Chapter 18 - Public Sector and Policy PDF

Chapter 18 Public Sector and Policy Learning Outcomes The focus of this chapter is on the role of the public sector, in the shape of governmental organisations, in tourism. Specifically, upon completion, the reader will have:...

Chapter 18 Public Sector and Policy Learning Outcomes The focus of this chapter is on the role of the public sector, in the shape of governmental organisations, in tourism. Specifically, upon completion, the reader will have: a knowledge of the key organisations globally with an interest in and influence upon tourism; an understanding of the key functions of NTOs and an insight into how such offices might be structured and how responsibilities are divided; an overview of the role of the public sector; and a knowledge of the instruments available to governments to manipulate demand for tourism and control the supply of it. Photograph: Anchorage, Alaska, USA © Andrew J. Müller 448 chapter 18 Public Sector and Policy Introduction Governments are involved with tourist organisations at both the international and national level. In the latter case they are normally the instigators for the establishment of a national tourist organisation (NTO), while in the former instance they are partners along with other member states in such bodies as the UN World Tourism Organization (UNWTO), the European Travel Commission (ETC), and the Pacific Asia Travel Association (PATA). All these bodies can contribute to the formation of a country’s tourism policy. In this chapter we look at the overall policy framework and consider the experience of different governments in order to illustrate the changes that occur in policy, noting the very many organisations that express an interest in tourism at the national level. As national tourist offices are commonly the executive agency for government policy, their administrative structure and functions are considered in some detail. The last part of the chapter examines intervention by the public sector in tourism. Particular consideration is given to the variety of instruments governments have at their disposal to manage the direction of tourism development in the interests of the host community. Public Policy Framework With tourism as one of the main international economic drivers in the twenty-first century, together with increasing demands from the domestic population for leisure and recreation, the industry is a development option that few governments can afford to ignore. A critical difference between tourism and many other agents of development is that of inseparability, in that tourism is consumed at the place of production, thus involving itself with the host community, and requiring some commodification and sharing of traditions, value systems and culture. Since the tourist industry does not control all those factors that make up the attractiveness of a destination and the impact on the host population can be considerable, it is necessary for the options con- cerning the development of tourism to be considered at the highest level of government and the appropriate public administrative framework put in place. As a rule the greater the importance of tourism to a country’s economy the greater is the involvement of the public sector, to the point of having a government ministry with sole responsibility for tourism. While tourism can be planned to be more or less sustainable at the destination end through the range of policies analysed in this chapter, it must not be forgotten that there is the continuing issue of the ‘carbon footprint’ generated by domestic and international travel to the destination, arising particularly from the growth in low-cost air transport (see Chapter 17). The airlines’ response has been to increase fuel efficiency and introduce composite materials that are capable of being recycled and are lighter in the air. Beyond the national horizon, governments are involved in supporting a variety of multi- national agencies. The official flag carrier for international tourism is the UNWTO (Mini Case Study 18.1), which is vested by the United Nations with a central and decisive role in promoting the development of responsible, sustainable and universally accessible tourism. Elsewhere there are a number of other international bodies whose activities impinge upon tourism: these include the World Bank Group – whose commercial arm is the International Finance Corporation (IFC), which takes on private sector projects, whereas its other arm, the International Bank for Recon- struction and Development (IBRD), provides government funding for structural adjustment and infrastructure developments – other United Nations bodies – such as the International Civil Aviation Organization (ICAO), the World Health Organization (WHO) and UNESCO – the International Air Transport Association (IATA) and the Organisation for Economic Co-operation and Development (OECD).  