $16,000 in income to poor households.; "Funding and implementation of a vocational training program with an Accra school to develop trained individuals in the hospitality and leisure sector;
This innovation will not only enhance the impact of this project, but will be used by the Bank to inform future strategies for enhancing linkages in the hospitality sector and beyond.
3.1 Development ImpactIn an effort to capitalize on its improving international reputation and to better integrate its economy to the global economy, the Government of Ghana has intensified economic and structural reforms in recent years. In its current development plan, the GOG has put promotion of the business enabling environment as a pillar of its strategy. This strategy involves modernizing and construction of new infrastructure and improvements in the investment climate. It also highlights public-private partnerships as a key "smart financing" vehicle to leverage public financing with private sector resources . The success of the country's strategy was recently marked by the issuance of Ghana's first bond on the international capital markets .
3.2 The Kempinski hotel project fits perfectly into Ghana's development strategy as the country seeks to strengthen its business enabling environment. The hotel's location in central Accra makes it a strategic asset for the development of the hospitality sector in Ghana. Only a few hotels can offer similar services as KAH and its link with the conference facility is expected to substantially enhance the country's ability to increase its share of the lucrative business traveler and conference markets.
3.3 In terms of the direct economic impact, the hotel is estimated to generate an economic Net Present Value (NPV) of about USD 25.4 million in constant 2007 prices (discounted by 12% real). As illustrated in Table 5 below, these economic benefits will accrue to five main stakeholders:
(i) the Government of Ghana;
(ii) Local Labor;
(iii) Local SMEs;
(iv) Local Development Fund; and
(v) the Investors. The combined direct cash contribution to the Ghanaian economy from the project represents about 58% of the total benefits while the investors retain about 38% of the estimated benefits. Annex 3 provides detailed economic tables.
Table 5: Stakeholder Analysis (USD million, Constant 2007 Prices)
StakeholderPV@12% Government of Ghana8.5 Local Labor4.0 Local Development Fund0.2 Local SMEs1.9 Investors9.9 Lenders0.9 Total25.4
3.4 For the GOG, the project will contribute an estimated USD 8.5 million in NPV terms during the first 10 years (discounted at 12%). Sales and value-added tax will account for USD 3.5 million while corporate and property taxes add about USD 6.6 million and USD 1.3 million respectively. In addition, the government will receive dividend for its 10% equity stake (USD 0.6 million) as well as withholding taxes on other dividends (USD 2.0 million). Revenues will also be generated by the country's utility companies. The GOG will lose taxes from other hotels (USD - 5.5 million) as part of the demand will be displaced from other lower category hotels.
3.5 For local labor, the project will create substantial direct and indirect job opportunities with an estimated NPV of USD 4.0 million. During the construction phase about 500 construction workers will be employed as well as additional jobs for subcontractors, suppliers, etc. From a human capacity development perspective ZICL will provide training programs developed by the engineers appointed by the Zakhem Group as the main contractor. These engineers will be required to train locally recruited labor and tradesmen to the required level of competence in order to deliver an end product whose engineering and finish compare to the highest international standards.
3.6 During the project's operations phase about 352 permanent direct jobs will be created and it is estimated that 30-40% of these employees will be women. From a skills development perspective, the bulk of the project's skilled workers will trained abroad at the Kempinski Group's other hotels. In addition, the Kempinski Group will provide in-house training for hotel employees and it will conduct special seminars and workshops for senior staff for the purpose of reviewing industry performance. A sum of USD 288,500 has been budgeted by Kempinski for training to be provided by short residential inputs by highly qualified Kempinski employees from elsewhere. Implementation of the in-house training for the employees of Kempinski hotel will increase the pool of trained hospitality personnel, which in turn, will contribute to the development of hospitality industry in the country.
3.7 A major development feature of the project is the way it will create indirect opportunities for local enterprises, including SMEs for goods, works and services. During construction, construction materials and soft furnishings will be sourced within Ghana or West Africa. Wood and aggregates are likely to be the main material items that are locally produced. There will also be items purchased from local traders that may have been imported from elsewhere in Africa. The furniture (including fitted items such a paneling, wardrobes, doors etc.) and soft furnishings will in all probability be manufactured and supplied locally. Furthermore, during the hotel construction, ZICL will employ Ghanaian contractors for site clearance, foundation and concrete frame construction, and many of the electrical and mechanical installations. Already, a local contractor who has been awarded the relocation and construction of the new Accra racecourse has commenced works at the site (estimated cost USD 1.75 million). During the hotel operation, tropical food requirements will be locally sourced. While planning for the project's food requirements is not yet completed, it has been found that other 5 star hotels in African cities can spend almost as much on food supplies as on domestic payroll, thus if a considerable share is produced domestically, this can be a substantial injection into the agricultural and food processing economy.
3.8 Hotel operation will generate demand for a range of goods and services from the domestic economy, of which the food and beverage supply chain is likely to be the most substantial. According to the Horwarth feasibility study (April 2007), annual spending on food will be around US$1.6 million per year by 2012. Tropical food requirements will be sourced locally, but the total relative shares of imports and domestic production in this are not yet known. Nevertheless, whether Ghanaian supplies account for 30% of 50%, it is clear that there is a substantial injection of demand into the important agricultural and food processing chain. As important as the volume of spending can be the market opportunity provided for producers to upgrade their production: meeting standards of a 5 star international hotel can be a staging post for meeting standards of export clients overseas.
3.9 The project investors will earn an estimated USD 9.9 million in NPV terms during the first 10 years, composed of dividends earnings for the sponsors and management fees to Kempinski. Dividends will be withheld until the quarterly Debt Service Coverage Ratios reaches 1.5.
3.10 The project is also expected to have two major longer-term effects on Ghana's development that have not been quantified in the economic analysis:
(i) contribute to the urban upgrading of downtown Accra; and
(ii) enhance Accra's market position for business and conference tourism. The hotel is the first phase of an integrated mixed-use facility ("Gold Coast City") and subsequent phases include residential, commercial and shopping mall developments in the city's center. The up-market hotel and wider improved services will enhance Ghana's hotel offering to the business travelers and attract more businesses-oriented fairs and events to the city. These in turn will have substantial knock-on impacts on the local economy. 3.11 In addition to its contribution to Ghana's economic growth and long term strategy for poverty reduction, the project will contribute directly to incomes of the poor. Of the 352 jobs created for hotel operation, an estimated 25% will be un-skilled and 50% semi-skilled, thus accessible to relatively poor and less-skilled workers. Much of the construction labor is also likely to be filled by relatively unskilled laborers. Incomes will reach the poor and more rural Ghanaians through the substantial food supply chain. It is estimated that direct income accruing to poor households simply from hotel wages and food purchases could be around $1.2 million per year.
DERBY Nanette Esi - OPSD4