Optimising Tourism Investment - November 7, 1999

Let me start by welcoming each and everyone of you to St. Lucia. As you may have heard, we have made quite an art of welcoming visitors and friends to our shores. Indeed, what sets St. Lucia apart is that we have made an industry of it without losing the genuine art of hospitality. I am therefore doubly honoured, on behalf of our Government and people, to extend that tradition to you all.

I have also been asked to share with you some thoughts about tourism and its role in economic development, particularly from an investment perspective. It is a privilege to have been asked and I trust that this brief address will be a useful introduction to the in depth deliberations and exchanges to take place over the coming days.

With the evolution of Caribbean societies from traditional agriculture to service based economies, no other sector has impacted or accelerated transition more pervasively than tourism. In this respect, tourism is unique. As it matures from an industry to an economic sector, it touches practically all the other divergent sectors of the host economy.

In St. Lucia, the tourism sector has now become a prime determinant of our growth and economic evolution. We recognise that it is one of the fastest growing industries in the global economy, and one in which we have developed a comparative advantage. That recognition is increasingly manifested in our long-range investment policies.

In the last two decades, the global industry has experienced unprecedented growth. According to the World Tourism Organisation (WTO), tourism and travel accounts for over 25% of world trade in services and is the largest employer next to agriculture. That growth has been reflected here in the region. In St. Lucia and several other regional economies, tourism now accounts for a larger share of GDP, employment, and foreign exchange earnings than does agriculture. Our commitment to the industry is therefore well placed as it acts as a pivot for wider growth and the economic advancement of our people.

But there are certain peculiarities about out industry. The Caribbean has the distinction of being the most tourism dependant region in the world. One out of every four jobs in the Caribbean is tourism generated - the world average is one out of nine. Ultimately therefore, the sector requires a commitment to investing in people.

The further implication is that such investment must take place at several levels simultaneously if the industry is to be optimally developed for the benefit of the wider society. It is hoped that in contemplating the many faces of tourism investment, this forum will place appropriate emphasis on this multi-dimensional aspect, as well as on its social costs and benefits.

In recognition of the importance of tourism to the economies of this region, it is also necessary for governments to put in place user-friendly investment policies. These are indispensable if the region is to attract an adequate level of human and capital resources to be sustainable.

Capital is increasingly mobile. In a very competitive environment, a requisite step is for regional governments to revisit impediments to the inflow of investment to the region. While there is a need to be selective, to ensure sustainability, and to choose wisely between mutually exclusive projects, investment growth in many of our economies is still impeded by a number of archaic regulations and restrictions.

These seem to form a great barrier reef through which potential investors must navigate at their own risk. Among these are restrictive operating and trading licenses, outdated work permit regulations, and in come cases, obsolescent Alien Land Holding legislation. Various approvals by a multitude of agencies are required throughout the project cycle; and cumbersome procedures characterise physical planning and other building approvals. Further complications and uncertainties often arise from a paucity of articulate and definitive policy information.

These are just some of the issues faced by potential investors. They are not unique to any individual island, but common in varying degrees to all. The result can be delayed or deferred investment and the sub-optimal deployment of scarce, expensive resources. In the final analysis, the returns to the specific investment, to indigenous private sectors, to labour markets and to the society as a whole are irrevocably diminished.

Unquestionably, there is a need to streamline application and approval process for prospective investors; to reduce the incidence of required licenses and approvals; and to ease restrictions on land, capital and share acquisition. There is also the need to improve the policy environment as it relates to joint ventures between domestic and foreign interests. In the case of St. Lucia, we have recently reviewed the definition of foreign companies to promote this particular investment vehicle. Indeed, if we are to merge the often exclusive circles of large foreign and small domestic investors, the whole environment for joint-venturing will need radical revision. Such a merger is desirable if indigenous participation in the sector is to expand.

Another vehicle that we are exploring locally is the "one stop" concept: a single agency to replace the multitude of ministries with which an investor must now consult. This option offers a single window where an investor can acquire all necessary information and investment processing services. This innovation is also worth pursuing at regional level and is critical if the region is to position itself as a competitive investment destination. In this respect Saint Lucia is taking the lead. Draft legislation has been prepared to transform our National Development Corporation into a one stop shop. This legislation is now being considered by the appropriate agencies of government and will, in the next few weeks, be added to the agenda of Parliament.

