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Investing in Tourism

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1967
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H. David Davis

THE IMPORTANCE of tourism as a factor in economic development is now widely accepted. Since it is recognized everywhere that the expansion of the international tourist trade generates foreign exchange earnings and stimulates employment and incomes, it is not surprising that for some time now World Bank economic reviews and appraisals have regularly given consideration to the tourist industry in the countries surveyed.

Proposals for direct investments in the tourist industry are entertained, however, by only one of the three members of the World Bank Group, the International Finance Corporation (IFC). To date IFC has made one such investment in a company establishing an international-class hotel in Kenya’s capital, Nairobi. This company is participating also in the development of game lodge facilities in Kenya’s game park reserves. IFC’s investment was made in partnership with investors from Germany, Kenya, the United Kingdom, and the United States.

The World Bank and the International Development Association (IDA), although not lending directly for tourism, are—as is IFC—prepared to have the funds they make available to development finance companies reinvested in projects relating to tourism. Among the development finance companies associated with the World Bank Group, the most active in promoting tourist industries so far have been those in the Mediterranean area, in particular companies in Morocco, Tunisia, and Greece. In addition, some projects for infrastructure supported by Bank loans and IDA credits, particularly in the transportation sector, indirectly benefit tourism; a good example is the Adriatic coastal road in Yugoslavia, the construction of which was assisted by a substantial Bank loan.

Four Stages of Tourism

In general, four stages may be distinguished in the development of tourism. If tourists are defined as nonresidents stopping more than 24 hours in a country (this is the United Nations definition), then all countries receive some tourists. In some parts of the world, however, the numbers are very small, and there is not much hope of increasing them at present. Then there are countries which have few tourists as yet, but where there are opportunities for immediate increases. Next, there are countries where the tourist trade has been expanding at a fair rate, and there is a near prospect, given proper action, of large-scale tourism. Finally, there are those countries which already cater for large-scale tourism but are naturally interested in increasing their tourist traffic still further.

This article is based on a talk delivered to the OECD Seminar on Tourism Development at Estoril, Portugal, in May 1966.

For countries in any of these last three stages it is vital to have a proper phasing of investment in tourism to keep pace with, and stimulate, the traffic. Because the plant required to meet the needs of tourists is necessarily composed of a large number of operating units, decentralization is usually desirable—although coordination is vital. The industry therefore relies on a delicate balance between private initiative and public intervention.

A wide range of measures is open to a public authority that wants to increase investment in tourism. These measures can be classed as either generic or specific, the former being directed to creating a propitious context for the trade as a whole, while the others are concerned with encouraging individual enterprises.

Economic Planning and Tourism

Tourism, like other economic activities, flourishes best when it fits into a context of general economic policies and programs designed to lead to the optimum growth of the economy as a whole. For this, some sort of national planning—at least in setting priorities and seeing that they are emphasized—is required to create a climate for productive investment in all suitable fields.

As part of the general economic plan, a coherent national program for the tourist industry can be established. Since much depends on private initiative, the best programs are indicative and flexible: they take into account the various proposals and forecasts of the different private interests and ensure that the public part of the program dovetails in such a way as to form an integrated whole. If the government clearly demonstrates the will and the administrative capacity to carry out its part of the program, then businessmen are able to make their investment decisions in the knowledge that their individual operations will receive the backing of the entire tourism complex.

A national plan for tourism takes into account the cost of infrastructure and general services, and thus gives a view of the rate of return on all relevant investment and indicates the desirable geographic distribution of the development effort. Most national plans for tourism do in fact indicate priority zones where expansion efforts are to be emphasized; Spain, a large-scale tourism country, has designated such zones, as has Morocco, a country on the brink of rapid expansion. Individual investors can be assured that basic and ancillary services will be available in such zones, and that development carried out in them will get strong government support.

Although businessmen do invest in hotels and other tourist facilities even in the absence of a national plan for tourism—particularly if the traffic is presenting itself—a plan, devised in consultation with the tourist industry, acceptable to it, and widely understood, is probably the single most important step that any country can take to ensure a balanced program of investment in the development of tourism.