Public Policy Framework 449 Mini Case Study 18.1 The United Nations World Tourism Organization (UNWTO) The UNWTO can trace its origins back to 1925 to a non-governmental body that after World War II became the International Union of Official Travel Organisations (IUOTO). IUOTO was made up of a mix- ture of private and public sector organisations dealing with the technical aspects of travel and tourism. However, by the 1960s, the growth of tourism, its international dimensions and the increasing activities of national governments in this field, necessitated the transformation of IUOTO into an intergovernmental body, the World Tourism Organization. The latter was ratified in 1974 and was empowered to deal on a worldwide basis with all matters concerning tourism and to cooperate with other competent world agen- cies that came under the umbrella of United Nations organisation. The prefix UN was added when the WTO joined the UN family in 2003. The UNWTO is an operative rather than a deliberative body that pays particular attention to the interests of the developing countries in the field of tourism. Its functions include: helping member countries, tourist destinations and businesses to improve their competitiveness and max- imise the positive economic, social and cultural effects of tourism; fostering sustainable practices and policies to make best use of environmental resources and respect socio-cultural differences; collecting statistics, identifying and forecasting markets; assisting in tourism planning as an executing agency of the United Nations Development Programme (UNDP), with emphasis on its pro-poor strategy; advising on the harmonisation of policies and practices; sponsoring education and training, and identifying funding sources to build human resource capacity; promoting e-tourism initiatives to introduce web portals for distribution and destination management, increase security and simultaneously reduce ‘hassle’ for travellers; promoting the broader relationship of visitors to the physical and social environment, by defining sustainability as development which meets the needs of present tourists and host regions while protecting and enhancing opportunities for the future; encouraging the implementation of a global code of ethics for tourism for promoting peace, the observance of human rights and fundamental freedoms. As an intergovernmental body the UNWTO’s membership (currently 157 member states, seven associate members, and two permanent observers) works largely in terms of political groupings that can bring pressure on the general formulation of tourism policy. In order to benefit from advances in operational practice, the UNWTO has an affiliate membership scheme (currently over 480 members) for organisations working within the tourism sector. While the general assembly of the UNWTO is largely concerned with debates on policy, the meetings of affiliate members usually take up topical issues affecting tourism, for example taxation. Some major successes of the UNWTO have been: the methodological design of the Tourism Satellite Account, which has set the standard for measuring the economic importance of tourism within the framework of the United Nations system of national accounts; working with the World Bank Group, the regional development banks and national aid agencies to place tourism amongst their key priorities for infrastructure and entrepre- neurial support in relieving poverty; promoting education and women in tourism; and establishing good prac- tice in terms of ethics and environmental standards. The latter is of particular significance and is now represented in the Global Code of Ethics for Tourism (GCET), which is a comprehensive set of principles designed to guide key players in tourism development. The Code aims to help maximise the sector’s benefits while at the same time minimising negative impacts on the natural environment, society and cultural heritage. Originally adopted back in 1999, the Code represents a voluntary implementation mechanism and is recog- nised by the World Committee on Tourism Ethics (WCTE). Source: https://www.unwto.org 450 chapter 18 Public Sector and Policy Discussion Questions 1. Consider the benefits of having a world body that has tourism as its sole sphere of interest. 2. What priorities would you attach to the range of functions covered by the UNWTO? 3. If your country is a member of the UNWTO, what benefits do the tourist authorities perceive they get from membership? 4. What may be some of the barriers, whether real or perceived, that hinder the implementation of a global code for ethics in tourism? At a lower level, there is a variety of regional bodies such as the Organization of American States (OAS), Pacific Asia Travel Association (PATA) and the European Travel Commission (ETC). Most of their efforts are devoted to promotion and marketing, though they do provide technical assistance and promote codes of conduct to encourage travel that is respectful of other people’s lives and places. As an organisation whose membership is made up of the NTOs of Europe, the ETC provides a forum for the directors of the European NTOs to meet regularly and exchange ideas. It carries out its objective to promote the region as an attractive destination through its web portal visiteurope.com and its recent visiteurope iPad app, public relations, and consumer advertising and trade promotion. Prior market research determines the choice of activities and campaigns in the overseas markets. The ETC is in constant touch with the principal international agencies and people working in tourism, as well as assisting with the professional development of its mem- bers. Its work is supported by the European Commission, which sees tourism as an activity of great economic and social significance within the European Union (EU), particularly for the peripheral and somewhat poorer regions of Europe. Although a wide variety of regional dis- parities exist across the EU, from early on it was realised that there is a distinct tendency for the poorest regions to be situated on the outer areas of the Union and, since the late 1980s, greater emphasis has been given to stimulating small tourism firms and indigenous development in areas to take advantage of their natural surroundings. Apart from the World Bank, funds for developing tourism in low-income countries may be obtained from regional banks such as the European Bank for Reconstruction and Development (EBRD) for Eastern Europe and the Commonwealth of Independent States; the Inter-American Development Bank; African