For most of us in the region, our incentive legislation has not kept pace with the changing demands of investors. Various studies show for example, that there is no discernible correlation between tax-waivers on profits and the flow of new investments to the region. Despite this, we uphold this measure as the most significant element in our investment promotion policies.

By contrast, an investor who sinks funds into a major hotel may not achieve break-even in the first five years of operation. Thus, a tax waiver on profits in that initial period is of no value to that investor because the project would have not incurred tax liability in those years. Moreover, since the investor would have paid no taxes to the government during the period leading to the break-even point then government is not forgoing real revenue. For the tax waiver to become an effective tool in investment promotion, it has to kick in when the business has become profitable.

In the meantime what may interest the investor far more is a transparent market-driven investment policy which allows reasonable estimation of costs and benefits. Similarly, the availability of highly skilled professional and technical staff remains as important as a functioning market for competitively priced goods and services. A progressive macro-economic environment without tax incentives will probably attract more interest than a restrictive environment with generous but unpredictable waivers and exemptions for the select few.

A 1996 study conducted on behalf of CTO by Deloitte and Touche, suggests that fiscal incentives may be of less importance to the foreign investor, than the local investor. In their words:

"...fiscal incentives may have a relatively more profound effect in attracting local capital... the international investor on the other hand is less easily swayed by incentives alone..."

In summary, international investors, competing in a global marketplace, with a global perspective, make decisions based on broader strategies and evaluate competing locations on many other criteria. This view is supported by an earlier 1990 study sponsored by the OAS. That study dealt with the impact of tourism investment incentives in the Caribbean, and noted that the important motivations for foreign investors included:

- Effective and reliable infrastructural networks

- A positive popular outlook on tourism development

- Strong marketing efforts by the host country

- Reliable and affordable utilities

- Skilled and trainable labour force

- Co-operative and efficient public sector agencies

- Low income tax rates

- Long term viability of investment.

While I am not implying any particular ranking, this list underscores the fact that private sector investment in tourism is determined by a matrix of interrelated variables working consistently together. You may notice also that only one of these is specific to tourism. The implication is that the Caribbean needs to promote favourable macro environments for investment generally. If this is achieved, then investments will have a chance to enjoy improved viability and sustainability. Moreover, the investment environment should in all cases be seen as one consistent whole, rather than specifically foreign or specifically tourism.

In effect, these findings declare that there has to be a total rethinking of the investment promotion strategy in a macro context for the Caribbean in general and for individual economies. By extension, and considering the inter-relatedness of tourism with the rest of the economy, efficient infrastructure is a prerequisite for development generally. The same applies to human resource development and other critical attributes of the host country.

In all this, there must be a consciousness that we are competing with the world. It is of little solace to the investor that local investment conditions are vastly improved compared to decades past. The relevant comparison is with the rest of the world where the global competition for investment is being waged in terms of efficiency and rates of return. We must therefore set our eye on world standards if we as a region are to compete with the world.

PRESERVING PROFITABILITY

It is generally understood that hotels, which constitute most of the private sector investments in tourism, have quite low profitability in the Caribbean. This is so despite comparatively high prices. The efficiency and cost of domestic infrastructure such as seaports, airports, roads and utilities have a permeating influence on business performance. Tourism is most dependent on efficient infrastructure operations at competitive costs to users.

For tourism investment to be more attractive and sustainable, vast outlays will be needed by most Caribbean countries to upgrade the supporting infrastructure. This is a great challenge; especially for smaller states where the per-capita cost of world-class infrastructure is particularly high. In some regards, we are fortunate to be able to spread the user-costs of such infrastructure across indigenous and transient tourist populations. Tourism offers us this valuable premium.

Nevertheless, we must achieve higher efficiencies across the entire economy if we are to generate surpluses for expansion and growth. For the region as a whole, this constitutes the major challenge of the next decade. Some of the fiscal burden can be relieved by privatization; especially the privatisation of typically state-run utilities. That alone will not eliminate heavy per capita costs. However, it might improve efficiency, reliability and ultimately, the affordability of services.

By way of example, we are in the process of corporatising our local water utility. Ultimately, we wish to position this utility to undertake joint investment with the private sector. This is being done not only to make the utility financially viable, but to vastly improve quality of service. Imperatives of viability will necessitate significant tariff increases and tourism-based enterprises must anticipate this change. However, it is our further expectation that the hidden costs of poor quality service are even greater; and that improved efficiency and delivery capacity will serve the general good.