Definition of the Public Sector

Such a national program should state clearly both the objectives and the limits of public investment. Private investors need assurance that public investment in infrastructure will be phased to support their own investment in facilities intended specifically for tourists. On the other hand, they want to know how far the authorities mean to carry public investment in hotel accommodations and allied tourist facilities. Unless public investment is clearly a residual, used when private capital is not forthcoming and when the national plan indicates the need for such an investment, private investment will be inhibited. Both Spain and Greece have succeeded in striking a satisfactory balance between public and private investment: the hotels, motels, and wayside restaurants operated directly by their governments have been intended to provide accommodations where private facilities did not exist, such as at strategic crossroads remote from urban areas and in some historic towns. They have also been conceived as models for prices, comfort, and service which private operators could emulate.

Where direct public investment in tourism does take place—either in exclusively public enterprises or by participation in “societes mixtes,” as, for example, in North Africa—operations should be under normal commercial conditions so that private businessmen do not feel they are at a disadvantage vis-à-vis the state power. The first essential is that if a public corporation is set up it should be independent of the Ministry of Tourism or the national tourist office, and of all other public agencies. Furthermore, the public corporation should be obligated to cover all interest charges and to provide for depreciation, and should be subject to the same administrative regulations as a private hotel business.

Government Regulation

Private investment inevitably takes place against a background of various types of government regulation. Government regulation can be a positive force for creating a suitable investment climate. However, it must not be felt to be cumbersome or arbitrary. It should be established in consultation with the tourist trade, and self-regulation should be encouraged wherever possible.

For example, experience in successful tourist countries in Europe shows that government regulation of prices has negative effects that are often serious. Officially regulated prices are often out of step with current operating costs and, as a result, price controls are often evaded. This is bad for customer relations and in the long run discourages tourists; potential visitors ought to have reliable information about how much their vacation is going to cost. Moreover, the existence of price controls—even though they may not be observed in practice—tends to discourage further hotel expansion by creating an additional uncertainty about the return that may be expected on new investment.

Although official price controls generally are undesirable, this does not mean that all price discipline should be removed. Hoteliers should be allowed to fix their own prices from year to year, with different rates for the various seasons if they wish. Once the hotelier establishes his schedule of prices for the full year, it should be communicated to the official agency and should be published in official guidebooks well in advance. Hotels should then be compelled to maintain the published rates during the year and should be liable to severe sanctions for exceeding quoted prices.

The abolition of price controls in countries which formerly had them has not led to an excessive rise in hotel prices; there is too much competition among hotels for this to happen. Competition has indeed been intensified as increasing numbers of hotels have been built, in part as a result of the stimulus to new construction that removal of the price controls has itself provided. In addition, competition for tourists in other countries induces hotel operators to keep prices in check.

A voiding Speculation

Assuming that the demand for tourist facilities in a country is increasing—either spontaneously or as a result of assiduous promotion—then there should be room for additional profitable investment. And it should produce quick returns; facilities for tourists can be constructed rapidly and thereafter operating income begins to flow with little delay.

The amount of money that ought to flow into the tourist industry should be determined by comparing the rate of return for projects in this sector with that in other sectors.

Expansion of tourist facilities, particularly with respect to hotel accommodation, needs to keep pace with demand rather than to run ahead of it. The optimum phasing of investment in tourism is admittedly a delicate task. The desire to meet all potential demand must be balanced against the industry’s ability to absorb investment and use it to provide facilities in sufficient quantity and of appropriate quality in such a way that long-run demand is maintained. Hasty, get-rich-quick hotel investments—with poor standards of construction, inadequate staff and training, and without provision for associated amenities and entertainment—can rapidly spoil the reputation of a resort and badly damage its prospects for long-term development.

While speculation of this sort should not be encouraged, there are a wide range of positive measures which can stimulate investment of the right type at the right place and time.

Credit

Perhaps the most potent tool for stimulating investment in tourism is the provision of credit; public credit facilities can augment private capital and act as a catalyst.

Because of the special nature of tourism, a separate hotel credit fund is desirable. It may be operated by an existing credit agency but, even then, it should be established as a special section so that expertise in this particular field is developed. When its activities are extensive enough and experience has been gained, the fund could become an autonomous credit institution. A distinction should be made between hotel financing and mortgage banking; the people responsible for providing credit should be looking at the potential of the business as a going concern rather than at the collateral represented by the real estate value of the land and buildings.

