Economic Analysis of the CaribbeanBrazilian Tourism Market São Paulo, Brazil, November 26, 2013 Therese Turner -Jones IDB Representative, Jamaica Motivation • Caribbean tourism is highly concentrated in terms of visitor origin. • Brazil offers a big, fast growing country with travelling population However, • Challenges arise from accessing new markets Upfront investment and recurrent guarantee liabilities. Fiscal challenges in many countries. Specific details of cost/risk sharing for guarantee and marketing cost essential for benefits to countries. Is it worth it? Benefits GDP Revenues Employment New trade routes Freight possibility Costs Marketing Guarantee Future liabilities Cost-Benefit Analysis • Success depends on Number of visitors (NV) Spending per visitor Value for money, experience • Influences marketing spend in subsequent years. Benefits = NV·$ + NV·$· Tax Rate Cost = MARKETING + GUARANTEE (depends on guarantee agreement and load factor) Assumptions • One additional weekly flight with capacity of 220 – US$800 for Jamaica and Bahamas, US$700 for TT and Barbados. • Full guarantee for Barbados, 85% capacity guarantee for Jamaica and Trinidad and Tobago and none for Bahamas. • Spending is US$3000 for one week. Different taxation for different spending categories. • US$1 million for marketing in first year, then US$500,000. • Capacity 90% and 65% in high and low season. Baseline results High Scenario (100%/70) Medium Scenario (90/65%) Low Scenario (70%/50%) Break Even Net GDP Fiscal Net GDP Fiscal Net GDP Fiscal Yearly Capacity 19,909,786 1,364,842 17,523,366 508,830 11,487,130 (1,656,374) 69% 21,542,772 4,564,390 19,682,447 4,105,192 14,976,915 2,943,693 14% Jamaica 20,424,655 1,303,542 18,415,247 872,090 12,336,915 (1,214,941) 65% T&T 19,542,590 971,952 17,540,520 405,757 11,744,496 (1,465,545) 65% Barbado s Bahama s Under high and medium loading scenario, no fiscal burden on government. Guarantee and marketing costs lead to losses under low scenario. Except for Bahamas, 65% or higher capacity is needed to avoid negative fiscal impact. Sensitivity Three major assumptions and its influences • Load factor of flights – Marketing expenditures (research before and on relationship with travel agents) • Guarantee – Wide range from 100% seats guaranteed to partial (e.g. below 85%) to fixed amount per seat. • Marketing – New initiative will require substantial first time investment. However, amounts should decline over time and could be shared with hotels, travel providers (PPP) Risks and possibilities Under the baseline, the initiative would add 0.1% in GDP and US$405K of revenue. However, airlines might insist in a full guarantee of all seats, which would add almost US$2 million in cost. While Brazilian tourists have relative high spending power, Tobago might attract lower budget travelers. GDP and Fiscal Effects under different scenarios Medium Scenario (90/65%) 22,111,455 405,757 All seats guaranteed 20,211,008 -1,494,690 Lower spending in Tobago 11,694,381 Suggestion: Type of guarantee and targeting of potential visitors will determine economic and fiscal impact of initiative. -364,341 Risks and possibilities • Under the baseline, the initiative would add 0.2% in GDP and US$800K of revenue. • If Brazilians spend similar to current tourists, revenues would not be sufficient to compensate for additional cost. • Airlines might insist on a full guarantee , which would add almost US$1.2m. Ideally, GOJ would ‘subsidize’ each seat. GDP and Fiscal Effects under different scenarios Medium Scenario (90/65%) 23,241,541 872,090 Spending at current rates 12,667,469 -144,125 All seats guaranteed 22,009,541 -359,910 Fixed amount per seat as guarantee 23,993,941 1,624,490 Suggestion: Type of guarantee central. Marketing is burden but might be lower in following years. GDP and Fiscal Effects under Risks and possibilities different scenarios Under the baseline, the initiative Medium Scenario (90/65%) would add 0.5% in GDP and US$4 m 24,508,741 4,105,192 of revenue. Bahamas has potential for two Two weekly flights/ Miami visitors weekly flights and attracting Miami 49,017,482 8,210,385 visitors. Guarantee of 85% flight load Airlines might insist on a 23,017,917 2,614,369 guarantee, which would add Expenditure at current level of US$1.5m in cost. spending by Brazilian tourists Current Brazilian visitors spend 36,045,383 5,441,574 above baseline. • Suggestion: Potential to use marketing for two weekly flights or to market short trips from the US. Specific targeting of visitors similar to current ones could increase benefit. Risks and possibilities • • • • • Under the baseline, the initiative would add 0.5% in GDP and US$500K of revenue. Marketing would also benefit existing flight. The current guarantee scheme concentrates risk on government. Savings could be achieved by changing it, for instance restrict it to 85% load. If capacity is not achieved, additional incentives could be given, adding US$800K cost. GDP and Fiscal Effects under different scenarios Medium Scenario (90/65%) 17,523,366 508,830 Marketing only in addition to current efforts 18,023,366 1,008,830 Guarantee limited to 85% capacity 18,601,366 1,586,830 Additional incentive needed to get load factor 16,691,766 Suggestion: Marketing could increase load factor of the existing flight. Savings could also be achieved by using different guarantees (up to 85%). At the same time, experience shows that additional incentives might be needed. -322,770 Opportunity costs Cost-Benefit cannot be seen in isolation as marginal impact is important for decision. – What would be effect of same marketing and guarantee scheme for existing, mature markets (USA, Canada, UK)? General rate of return of government expenditures. Versus exploring new market • Private sector focuses more on mature markets. • Accessing new markets is costly, requires front loaded investment and has externalities (everyone benefits whether they pay or not). • Public good character. • Diversification. • Externalities in terms of trade routes, knowledge about Caribbean. Conclusions • Brazil offers new opportunities for the Caribbean to diversify visitors, both in terms of origin but also characteristics. • Our results indicate that there are potential benefits from the initiative under realistic assumptions. • New market probably requires upfront investment and some kind of guarantee. These expenditures have characteristics of a public good. • Creative solutions needed to share burden and risk, PPP, regional PR campaign. • However, potential liabilities for government as well as incentives for airlines/travel agents depend on details of the guarantee. http://blogs.iadb.org/caribbean-dev-trends/ http://www.iadb.org The Inter-American Development Bank Discussion Papers and Presentations are documents prepared by both Bank and non-Bank personnel as supporting materials for events and are often produced on an expedited publication schedule without formal editing or review. The information and opinions presented in these publications are entirely those of the author(s), and no endorsement by the Inter-American Development Bank, its Board of Executive Directors, or the countries they represent is expressed or implied. This presentation may be freely reproduced.