THE COST OF CAPITAL

Another major issue affecting hotel investment in the region, also related to the cost of capital, is low profitability. A study by Pannel Kerr Forster, commissioned by the CTO in 1995, revealed that while Caribbean hotels charge some of the highest room rates in the world, average return per room is below world average. Of course, the method used by hotels to price their rooms is truly a complex issue. Nevertheless, if tourism is to remain a major source of employment and growth, the issue of low profitability requires collaborative action by governments and private sectors.

The tourism industry by virtue of its composition, is a capital intensive industry. It requires substantial investment in land, physical plant, furnishings and equipment. Costly operational functions include training, marketing, and maintenance. In addition, existing properties - if they are to remain competitive - need frequent refurbishment, periodic upgrading and modernisation of in-house technology. However, local capital is limited and expensive.

We acknowledge that this is due in part to conservatism in traditional lending by commercial institutions and possible some ambivalence towards tourism related enterprises. Small and medium sized enterprises often face daunting odds in this respect. Other factors include the perceived high risk of tourism projects, high start-up costs, and the limited availability of long term financing.

Governments and private sectors must seek constructive solutions to these constraints. In particular, we must work closely to develop tradable securities and deepen financial and capital markets. This issue will be partly addressed by the Eastern Caribbean Capital Markets Project involving the ECCB and CDB. But it is also the subject of a proposed consultation now in its planning stages to be spearheaded by the St. Lucia Chamber of Commerce and the Office of Private Sector Relations. I would urge the industry to follow these developments and participate as they unfold.

Possible solutions lie in the use of credit enhancement and risk mitigation instruments to lower tourism product risks for lending agencies. These include completion guarantees, debt service guarantees, tax rebates for debt service, tax-free investments and equity participation. The overriding objective is to ensure that the project financing structure serves to distribute risk among stakeholders, thus lowering the risk to any one party.

A troubling issue which constantly faces government is how to finance capital investment to satisfy the needs of the industry. We speak here of investment in marketing, infrastructure, training and alike. In order for these things to happen, government must be able to earn revenue from the industry. The industry must therefore, be able to ensure returns to government, to sustain investment overtime. Operators who are the beneficiaries of this investment must understand that revenues from this sector must be self-sustaining. As the industry matures, it must carry its own weight. When attempts are made by government to strengthen its resource capacity operators must resist the temptation to oppose such revisions.

 A PROACTIVE PERSPECTIVE

Historically, the sub region has not been very proactive in its investment strategies. We have tended to offer incentives and generally wait for investors to show interest. As a result, our tourism - particularly our accommodation sector - has developed in an ad hoc manner, without conscious sectoral design. There has been a chronic lack of sector strategies to determine what quantum and mix of hotel profiles best suit our global development objectives.

We need to improve this aspect of the industry through a more intimate collaboration between public sectors and private stakeholders. While master plans are somewhat dated there is a need to be far more proactive in the design of our industry. This offers vast opportunities for distinguishing Caribbean destinations from the competition. It would also allow us to validate and embrace our own unique social and cultural attributes in product development. Most importantly, it could create a framework for being selective about public and private tourism investment; particularly if we can target specific components of the strategy to ideally qualified investors.

INTO TO THE FUTURE

Finally, we must improve the ability of potential investors to properly assess tourism investment opportunities. Admittedly, in developing countries, this process is complex, and doing so efficiently and cost effectively is a major consideration. Private investors must therefore expand the use of methodological approaches to tourism business development and improve their own understanding of global industry trends. We cannot be all things to all consumers but we do have the ability to develop up-market and uniquely Caribbean tourism products and a sustainable regional industry.

Governments for their part, must revisit their approach to sector tourism investment policy; not in isolation, but as a subset of global investment policy and macro management. In all this, there is need for greater collaboration across sectors, across the region and between private and public sectors; particularly in the sharing of information, and in policy design and decision making.

I trust that this particular exercise will contribute to those processes and I look forward to learning of your conclusions and recommendations. In closing, I encourage you to partake in the fine art of St. Lucian hospitality and make yourself at home.

Thank you and God's speed.

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