Development Bank; Asian Development Bank; Arab Bank for Eco- nomic Development in Africa; East African Development Bank; and the Caribbean Develop- ment Bank. Their principles of operation are mainly for the granting of medium- or long-term loans (often with various grace periods and low rates of interest) to specific projects or to national development institutions, and providing technical assistance in project preparation. They are sometimes prepared to take a minority shareholding in investments, provided there is an option for onward selling, preferably to host country nationals. Looking at the structure in Europe, officially tourism within the EU comes under Directo- rate-General Internal Market, Industry, Entrepreneurship and SMEs, but the development work of Directorate-General Regional Policy also involves tourism projects as a means of overcom- ing regional disparities. With the adoption of the Single European Act (1987), there is a com- mitment by the EU to promote economic and social cohesion through actions to reduce regional disparities, and the Maastricht Treaty (1992) acknowledged, for the first time, the role of tour- ism in these actions. With the more recent Lisbon Treaty (2009), tourism became a specific competence of the EU, allowing the latter to support and complement actions within the mem- ber states by encouraging the creation of an atmosphere that is conducive to developing tourism enterprises and fostering cooperation between member states, while excluding any harmonisa- tion of the legal and regulatory provisions of member states. The resources for mitigating regional differences are drawn from the structural funds, which are made up of contributions  Public Policy Framework 451 from member states with the express purposes of helping less well-off regions (see Major Case Study 18.1). Alongside public monies, commercial funding of tourism projects is obtainable from the European Investment Bank. Largely because of the new tourism powers in the Lisbon Treaty, Members of the European Parliament (MEPs) are now more engaged with European tourism policy than ever before. Spe- cifically, strategy is developed around the following objectives: stimulating competitiveness and demand in the European tourism sector, which divides into: promoting diversification of the supply of tourist services; developing innovation in the tourism industry; improving professional skills; encouraging an extension of the tourist season; consolidating the socio-economic knowledge base for tourism. promoting the development of sustainable, responsible and high-quality tourism, with priorities for coastal tourism, cultural heritage, promoting the low season, and accessibility for all ; consolidating the image and profile of Europe as a collection of sustainable high-quality destinations; maximising the potential of EU policies and existing financial instruments for developing tourism. It is important that, in developing its strategy for tourism, the European Commission does not duplicate the work of other organisations. The key aspects in recent years have been: cooperating with ETC in the creation of a ‘Europe’ brand in the face of falling world market share; simplifying visa rules; launching the European Destinations of Excellence competition; the development of a tourism business portal and ICT initiatives to help businesses get the most out of new technologies; tourism training initiatives to build capacity; a ‘virtual tourism observatory’ by making research information available online; funding a wide range of tourism projects. Ultimately, the differing nature of the tourist product within Europe leaves the Commission with little option but to assign the primary role of tourism policy to member states and proceed with tourism projects only in close partnership with national and regional bodies. The principle applied is that of subsidiarity, which argues for decisions to be made at the lowest level of authority so as best to meet local needs and be as close as possible to the citizen, which is seen as a requirement to safeguard democratic control of European institutions and to maintain the variety of regional differences and cultural identities. All European countries have NTOs: some are part of government, as in France or Spain, or in Eastern Europe, while others are established independently of government but are supported by central grants and other income-generating activities, as in the United Kingdom. The case for public sector involvement in tourism rests on concepts of market failure, namely that those who argue for the market mechanism as the sole arbiter in the allocation of resources for tourism are ignoring the lessons of history and are grossly oversimplifying the complex and varied nature of the product. In an EU context, research among member states has indicated a number of sources of market failure that are the concerns of member states: developing tourism as a common good that collectively benefits many businesses, with the NTO acting as a broker between suppliers and potential visitors; 452 chapter 18 Public Sector and Policy infant industry development as part of regional policy (including peripheral areas), where commercial viability requires public sector support through the provision of essential infra- structure and financial incentives; improving the tourism product through more emphasis on research and development, and via the implementation of measures such as benchmarking good practice and training programmes for tourism workers; incorporating the concept of sustainable and balanced growth into tourism by taking account of socio-cultural and environmental issues in tourism planning; enhanced support for rural and farm tourism. By way of