Development Impacts in the Tourism Sector through the Lens of Two IFC Hotel Investments: What They Show and What We Can Learn

Transcription

1 Development Impacts in the Tourism Sector through the Lens of Two IFC Hotel Investments: What They Show and What We Can Learn Hyatt Regency in Kiev Peru Orient Express Hotels Hayat Abdo (Economist) and Shaun Mann (Snr. Investment Policy Officer, CICIG) January

2 IFC and Hotels Section 1: Unraveling the Untold Story of Development Impact IFC has invested more than US$ 2 billion in hotels since At first sight, a focus on hotels by an organization driven by a desire to reduce world poverty seems incongruous. However, there is evidence both from the case studies in this paper and in mainstream tourism literature and research, that hotels have a significantly higher development impact when compared to other industry groups. This impact is evident in indirect and induced jobs, income generation, taxes, and, public good dimensions, such as enhancing the image of a country or contributing to environmental conservation. As well as putting money into local economies and achieving financial returns for investors, IFC s support for hotel investments can have a catalytic effect on boosting a country s tourism sector and contributing to its economic diversification and sustainable growth. Some of the direct and indirect benefits from hotel investments, including some public good dimensions escape the current DOTS 2 framework. The standard IFC model 3 for development impacts from tourism (Fig.1) shows these areas, but in reality, aspects like indirect jobs, foreign exchange, or linkages are not currently measured. Figure 1: IFC Model of Development Impact from Hotel Investments 1 Since 1956, IFC has approved over US$2 billion in hotel investments (including syndications) in 220 projects in 80 countries. 2 DOTS: Development Outcome Tracking System measures indicators of financial performance, economic performance, environmental and social performance and private sector development, but all from the perspective of the individual project rather than the broader destination , IFC Tourism Sector Review 2

3 The body of research on the development impacts of hotels is growing: In 2008, GTZ looked at eight all inclusive resorts in the Caribbean and found that 5-star resorts employed 2 people per room (versus an average of 1.2 in 3 and 4 star resorts), paid 36% higher wages, 20% higher taxes per room, created 2.6 indirect jobs through outsourced supplies of goods and services per room, and had 30% more employees on full-benefit contracts against the more standard short-term-no-benefits contracts that are the typical industry standard. In 2007, the World Bank looked at two large hotels (one 3-star and one 5-star, both operated by Sun International) in Livingstone, Zambia and concluded that the 380 rooms directly employed 840 (2.2 per room), were responsible for 60,000 tourists coming to Zambia in 2006, gave the government $8 million in direct revenue from taxes, visa fees and park fees, and spent $4 million in the local economy. That $4 million generated another 400 jobs, of which over 300 were women, and sent nearly 1000 children to school. In 2009, ODI looked at a large TUI 900-room resort hotel in Turkey and found that while employment levels were only 0.6 per room (reflecting the lower quality product), the hotel annually generated $32 million in local purchasing and local salaries, and an additional $16 million in taxes and levies for the Turkish economy. While the direct benefits are relatively easy to quantify, it is the indirect benefits to both the local economy, and the sector as a whole, that are the untold story behind the true development impact of hotel investments. In an effort to understand where improvements can be made in measuring IFC s development impact, two detailed case studies were carried out on existing IFC investments; (i) Hyatt Regency Hotel in Kiev; and (ii) Peru Orient Express Hotels, focusing on the Monasterio Hotel in Machu Picchu. The analyses focused on measuring: i) Payments made by the hotel to staff, for used consumables (water, energy, etc.) as well as for taxes, licenses and levies paid to government; ii) Expenditures by hotel guests (in the case of hotels) on purchases outside the hotel on transport, retail, F&B, etc.; iii) The hotels direct and indirect foreign exchange generation; iv) All suppliers of goods and services to the hotel to ascertain their employment, wage, and tax levels; v) Effects on families who receive wages from the hotel and those in the supply chains linked to the hotel. In addition, the studies also showcase some of the costs associated with a poor business environment and weak governance of the sector, for example delays in project construction due to a range of redundant processes, delays in obtaining licenses and onerous inspection procedures linked to the operation of the hotel. 3

