Sunday, January 18, 2009

New resort developments: the lost revenue

Maldives government has decided to grant an extension to all the new resort developers, so that they get an additional 12 months before they start paying rent to the government.
The lease agreement between the investor and the government requires the investor to start operations and start paying the lease rent within 24 months of the signing the agreement.
The decision by the government to grant an extension would result in a decline in the expected government revenue within the next 12 months, on top of the escalating government expenditures.
The delay in opening the new resorts for operation also means the lost revenue to the government through bed tax.

So, the delay and extension costs a lot to the government, and these factors make us wonder, why the delay in opening those resorts?

The leasing of islands for tourism development is carried out by the Ministry of Tourism and follows a model in which uninhabited islands are auctioned off in a bidding process with government publishing the criteria in advance.

The Ministry of Tourism embarked on an ambitious expansion of the tourism industry with 37 new islands opened for bidding in the period 2004-2006. The first round of developments was announced in 2004, with 11 islands being opened for bidding.

In 2006, with the new set of islands, government tried to be more transparent and objective and opened islands for bidding under the ‘open-rent’ and ‘closed-rent’ categories.

If we were to construct a model for determining the probability of opening a resort for operations within 24 months of awarding the island, it would depend on the following factors: availability of investment finance; management expertise; location of the island; proposed lease rent; assuming all the other factors remain the same.

The availability of investment finance or the ability of obtaining debt finance from banks is linked to almost all the factors mentioned above. For example, the higher the proposed lease rent, the lower will be the profitability, and thus feasibility of the investment. The location of the island has significant implications on the transportation costs and the construction costs of the island, and thus affects the prospect of obtaining finance as well.

The lease rent plays a major and a significant role in making the investment worthwhile, and thus the sustainability of the venture. Hence, bidding procedures need to be de-linked to the rent component in order to make new resort developments a success. The policies adopted in 2004-2006, especially in the case of the ‘open-rent’ category of islands, has done nothing but inflated the lease rents above the true market value. As a result, new investors are struggling to obtain the necessary finance.
If these islands were awarded with industry average lease rents, the probability of getting those islands opened would have increased, and with it the government revenue through bed tax.
Sustainable tourism development is much more important than trying to squeeze short-term gains through high lease rent payments. Sustainable it can be made only through allowing true market values to be reflected in the lease rents.

1 comment:

  1. Why would policy makers think beyond a 5 or 10 year period?

    They SHOULD but they don't seem to do they? We're chronic short term thinkers - it's worked for us so far... BUT when you squeeze and squeeze and squeeze... you MIGHT wind up breaking something that you 'assumed' will work fine forever.