Issue link: https://maltatoday.uberflip.com/i/183948
14 BUSINESS & FINANCE maltatoday, WEDNESDAY, 2 OCTOBER 2013 Tourism – a volatile industry that needs attention George Mangion During a press conference held in January of this year, three months before the election, the Malta Hotels and Restaurants Association (MHRA) highlighted its proposals to all political parties. Yes it is an important industry that contributes generously to our GDP growth and more so the sustainability of thousands of well paid jobs, but as can be expected it is open to fierce competition rom many resorts, particularly in the southern part of the Mediterranean. It is led by its energetic president, Tony Zahra, who is well known in tourism circles and describes tourism as a major stakeholder but, of course, a volatile one. MHRA urgently called for efforts to reinvent governing processes, which may involve revisiting outdated ones or making them more user friendly. Naturally, the elected government has taken the lead and appointed a simplification commissioner, a prerequisite to instil a 'culture of accountability', where there must always be somebody held responsible for the actions taken, ensuring things are done as promised. It goes without saying that the incumbent government faces a stiff uphill climb to reform, and new concepts must be tracked through a channel which is sustainable environmentally, socially and economically. Certainly this is a tall order, but while reforms can be painful, the only way to increase our low ranking in global competitiveness levels (currently 41) is to bite the bullet and take the bitter medicine. Obviously the energy reform promised at the last elections hangs like the sword of Damocles over this administration, and no effort should be spared to hasten the conversion to gas-fired energy generation –which, it is hoped, will reduce tariffs to the industry by 25%. MHRA's proposals include a plea to government to help the sector achieve better sustainability, particularly by increasing tourist arrivals in the shoulder and winter periods. One of the proposals includes the reduction of VAT back to the original 5% rate. Some may question why the association is asking for help when the past three years saw record arrivals, but, in the words of Zahra, this is a game that never ends. He expressed concern that increasing costs are leading to serious sustainability issues, which may be detrimental in the long term. Taking the bull by the horns, MHRA has commissioned PKF to conduct a scientific study to prove that the reduction of VAT from 7% to 5% would have beneficial effects surpassing the forfeiture by government of the incremental VAT revenue. To start with, let us explain the mechanism of VAT, how it works and how it has always played a significant role in the economy. On 1 January 2011, a new VAT rate on accommodation was introduced. This new rate, 7%, exceeded the previous 5%, much to the dismay of hoteliers. The increased VAT yielded approximately an additional €5.8 million in revenue, which was expected to be allocated to advertising Malta abroad. PKF has undertaken a study to investigate the relationships between various tourism factors and to measure the economic impact on owners of hotels of reducing the VAT rate to 5%. PKF has used statistical techniques and tools to analyse the data available, as well as conducting a survey of hoteliers to study the impact of a VAT increase and also what they would do in the instance of a decrease. A fundamental part of this study was gathering data from various sources, including other European countries which have experienced some sort of accommodation VAT increase or decrease. This enabled a general idea to form regarding how accommodation VAT changes affect the economy and to what extent. Extensive research was conducted in the Melitensia section of the University of Malta library. Various dissertations based on hotel accommodation VAT as well as VAT in general were consulted. After a number of meetings with experts in the economic industry, a preliminary list of variables was obtained to enable the determination of some form of elasticity between such variables. This enabled us to predict the future behaviour of the economy and the hotel industry. The data required was mainly gathered from NSO press releases as well as MHRA reports. The information comprised data on factors such as bed nights, tourist arrivals, 'gainfully occupied' properties, GDP, HICP and the retail price index (RPI). All this information was subsequently combined in tables in an organised manner, such that arrivals and nights spent,averagetotalrevenue,employmentunemployment (full-time and parttime), HICP and revenue estimates became evident. All such information was split into relevant categories and sorted by month (consisting of a time series from 2005 to 2013). It is important to highlight that revenue estimates were calculated manually, by multiplying the total number of nights spent in accommodation by the revenue generated in an available room. Gross operating profits were also estimated, by multiplying the gross operating profit per available room by the number of available rooms, which monthly number was obtained from NSO for each category. It is important to highlight that such computational procedures were approved by MHRA. Some problems were encountered when obtaining GDP data. It was not available on a monthly basis, and so monthly figures were estimated, as suggested by NSO. With regards to VAT revenue figures, they were obtained from the VAT Department. Total annual figures were made available only, such that monthly revenue needed to be estimated. Apart from this, some slight modifications were made so as to ensure consistency in the VAT revenue on accommodation for all years. Also, VAT revenue figures were 'seasonalised' to extract any possible patterns. According to statistics issued by Eurostat for general government, in 2011 VAT accounted for 7.7% of GDP in Malta, or a total of €510.4 million, of which €20.6 million was generated from accommodation. In addition, the 2010 figures stood at 7.4% of GDP, or a total of €469.8 million, of which €14.8 million came from VAT on accommodation. As a general rule the Maltese standard VAT rate is 18%. In respect of certain supplies, a reduced VAT rate of 5% can be applied as provided in the VAT Act. In 2011, the new, higher rate of 7% for accommodation and restaurants was introduced. This increase in VAT possibly eroded one of Malta's advantages over its competitors in the Mediterranean region, especially since most of them charge a reduced VAT rate for the same services. A proposed reduction in VAT will likely stimulate tourism spending and hence increase the government revenue derived from food and beverages. One may stop and ask why we should help the industry when it's engine is firing on all cylinders? The answer is simply that it is a volatile sector which depends on so many international factors which are beyond its control, and such a prosperous period may regrettably be short lived. Let us take an example and discuss the measures taken by a competitor country: Greece. A policy to revise VAT on hotel accommodation and restaurant services in Greece was taken in November 2010 by the Greek Minister of Culture and Tourism, Pavlos Geroulanos. He officially announced the reduction of VAT from 11% to 6.5% on hotel accommodation, starting at the beginning of 2011. The minister in his speech stressed that "tourism is what will lead the country out of the crisis". He also pointed out that this change would be absorbed by the customers and increase the arrivals in the country. Furthermore, the Association of Greek Tourism Enterprises (SETE) was very satisfied with the government's decision concerning the change of VAT on tourist accommodation. They argued, "This measure is the first important decision for development from the part of the government that came after realising that the excessive VAT rate, while it did not boost the public finances in the past, instead resulted in a reduction in the government's revenues and also in that of individual firms by reducing demand". After this announcement, the Research Institute for Tourism of the Hellenic Chamber of Hotels conducted research and came up with the estimates that this decrease in VAT would bring a rise in revenues from incoming tourism of up to 25% in the following three years. Three years later, in May 2013, according to figures released by the Bank of Greece, tourism income had increased by 38.5%, compared with the same month in 2012. This increase in income is reflected in the 24.4% increase in the number of arrivals to Greece. But back to Malta: one can follow in greater detail the working of the econometric models prepared by PKF with the assistance of a university professor and a number of highly talented university undergraduates from the statistics faculty. Indeed there are several justifications behind such a proposal to reduce the burden of taxation on accommodation, even though prima facie government revenue will decrease due to the lower VAT rate. However this will be paid off in terms of expanding the Maltese economy, in particular the GDP, while, more importantly, hotel owners will either reduce their prices by the amount of the VAT decrease, reduce their price partially or else keep their prices at the same level. By decreasing their prices, either fully or partially, hotels will attract more tourists. In fact, PKF conducted a survey, which showed that 65.6% of all the hotels surveyed would reduce their prices partially in the event of a VAT decrease. By attracting larger volumes of tourists, hotels would be inclined to hire more employees in order to cope. It is interesting to note that 56.2% of hotels surveyed said that given a VAT decrease, they would increase the number of employees. If hotels choose to keep their prices at the same level, then the hotels will generate more revenue than in previous years. The extra revenue generated would be then reinvested by these hotels into their own facilities, as was conveyed by 71.9% of the sample surveyed. After meetings held with several top hotel managers, it became evident that most of the hotels would focus their investment on refurbishment, green energy, the products and services offered, the extension to premises as well as staff training. To conclude, the PKF study when published in its entirety will be soon discussed with MHRA officials, which may then use it as part of its strategy for talks with other stakeholders and, of course, the government. George M. Mangion is a partner in PKF, an audit and business advisory firm (gmm@pkfmalta.com)