4 Section 2: Case Studies Methodology Two detailed development impact assessments were carried out in June and July 2009 on two existing IFC hotel sector investments (Hyatt Kiev approved 2005, and Peru Orient Express Hotels approved 2007). The framework used to collect data was adapted from the model developed by IFC / Harvard Business School 4 : Groups Impacted by the Project Benefits to Group (Qualitative and Quantitative) Costs to Group (Qualitative and Quantitative) Hotel Financiers Earnings Taxes on earnings Hotel Employees Number, gender, average Taxes on earnings salaries, benefits package, training All Suppliers of Goods and Services Number, increased earnings from Taxes on earnings hotel, jobs created Customers of the Hotel Number, better quality of Spend per day product, place to do business Government Tax collection; VAT, excise taxes, earning taxes, profit taxes Collection costs, subsidies and tax breaks provided to hotel Neighbors & Environment Pro bono/subsidized services from hotel Waste, increased congestion, increased water/power utilization Competitors Increase/decrease in demand, Price competition demonstration effects Complimentary Services Growth of business, jobs created Taxes on earnings Through structured questionnaires and interviews detailed qualitative and quantitative information was collected on each group and this was used to build new financial models (based on the original project models) as well as a more complete and descriptive picture of the development impact of these projects , Frank Lysy, Benjamin Esty and Carrie Ferman, An Economic Framework for Assessing Development Impact. Harvard Business School 4

5 2.10 Hyatt Regency in Kiev Project Snapshot The 234-room 5-star Hyatt Regency is a centrally located business hotel in Kiev. IFC provided a long term senior loan of US$29.5 million towards total project costs (estimated at $75 million) and it is IFC s first investment in the hotel sector in Ukraine. The hotel opened in September 2007 and was operational for 18 months at the time of this study. The projects sponsors, the ISD Group, are a diversified Ukrainian holding company whose main business is steel manufacturing. This is also their first venture into the hospitality sector. Findings As the project had been operational for only 18 months, the team assumed that for the 10 years of IFC s investment in the project, operating performance would be at 50% of that achieved in its first year. The project performed better than initially forecast as a result of higher achieved room rates. In its first year of operation, the hotel grossed $42 million and achieved an average room rate of $528, more than doubling expectations. The economic crisis reduced these figures for year two (average room rate down to $360), but brought them closer in line but still exceeding original projections; base case projections predicted average room rates of $195. Based on this, the measurement framework suggests that over a 10 year period: The hotel will generate $100 million for the local economy through purchases and salaries; The hotel will generate 500 permanent jobs; Leakages from the Ukrainian economy over this 10 year period in the form international purchases, plant replacement, the Hyatt management contract and the debt repayment to IFC will amount to roughly $60 million; The hotel will pay the government around $40 million in taxes and fees; The hotel will create foreign exchange earnings of between $ million; 5

6 A survey of hotel customers showed that they spend on average US$ 337 per day on transport, souvenirs, meals, drinks, communication, and other out-of-pocket expenses. Over the 10-year period that IFC is invested in this project, this represents an extra US$ 25 million going directly into the local economy. As a result of this analysis, the Project s FRR and ERR improved significantly to 9.6% and 19.1% respectively, despite an increase in capital expenditure of US$15 million. Table 1: Comparison of Estimated ERR over 10 Years: Present with Board Paper Government taxes - Income taxes - Property taxes - Net VAT - Taxes paid by local suppliers (based on revenue earnings from the hotel) Original (US$ Millions) Estimates in Board Paper Revised (US$ Millions) Estimates After More Detailed Data Collection Employees Local community Overall economic benefits 3.3 ERR = 9.7% 42.7 ERR = 19.1% IFC Additionality In addition to these findings, IFC s involvement in the project contributed to the following: IFC s term sheet insisted on a lender supervisor who made regular site visits and provided useful independent feedback to both IFC management and the client; this improved communication between the client and IFC and ultimately averted several potential confrontations. This was particularly important for this client as this was their first venture into hospitality. IFC s willingness to lend attracted parallel lenders, enabling the project to be completed. IFC s environmental and social standards were important in ensuring issues like water quality were tackled effectively at an early stage of the project; these might have been expensive to resolve had they not been flagged early. The presence of IFC as a lender allowed the hotel management team to avoid corruption issues with local municipal authorities; they were able to simply say we are not allowed to pay bribes. 6

7 Summary of Development Impact for Kiev Hyatt Regency Groups Impacted by the Project Hotel Financiers Hotel Employees 365 staff 62% Women (over 70% of whom are supporting families) Suppliers of Goods and Services 160 staff for hotelrelated operations 52% Women (over 85% of whom are supporting families) Benefits to Group Diversification of business operations and risk Social and political PR with a prestigious hotel Return on investment Salaries on average 30% better than market rates Paid vacation Job security Free meals Transport Official contracts High quality training Access to credit due to official contracts Medical insurance Promotion opportunities across the Hyatt group Regional employment mobility with Hyatt Prestige value of Hyatt Higher redundancy benefits if laid off due to official contracts 63 different suppliers are contracted with the Hyatt Total $11 million annual revenue Increase in turnover 6-80% Halo effect from connection with Hyatt estimated 20-30% extra business Improved operating systems to satisfy Hyatt 160 people employed on Hyatt-related work o Hotel management outsourced o Car hire, taxi service outsourced o Security outsourced o Laundry outsourced o Window cleaning outsourced o Landscaping outsourced o Public area cleaning outsourced o Stewarding outsourced o Grease-trap cleaning outsourced o Staff transport outsourced Costs to Group Taxes on earnings Financing costs Personal No dental insurance Formalize business Invest in improved operating systems Invest in staff training Taxes on earnings Increased hassle factor Customers Out of pocket expenditure averaged $337 per day over 10 years this is over $25 million spent in the local economy Government Neighbors & Environment Access to a 5-star product Place to do business A place to host VIPs Access to quality restaurant Access to quality spa Improved service standards Improved safety standards $4 million in government taxes $1 million in utilities Enhances St. Sofia Square Enhances the business environment for Kiev Enhanced prestige for Kiev $100,000 per annum charitable contributions (0.25% of gross revenue) 7 High prices Revenue collection costs Increased traffic congestion Competitors Demonstration effect, a 5-star hotel is profitable X% estimated lost business New Entrants 3 new 5-star hotels are planned over the next 3 years Price competition