During the development of a country’s tourism, concessions in credit extension are often necessary. Since cash is usually a limiting factor in mounting a project, an increase in the debt-equity ratio can be a useful device: the public credit institution can raise the proportion of the total investment which it is prepared to extend as a loan. In addition, amortization periods can be lengthened so that the burden on operating income is spread; furthermore, long-term credit can induce businessmen in underdeveloped countries to engage in businesses which show a steady return over a period rather than in the short-term operations of little lasting national value which often seem attractive. In doing this, long-term credit has a very desirable instructional effect.

Whatever credit concessions are offered, it is a mistake to charge interest rates significantly below the prevailing market levels. If a project is economically justified, this sort of incentive is not needed: on the contrary, it leads to a misallocation of resources. The business of a hotel credit institution should not be to make loans below the market rate, but to channel public funds into the industry in order to augment the total volume of hotel investment.

By a judicious use of public funds, the authorities can ensure that the expansion of hotel accommodation takes place where it is most needed. Funds for tourist expansion should first be concentrated in existing tourist areas, where consumer preferences have already been demonstrated and where basic facilities exist. In such areas, relatively small investments will yield immediate and high returns. If such funds were spread around the country irrespective of established demand patterns, additional accommodations in some areas would not be fully used, while in other more popular areas the contribution to meeting the hotel shortage would be proportionately reduced. This does not mean that, in the longer run, new tourist regions might not be opened up if their potential profitability is reasonably clear; however, public money for tourism, like all public funds, should go first to the areas of greatest return.

Other Incentives

Most countries provide a range of incentives for productive investment in various types of activities, and tourist enterprises are often included. A re-examination of such an incentive system can often ensure that the special needs of tourism are more effectively met.

For example, many countries offer a set of tax incentives for listed investment: rebates, allowances, tax holidays, and the like. Tourism often requires a special “package,” including favorable real estate taxation, with incentives used as an instrument of the national program: differential treatment may be applied, with zones of high priority receiving the most favorable concessions.

Another way to help tourism—and thereby encourage investment in the sector—is to liberalize the import of capital goods and equipment required both for starting new tourist facilities and for running successfully those already in existence. Concessions on customs duties are sometimes appropriate, and of course bona fide tourist operators must have access to foreign exchange to purchase the necessary goods.

In many underdeveloped countries, where local capital markets are limited, the prime source of funds for hotel investment is likely to be found abroad. Foreign capital will be forthcoming only if the government takes positive steps to encourage it, including the simplification of regulations, reasonable protection of equity, and the assurance that foreign investors will be able to take their profits—or at least a proportion of these that will satisfy them—out of the country.

Finally, investment in tourism is stimulated by the general nature of administrative services offered, and the control exercised, by the government. Naturally, entrepreneurs expect vigorous action in national and regional promotional and informational programs and in the maintenance of places of tourist interest such as historic sites and national parks. Furthermore, the government can be of service through its regulations for siting and land acquisition. Labor laws too are often important in setting the context within which hotels, restaurants, and other tourist facilities must operate; since the tourist industry is directed toward an international market, access to specialized foreign personnel is particularly important.

In sum, the government can not only take direct action itself but can also create an ambiance of welcome to tourists and to the trade which serves them.

Importance of Tourism

A recent study 1 has produced some striking evidence of the growing economic importance of tourism: between 1950 and 1963 national incomes throughout the world grew by an annual average of 6 per cent while world tourist receipts increased by 12 per cent. Most of this is explained by the fact that as income per capita rose by 1 per cent foreign travel expenditures went up by 1.5 per cent; in economic terms, there was a world-wide income elasticity of 1.5. Other factors include demographic considerations, particularly urbanization, working conditions, educational factors, social habits, and changes in transport technology.

Within these aggregates there are, of course, wide individual variations. Underdeveloped countries, beginners in the business, can often increase their tourist arrivals and receipts by more than 10-12 per cent annually. For many of these countries, their tourist attractions—climate, natural beauties, and historic interest—represent one of their major resources. This can be developed by positive action to maximize potential traffic and to stimulate the investment necessary to handle it.

International Union of Official Travel Organizations (IUOTO), The Economic Impact of Tourism on National Economies and International Trade (Geneva, 1966).

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