Finance in Investment Promotion For Tourism Iain T. Christie Senior Research Associate George Washington University October 12, 2011 1
Underlying Considerations 1. Tourism is a private sector activity Entrepreneurs finance hotels and other businesses Opportunity to make profits -- markets Cross-sector, with wide business linkages 2. Success depends on a performing public sector Continuing macro economic and BoP performance Policy & regulatory framework (economic, environmental, social & cultural) Key services: public health, security and rule of law 3. Public/private partnership 4. Thus, both public and private finance required
Underlying Considerations (cont.) 5. Private sector development Growth and composition of growth 6. Public sector Redistribution Efficient and equitable public services 7. Tourism is real estate Long-term stability and appreciation? 8. Production and consumption take place together Consume capital goods, rather than produce inventory for sale.
Type Features Sources PRIVATE Framework For Financing Equity Run main commercial risks Individuals & companies Returns unlimited Investment funds Venture capital Preferred Risk limited Family, friends shares fixed return, only if dividend paid Stock market Investment houses Quasi-equity Limited risk, fixed returns Mostly institutions Debt Long-term Banks Medium-term Pension funds Short-term, working capital Insurance companies Bond markets PUBLIC Non-bank institutions Own Resources Capital or operating budget Government Debt Long-term Sovereign bond issues Medium-term Donors Short-term Commercial banks
Relationship between population/wealth and use of financial institutions Source: Tourism and Investment Finance Guide 6
Private Sector Hotel Finance Projects will usually have equity and debt financing but can also access grants and sometimes incentives that alleviate the burden Hotels are long-term real estate investments requiring periodic rehabilitation/upgrading to remain competitive The building is often owned by one entity, the management assured by another (manager/management company, or building leased) Many hotels grouped in chains but most are individual Some countries have specialized banks, others use commercial banks; also pension funds, insurance companies Long-term or short-term finance? Hotels are best-suited to long-term finance: Equity from 0-50% of cost Long-term debt, 8-15 years or more Typical structure: 70/30, debt/equity 7
Private Sector Tools Lines of credit, leasing and matching grants SME and micro finance Project finance and guarantees
Private Sector Lines Of Credit And Related Activities For Tourism 1. Lines of credit Apex facility to local financial institutions Commercial banks participate, blending donor funds with their own direct financial exposure Approval procedure agreed - free limit - prior approval Appraisal criteria agreed by sub-category 2. Leasing setting up leasing institutions lease registers 3. Matching grants
Private Finance - SME and Micro Credit 1. Building capacity Especially locally-based micro, small- and medium-size businesses. 2. Improving the policy framework To make it more favorable to SMEs. -- identifying real constraints and determining solutions 3. Working with technology To develop small businesses 4. Expanding access to capital for existing institutions and helping build new institutions
Private Sector Project Finance: Partial Risk Guarantee Central Bank Forex & Transfer State Electric Utility Government State Oil & Gas Comp. Power Purchase Agreement Implementation Agreement Fuel Supply Agreement Private Consortium Construction Contract Acme Power Company O&M Agreement Private Operator Adds comfort for investor and usually results in lengthening term of debt
1. National Agencies Public Sector Sources Of Finance Eximbank & OPIC (USA), EDC (Canada), ECGD (UK), COFACE (France) 2. Bilateral agencies CIDA (Canada), DEG (Germany), FMO (Netherlands) 3. Multilateral agencies World Bank Group, OPEC Fund, ADB, AfDB, EIB, EDF, EBRD, IADB, Islamic Bank
Public / Private Finance Tourism projects may be complex: Land purchase Site planning, zoning, and regulation Infrastructure construction Tourism facilities Operation and maintenance 13
Land development model Lodge operators Service providers Tourism activities Roads Power Area for development Water & Sanitation Telecoms Other (e.g. air, rail) Land Ownership, or Long-term leasing Similar to EPZ, or SEZ Clear right of use On-site infrastructure Land management and landscaping Cost recovery Off-site infrastructure Localized vs. national grids Provision Off-site: national utilities On-site: development authority Operation and maintenance Cost recovery: Utility tariffs Indirectly through taxes Case study: Dominican Republic
Community Development Model Source: Mafisa Robson Tourism: Lubumbo Concept plan for Community Tourism Development & Iain Christie
Community Development Model Source: Mafisa Robson Tourism: Lubumbo Concept plan for Community Tourism Development & Iain Christie
Community Development Model Source: Mafisa Robson Tourism: Lubumbo Concept plan for Community Tourism Development & Iain Christie
Source: Mafisa Robson Tourism: Lubumbo Concept plan for Community Tourism Development & Iain Christie
Overview of Investment Promotion Private tourism investment doubled to US$600 billion in 2010 Source: www.wttc.org/research 1600 investment promotion agencies Multiple investment banks and specialized consultants Many projects chasing investment funds 19
Investment Promotion Investment barriers (also see www.doingbusiness.org) Investment promotion - the Ministry or National Investment Authority? Investment forums Role of investment banks and other consultants Tanzania hotel case - Kempinski Kilimanjaro 20
More complex ideas follow - please review! 21
Other tools for financing tourism These are similar to the model just discussed: - Special economic zones - Industrial estates - Urban development corporations - Conservancies 22
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bilateral debt-for-nature swap --- source WWF WWF initiates discussion between Governments and facilitates negotiations WWF may design conservation criteria by which grants made from the fund will be evaluated and/or oversee the fund s management. Creditor Government $100 million debt is canceled Debtor Government $20 million local currency equivalent Conservation Project fund Step 1 Step 2 Assumes 20% payment in local currency
OVERARCHING GOAL IS POVERTY ALLEVIATION Millennium Development Goals Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality and empower women Reduce child mortality Improve maternal health Combat HIV/AIDS, malaria and other diseases Ensure environmental sustainability Develop a global partnership for development Copenhagen Consensus Climate change Conflict Malnutrition and hunger Governance and corruption Sanitation and water Communicable diseases Financial instability Education Population and migration Subsidies and trade barriers
Investment Guarantees: Political Risk Coverage M I G A: Investment G u a r a n t e e s Investment promotion
WBG MENU OF PRODUCTS AND SERVICES 1. Loans to Governments (project and adjustment) 2. Private Debt & Equity Finance 3. Commercial loan Syndications 4. Financial Risk Management 5. Political Risk Insurance 6. Investment Marketing Services 7. Guarantees 8. Advisory Services 9. Procurement Opportunities 10. Information Services
Source: Iain Christie