8 2.20: Peru Orient Express Hotels Project Snapshot Peru Orient Express Hotels ( POEH ) is a 50/50 joint venture between a local sponsor, Peru Hotels S.A., and Orient Express Hotels Ltd ( OEH ) and was established to develop and operate three concessions in Peru. OEH is an international operator of boutique hotels as well as luxury trains around the world. As part of long-term concession agreements signed with the Government of Peru, POEH manages and operates two hotel concessions (Machu Picchu Sanctuary Lodge and Monasterio Hotel) as well as the famed Cusco-Machu Picchu rail line (PeruRail) in the Cusco/Sacred Valley Region. In addition to being one of the first international luxury operators in the hospitality segment, the project also marked OEH s first investment into Peru. IFC's investment helped provide long term funding for the hotel projects, when none was available at that time. The Monasterio Hotel IFC s first financing in POEH was made in 2000 to support the refurbishment of the Monasterio Hotel (pictured) in Cusco and the Machu Picchu Sanctuary Lodge (MPSL) in Machu Picchu. The US$23.2 million investment program involved the refurbishing of the three concessions comprising: an existing 3-star, 32 room Machu Picchu Sanctuary Lodge; an existing 123-room, 5-star Monasterio Hotel in Cusco; and converting the Las Nazarenas Convent to a 58 suite, 5-star hotel to respond to a changing market dynamics. The latter two were historical properties with a rich cultural heritage. The Impact of POEH and IFC on Peru s Tourism Sector POEH has successfully contributed to positioning Peru as a high end destination. The project allowed OEH to introduce its professional training, customer service standards, hotel management and marketing techniques to Peru and thus change the profile of the tourists 8

9 traveling to Peru by attracting upscale travelers with higher spending patterns and longer stays. This, together with the fact that high-end clients spend on average around US$326 per day outside the hotel, in the form of souvenirs, transportation, tours, meals, etc. has had an important positive impact on the local economy. As both Cusco and Machu Pichu are World Heritage Sites, UNESCO was initially concerned with associated tourism operations, particularly with regards the Machu Picchu Historical Sanctuary. However, UNESCO has taken comfort from IFC involvement, and in particular, IFC s requirements in terms of environmental, social and heritage guidelines. Both Monasterio Hotel and MPSL have significant impact on the towns economic and social activity. Local trash is transported from the town of Aguascalientes by PeruRail to Cusco where it can be processed and disposed of properly. POEH is also actively involved in the local community, working with a local orphanage to produce locally made cups to be sold in the Hotels, with all the proceeds to benefit the orphanage in addition to its direct contribution of about US$9000 annually to the orphanage. Furthermore, it supports another local orphanage and elderly home with the total annual donation of US$24,000. Findings The team found that with improved measurement, the economic rate of return on the project was estimated at 28%, higher than initially projected at 17%. POEH- NPV of Cash Flows at 10% discount rate over the life of IFC investment (US$000) Board Paper Expanded Impact Assessment Project financiers 5,719 7,554 Government taxes - Income taxes Net VAT 1,101 - Taxes paid by local suppliers related to the hotels business 988 Employees Benefits - 3,462 Local community Overall economic benefits 6,713 ERR=17% 13,998 ERR=28% This increase is based on improved data collection that includes: Staff salaries and other benefits (service charge collection, social security contributions, training) Local suppliers tax contributions 30% income tax to government and net VAT payments Local community contributions 9

10 Summary of Development Impact for POEH Monasterio Hotel Groups Impacted by the Project Hotel Financiers $23.4 million gross revenue $3 million operating profit (after tax) $ 1.5million net income Hotel Employees 308 staff 23% female Local Suppliers of Goods and Services Benefits to Group Diversification of business operations and risk Social and political PR Return on investment 25% above average compensation 10% of service charge collected from guests passed on to employees, which is estimated at US$573 per month. 9% of social security contribution Paid vacation Job security Official contracts Training Free meals Medical insurance Promotion opportunities Regional employment mobility to other OEH facilities (such as Mexico) Prestige value of OEH Staff being amongst the most sought after employees in the hospitality segment 32 local suppliers are contracted with the Hotel( this excludes the local farmers, supplying fruit and vegetables) Total $ 1.5 annual revenue Improved operating systems to satisfy POEH Accounting outsourced Cleaning and recycling outsourced Landscaping and gardening outsourced Public area cleaning outsourced Costs to Group Taxes on earnings Financing costs Taxes to the government Opportunity cost of labor Formalize business Invest in improved operating systems Invest in staff training Government taxes Increased hassle factor Customers Occupancy Rate Monasterio % % ADR Monasterio 2001-$ $319 Ave. length of stay 3 nights Ave expenditure per day outside hotel- $326 Access to a 5-star product Access to quality restaurant Place to do conferences Improved service standards Improved safety standards 10 High prices

11 Government $ 6.8 million in government taxes in 2008 $630, 600 in utilities 2008 Neighbors & Training and internship opportunities for local Environment university students in the hospitality Enhances the tourism services in Cusco $33,000 per annum charitable contributions including to orphanage, elderly homes, etc. Competitors Demonstration effect, encouraging the existing hotels to improve service standards New Entrants 3 new 4-star hotels are planned over the next 3 years Complimentary Services Increased demand for locally produced goods including gifts, restaurants, bars, and transport services, among other things. Revenue collection costs 11

12 Section 3: Conclusions 1. The accommodation sector is a significant driver of local development impact economy. DISTRIBUTION CHANNEL Travel Agent/ Airline/Coach/Direct Marketing, Management, Overheads, Flights Business, Meetings, Conferences Visiting Friends Holiday TOURIST Discretionary spend Shops Transport Landing fee Passenger levies Visas Ground handler Ground transport Accommodation payment Excursion providers Transport providers Restaurants Attractions Owner Lease HOTEL Utilities Service providers Transport providers Savings Staff Food & beverages Meat Vegetables Dairy Cereals Soft drinks Alcoholic drinks Outsourced services Maintenance Security Management Non-F&B supplies Textiles Laundry supplies Bathroom supplies Service providers Taxes Remittances Local expenditure Accommodation Food & beverage Transport Entertainment Food wholesaler Supplier Beverage wholesaler Supplier Wholesaler Supplier Employment and Income Linkages to Local Economy 12

13 2. Investment generation and investment climate issues linked to accommodation is a good interface for IFC advisory and investment services. Accommodation-related business comprises about 21% of the global tourism economy, estimated at six trillion dollars in The availability of hotel rooms in any destination is a key determinant of demand as most destinations structure their marketing and sales offers around different segments of accommodation; business, leisure, resort, 5-star, 1-star etc. Therefore, a diverse supply of rooms catering to different market segments is critical for destinations to grow their tourism economy. IFC s increased emphasis on articulating our development impact provides an opportunity for sector-specific approaches that leverage products across advisory business lines and investment instruments. In the case of tourism, this more integrated approach is especially relevant because tourism goods and services are consumed in situ, at the destination, where development impacts (positive and negative) are directly felt at the local level. The strategic importance of accommodation to a tourism destination offers IFC an opportunity to increase the relevance and impact of its investment and advisory services in developing economies, many of which are increasingly reliant on tourism as an economic driver 6. In the past decade the demand for tourism-related operations through World Bank lending operations has also grown significantly. Several regions (Africa, Latin America and South Asia) now have either hired tourism specialists or developed tourism strategies linked to this growing demand; between FY06-09, 12 new lending operations directly linked to tourism were approved by the Board, amounting to over $390 million in lending. There is a role for IFC to collaborate more closely and strategically with this growing World Bank Group tourism practice, while leveraging its own unique perspectives to advance thinking and innovative approaches. 3. Higher quality investments have broader development impacts beyond the individual investment. These examples tell a much bigger story about the value of investing in 5-star operation to the growth of a destination. The study shows that there are a host of tangible benefits to hotel staff (who benefit from higher pay, better conditions and job security), suppliers (who benefit from having to improve the quality of their goods and services), customers (who benefit from having higher quality services), and the destination; in Kiev for instance, conference tourism rose 35% and Kiev s reputation as a business capital in Eastern Europe has been enhanced since the Hyatt Regency opened, In Peru, 22,000 new high-end tourist now use the POEH products. Both hotels have also set a high standard for corporate responsibility through the donation of goods and services to the local community; a previously unheard of practice , World Travel and Tourism Council Annual Report 6 80% of developing countries have identified tourism as a priority sector for growth 13