In his third major article for Barbados Free Press, Caribbean hospitality industry expert Robert MacLellan examines how some Caribbean governments are reacting to the economic crisis by increasing taxes on the barely-hanging-on hotel sector.
The bleached concrete skeletons of dead and stillborn hotels litter Caribbean coastlines like fish bones at Oistins. How much more carnage will it take for the Barbados Government to realise that the very foundation of our economy is being undermined by the government’s own taxation policies?
Destroying Caribbean hotels through taxation
by Robert MacLellan
Each of the Caribbean hotel investment conferences held in April and May this year included sessions to encourage closer cooperation between the public and private sector but, immediately prior to the Caribbean Tourism Summit in mid June, the governments of Jamaica and of Antigua & Barbuda announced significant new airport arrival taxes, with a new hotel occupancy tax also added in Jamaica. The Caribbean hotel industry’s greatest fear now is that other governments will follow.
These extra charges target the region’s highest spending visitors – the stay-over guests. While everyone understands the difficulties which island governments currently face in trying to balance their own budgets in times of world economic uncertainty and with increasing youthful populations, it is a fact that much of the region’s hotel industry is in deep financial crisis and has been for some considerable time. The region’s largest employer and biggest direct and indirect tax payer cannot be “the cow you take to market and milk it twice”.
Today, most lower and middle market Caribbean hotels, which have significant bank loans, are in default to some degree or other.
Energy and water costs on many islands are as high as US$40 per day per occupied room – with little actual utility cost differential per day per room between budget hotels charging US$80 a night and luxury resorts charging US$800 a night. Reservation systems, like Expedia, and tour operators continue to negotiate aggressively low hotel room rates, such that Smith Travel Research projects that average room rates in the Caribbean will not recover back to 2007 dollar levels until 2014. My own research suggests that lower end hotels will not even achieve that level of rate recovery. More tour operators are pressuring hotels for all inclusive rates, where meals become part of the tour operator’s “commissionable” package, but Caribbean hotel restaurants are already incurring operating losses in the face of escalating world food prices. Inevitably, hotel refurbishment and marketing budgets continue to be cut.
Prior to this year’s two hotel investment conferences, I researched opinions from the hotel sector, relative to its perceived needs from Caribbean governments, and the following points summarise the concerns and suggested requests…
Review taxation structures for new and existing hotels, “in their role as the region’s biggest export industry and foreign currency generator”. Many hotels currently require major re-investment and are struggling with bank debt and increased operating costs. Without new thinking, continuing low levels of inward investment in the sector and a downward spiral of standards, are resulting in a consequent loss of global competitiveness for the overall Caribbean hotel product. At least a certain percentage of hotel taxation should go directly towards generic Caribbean globaI marketing in order to create world class campaigns of adequate scale.
If taxes are reduced on the hotel sector – the current principal direct / indirect “tax cow”, governments should seek to derive compensating levels of tax revenue from the following alternative targets: much higher cruise ship port fees; effective taxation of private condo / villa rental income; a wider property tax base; corporation tax increases paid by a wider range of businesses; abolish duty free concessions for car rental companies. Governments should also take steps to re-invigorate and grow the region’s agriculture and fishery industries as major components in sustainable economic activity – for export and for direct supply to the hotel / restaurant sector and to other local consumers.
DUTY FREE INCENTIVES.
Governments should simplify and improve duty free import concessions for refurbishment of existing hotels and for development of new hotels – but also expand them to include incentives for furnished condos and villas, providing that those units are in a hotel managed formal rental program which generates taxable income on island. This latter action will speed up the recovery of the leisure real estate market, provide construction work, ultimately generate additional tax revenue and create new fresh resort inventory with extra earning potential for the region’s hotel companies. In general, current fiscal incentives are significantly better in many Central American tourism destinations than in most Caribbean countries.
In the light of rising world food prices, there is a need to eliminate import duties for hotels on all food items – not available from local sources – and governments should actively encourage the growth potential for local food supply.
Reduce utility costs through part / full privatisation of existing electricity companies in order to finance investment in better infrastructure: the proposed gas pipeline from Trinidad or on-island LNG trans-shipment facilities; replacement of old diesel generators with efficient gas turbines, hydro, wind and tidal generators. Similar privatization of water companies should be undertaken for greater efficiency through re-investment in updated and extended infrastructure. Given likely increases in long term energy and water demand, this is a safe investment for the region’s social security funds, insurance companies, unit trusts, credit unions and private conglomerates – many of them still too risk averse to invest directly in the Caribbean hotel industry.
Re-invigorate human resources within the hotel sector and improve the industry’s profile as a career choice. Governments and the hotel sector should cooperate in developing and resourcing better, larger management and operative level training facilities throughout the region. Speed up and expand CSME to effectively allow CARICOM citizen managers and specialists to work anywhere within the region. In the meantime, expeditiously grant medium term work permits for other skilled personnel from outside the region – where their expertise helps to drive world class standards and disseminates their specialist knowledge.
All stay-over visitors to the Caribbean (except yachtsmen) arrive by air. Greatly increased UK airline and regional airport taxes continue to have a significant negative impact on air travel to, and within, the region. The UK’s APD tax was highly discriminatory and costly for the Caribbean but lobbying by the public and private sector has been completely ineffective to date and must be more vigorously pursued with the UK government. The Caribbean diaspora in Britain can be a powerful lobby at the next UK general election, if the APD issue is successfully communicated to them. The region now faces additional potential negative effects from the proposed European Union’s airline “carbon tax” and must avoid further increases in regional airport taxes.
Almost all Caribbean based airlines are currently loss making but their ticket prices (including taxes) are some of the highest in the world per seat / mile. The private and public sector across the region should work together to help create, finance and under-write a viable Pan Caribbean international and regional carrier, which will genuinely “partner” with the rest of the Caribbean tourism industry. Meanwhile, the cruise sector which operates in the region virtually tax free and increases its “Caribbean hotel market share” year on year, must also be forced to make its fair share contribution to government tax revenues in the region.
I do not pretend that this commentary from the Caribbean’s hotel sector represents a panacea but the region’s most vital industry is on a slippery slope, with a significant part of it in danger of being decimated by strengthening world-wide competition. It seems very likely that middle market hotels on the islands with a lower cost base, like Dominican Republic and Cuba, will survive. Highly likely too that the region’s luxury resorts will survive, but what are the survival chances for some of the rest of the Caribbean’s hotels, particularly older properties with significant debt finance? Some of the dominoes are already falling.
Governments and the hotel sector should communicate quickly and effectively to ACT TOGETHER with the greatest sense of urgency. Arguably, the French market has already left for the Indian Ocean and most of the Germans for South East Asia. And some people still think, “These islands market themselves!?!?”
Robert MacLellan is CEO of MacLellan & Associates, a specialist Caribbean hospitality consultancy. His previous articles for Barbados Free Press include: