Incentivizing tourism

Michael Alan Hamlin

Posted on August 31, 2007

Now it’s up to Congress

Senator Richard J. Gordon has been talking up his national tourism bill, which would reorganize the Department of Tourism, provide meaty incentives to foreign investors, and meaningfully promote the Philippines as a vacation and meeting hotspot. In a recent talk with potential investors, Gordon explained the bill’s purpose and promise in an effort to generate support among these important players.

Although the bill is extensive in scope and objective, Gordon made just three key points. He said first that his bill – which was passed by the Senate in the 13th Congress but was “held hostage” to other legislative priorities, in his view, by the House of Representatives – when enacted will provide an effective regulatory environment resulting in higher quality tourism facilities and services around the country.

Gordon cited the example of Boracay to demonstrate the relevance of better regulation to investors leery of more bureaucracy. As a result of haphazard and ineffective regulation of the industry on Boracay – which boasts one of the world’s most magnificent beaches – the once pristine haven has struggled through a series of crises that threaten its future. Those crises include the infamous, late 1990s open sewage debacle that could have closed the island down; encroachment onto public areas of the beach of new businesses, often fly-by-night, undocumented retail establishments; and generally high prices for poorly appointed and maintained, if not shoddy, rooms and restaurants.

If Gordon’s bill is passed, he says it will provide a tight regulatory framework with zoning regulations that will not only help clean up Boracay and other resort areas that similarly suffer from opportunistic exploitation and mismanagement, but assure that these mistakes don’t recur as local and international investors begin developing other attractive areas, including many in Bicol and Palawan.

The second priority Gordon discussed was the need to increase the level and quality of marketing promotions. Noting that Singapore, Malaysia, and Thailand each spend $100 million annually promoting their tourism industries, generating fabulous returns on their investments, he said more and better promotions is critical to industry development here. Each of these nations projects that by the end of the year they will have welcomed from close to 10 million (Singapore) to almost 30 million (Malaysia) visitors. The Philippines, in contrast, may reach a comparatively disappointing three million.

The Philippines invests about one tenth what its neighbors do promoting themselves. As a result, the Philippines comes up short in two ways. First, the obvious: few visitors. Second, visitors that do come spend substantially less than visitors to Singapore, Malaysia, and Thailand. Conference delegates and families vacationing in these competing countries spend on average $1,000 – $1,500 a day. In the Philippines, the average visitor spends about $50. If the Philippines is to rival its neighbors, it must be willing to make the investment necessary to do so.

Gordon’s third priority is investor incentives. Under his bill, investors in the tourism industry will be entitled to a six-year income tax holiday that can be extended if substantial reinvestment takes place, three percent tax on gross income after the holiday expires in lieu of all other national and local taxes, and 100% exemption on taxes and customs duties on imported equipment.

The Department of Finance (DOF), Gordon noted, has raised its consistently tiresome argument that investor incentives “rob” the national treasury of much-needed funds. Gordon is clearly correct when he notes that the treasury can’t be robbed of funds that don’t exist. And if the Philippines expects to enjoy the benefits of 10 million or more visitors a year – including billions of dollars flowing into the local economy, hundreds of thousands of jobs, and improved country brand image stimulating further investment – it will have to match incentives offered by competing places. Gordon light-heartedly accuses DOF officials of suffering from “SARS – severe awareness and responsibility shortage.”

To manage investment incentives, Gordon proposes setting up a Tourism Economic Zone Authority (TEZA), similar to the Philippine Economic Zone Authority (PEZA), which already does these things for investors, including those investing in tourism. PEZA (Full Disclosure: My firm is PEZA certified.) is an agency of the Department of Trade & Industry, which perhaps explains why Gordon feels TEZA, which will be attached to DOT, is necessary. His bill notes that the nature of investment in tourism varies significantly from investment in manufacturing, which PEZA regulates.

But PEZA does more than regulate investment in manufacturing. It has regulated investment in business process outsourcing and other information technology-intensive sectors successfully for years. And as I’ve noted, it has also begun certifying tourism zones and granting incentives. Because PEZA has earned a deserved reputation for honest and efficient management among investors, there’s probably no reason to create another agency to do this for tourism investment.

Otherwise, Gordon’s tourism bill does a lot of the right things that will boost investment in tourism and the industry itself. It’s now up to the 14th Congress to make it happen.

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