ISLAMABAD, Aug 24: The government has decided to go ahead with the sale of Roosevelt Hotel in New York’s upscale Manhattan district despite sustained opposition from the property’s owner, Pakistan International Airlines Investments Limited (PIAIL).

Questions pertaining to conflict of interest and the fiscal propriety of selling the profitable hotel continue to haunt the sale process. Compounding the problem are mouth-watering offers of close to $1 billion from Manhattan-based real estate developers who reportedly want to build a skyscraper on the prime commercial land.The government, for its part, is trying to play down these offers because its financial advisers — a consortium led by Citibank, Prime Minister Shaukat Aziz’s former employers — have put the Roosevelt’s value at about $400 million, or less than half of what some New York developers are ostensibly willing to pay for the property.

Sources say that Deutsche Bank was also competing for the advisory post but its offer — the lowest bid, incidentally — was rejected. Insiders say whether or not the Roosevelt is sold, the Citibank-led consortium will be paid at least $4.1 million for advisory services.

In the case of a successful sale, it stands to pocket an additional 1 per cent of the bid price. Banking sources say Citibank may also enjoy an edge among lenders when the new buyer raises resources for the bid.

Background interviews with those privy to the process suggest that Cushman & Wakefield, a firm that now shares the advisory contract with Citibank, had until recently been offering about $400 million for Roosevelt Hotel on behalf of a third party. But soon after its appointment as one of the financial advisers, Cushman & Wakefield asked the original investor to take part in the bidding instead of making offers through C&W.

As in the Pakistan Steel Mills case, insiders question the government’s push for an accelerated sale process while the board of directors of PIAIL, a PIA subsidiary that runs the Roosevelt, is reluctant to lose a dependable revenue-generating asset.

PIAIL’s directors, including some close buddies of the prime minister, oppose the sale of Roosevelt Hotel and have proposed mechanisms including a takeover by Pakistani financial institutions or directly by the government. Given the hotel’s high value and financial health, they believe this option could give PIA the funds needed to replace its ageing fleet.

The 20-storey Roosevelt Hotel, which has 1,013 rooms including 47 suites, was priced at $325 million in 1999 before being refurbished in 2003. Some real estate executives say the Roosevelt, which sits on a one-acre parcel bound by Madison and Vanderbilt Avenues between 45th and 46th Streets, could be demolished in the future to make way for a new skyscraper worth over $1.2 billion. It also has 15 tenants occupying some 20,000 square feet of retail space.

The Roosevelt was again in the spotlight earlier this month when a team led by PIA chairman Zafar A. Khan visited New York for a first-hand view of the asset. On his return, he echoed the recommendations of the PIAIL board and asked the federal government not to go ahead with an outright sale because the hotel had improved considerably after renovation.

Insiders say that Salman Shah, the PM’s adviser on finance, shot down the idea during a meeting and told the PIA to not even think along those lines.

When contacted, Salman Shah said the meeting in question related to the airline’s restructuring and the PIA chairman was asked to update the plan in six weeks. He said the decision to privatise Roosevelt Hotel had been taken by the cabinet and could not be undone. He said the sale was necessary in terms of finding funds for PIA’s new fleet.

Asked as to why the request of the PIA board and management was not being considered, he said they should either run the airline or move into the hotel business.

Rejecting the notion that a conflict of interest may arise out of the appointment of Cushman & Wakefield as financial advisers along with Citibank, he said they are professional evaluators with an independent view of the asset. He said the Privatisation Commission was directed by the government to appoint the best available institutions as financial advisers, hold bidding in a transparent manner and sell the hotel against the highest bid.

When asked about offers coming from real estate companies, he said that “fly-by-night-operators” keep floating these ideas so as to foil the transaction. He, however, hastened to add that such investors are welcome to take part in the sale and offer big bids.

Informed sources say the PIAIL board of directors was recently told that assuming a bid price of $400 million, the net realisable proceeds to the PIA Corporation (PIAC) after deduction of taxes and liabilities would be only $122 million. In comparison, Roosevelt Hotel is expected to yield $7.57 million in profits this year, increasing to $22 million per year in 2017.

Based on these projections, PIA director Syed Ali Raza called for the retention of the Roosevelt Hotel given its improved financial health and future escalation in the price of the property. The PIA also supported the idea of exploring options for financing the new fleet without selling the property. Fellow directors Farooq Rahmatullah and Mueen Afzal called for a comprehensive analysis and capital gains to the PIA in retention of the hotel and the cost of money to be borrowed by the airline.

As a result, the privatisation decision should be “revisited in view of the changed situation of [the] Roosevelt, i.e. completion of hotel renovation, good management, healthy profit projection with good prospect […] for regular dividend payment”. The PIA chairman was accordingly “authorised to apprise the prime minister of the Board’s current thinking”, according to the official record.

Many in the know of things question why the government is in a hurry to sell a property whose market value is expected to appreciate with each passing day. They say the president and the prime minister had issued instructions in November last year for selling the hotel in a transparent manner.

At the same time, however, the Privatisation Commission was directed to appoint financial advisers within two weeks and complete the privatisation process “at the most in two months”.

The PIAIL management is already contesting an attempt by Saudi Prince Faisal, son of the late King Khalid, to sell his remaining 0.9 per cent stake in the Roosevelt to Alpha Capital for $8.6 million. The move was stalled through legal means by PIAIL/PIAC which owns 99.1 per cent of the hotel. On the basis of this price, the value of 100 per cent shares of Roosevelt Hotel comes to roughly $956 million. The PIA had purchased about 49 per cent shares from the prince a few years ago.

The sale of Roosevelt Hotel ran into snags in 2003 when the highest bidder accused a Privatisation Commission task force -- led by current secretary finance Ahmad Waqar -- of non-transparency and background negotiations with lower bidders.

The privatisation of Roosevelt Hotel has been dogged by controversy. Since 1981, the government and the PIA board of directors have taken 15 contradictory decisions regarding the sale of the hotel.

The Loews Corporation had purchased Roosevelt Hotel for $55 million in 1979 from the bankrupt Penn Central Railroad, along with two other railroad hotels. Loews quickly resold the Roosevelt to Paul Milstein, a developer, for less than $30 million. Nine months later, Milstein leased the hotel to a joint venture of the PIA and Prince Faisal for a rental price ranging from $2.7 million to $4 million a year.

The PIA and the Saudi prince bought the Roosevelt after a legal battle in 1999 with the Milstein family over a 20-year-old option to buy the hotel for $36.5 million. A landmark 2005 deal between the PIAC and Prince Faisal ended the joint ownership of three hotels under the management of the PIAIL and the assets were redistributed between the partners.

Under the deal, the PIAC got 99.1 per cent ownership of two hotels, namely the Roosevelt, New York, and the Scribe in Paris. In return, the PIA transferred a third hotel in Saudi Arabia, the Minhal Holiday Inn, Riyadh, to the Saudi prince in addition to $40 million.