contrast, the US Congress took a much more market-orientated stance and closed down the United States Travel and Tourism Administration (USTTA) in 1996, some 15 years after its establishment. In the main, the responsibility for tourism marketing and development was left with the individual states and the Travel Industry Association of America. The latter has campaigned vigorously for federal involvement in promoting the image of the USA worldwide, arguing that it should not be left to a few strong destination brands, such as Florida, New York or Hawaii, and major companies, such as Disney, Hyatt and Hertz, to ‘pull the tourism train’. In the last decade, tighter visa restrictions, tougher entry procedures at immigration desks and a general increase in anti-American sentiment in the wake of the wars in Iraq and Afghanistan saw the industry losing market share, so in response the United States passed the Travel Promo- tion Act which established the Corporation for Travel Promotion, now ‘Brand USA’, a public– private marketing entity, in 2010 with responsibilities for directing the national travel and tourism strategy. The past assumption that tourists would keep coming had been found wanting and Brand USA receives matching public funds to what it raises from the private sector. Today the United States has a National Travel and Tourism Office (NTTO) located in the Department of Commerce. It is tasked with: managing the travel and tourism statistical system; promoting the growth of US travel exports through agreements to ease travel movements; representation on international bodies, such as the UNWTO; development and management of tourism policy, strategy and advocacy; providing technical assistance for expanding international tourism and assisting in domestic economic development. It is important to note that much of the tourist product in the United States is under federal control through the Department of the Interior, whose responsibilities include: preserving national scenic and historic areas; conserving, developing and utilising fish and wildlife resources; coordinating federal and state recreation programmes; and operating job corps conservation youth camps. Also, the Forest Service of the Department of Agriculture takes an active role in promoting and sustaining the nation’s landscape. The US experience of changes in direction of tourism policy is not uncommon in other coun- tries. In Britain, the Development of Tourism Act 1969 (House of Commons, 1969) was insti- gated by the recognition of tourism as an important earner of foreign exchange after the devaluation of 1967. Over the years since the Act’s inception, the economic policy emphasis for tourism has shifted back and forth to the extent that there is little doubt that the frequent altera- tions in direction have been more of a handicap than a benefit to the development of public sec- tor tourist organisations in Britain. There have been continual changes in tourism ministers followed by one tourism review after another, all falling short of repealing the Act, but rather confining themselves to using funding as a means to curtail or expand the activities of the national boards.  Administrative Framework 453 On the question of financial commitment, the UNWTO has long used the rule that the mini- mum of 1% of a country’s tourist receipts should be devoted to the NTO, but in Britain this has never been the case and the industry continually laments what it sees as the short-sighted poli- cies of the UK Treasury that cause inadequate representation in source markets due to limita- tions on VisitBritain funds. With increasing devolution, the responsibilities for VisitScotland and Visit Wales have been transferred to their governing authorities (the Northern Ireland Tour- ist Board was established by statute in 1948 and has always been separate), which has given them much higher funding allocations, but this, it is argued, has only served to create a frag- mented presence abroad and ineffective impact and waste, due to uncoordinated actions and spending. In summary, the professional view is that the UK’s Department of Culture, Media and Sport, which is responsible for tourism, has repeatedly espoused policy targets, but has not cre- ated a cohesive strategy for their achievement; nor has it been able to ensure that VisitBritain can act as an adequate catalyst to implement, encourage or fund effective programmes. The last review of VisitEngland and VisitBritain took place in 2015 where again, ignoring experience elsewhere, the so-called ‘counterfactual’ situation was posed, namely what would be the loss to the country if these functions were not delivered? For political reasons there is always the temptation for governments to switch policy direction. This gives the impression of the dynamics of change, but can, in practice, generate chaos through conflicting objectives. It takes a long time to create tourist destinations and build up market positions and there is general agreement within the trade in Britain that VisitEngland and VisitBritain have been continually underfunded in terms of their objectives, with a consequent loss to the wider economy. It is, therefore, rather simplistic to behave as if the factors influencing tourism developments can be turned on and off as with a tap. One of the principal difficulties is that tourism is a diverse and fragmented industry with many different economic agents acting in their own interests (often on the basis of imperfect information), which may not be to the long-term benefit of tourism as a whole. Uncoordinated market competition can, in these circumstances, produce cyclical growth patterns, with a consequent waste of resources. This places a premium on an overall planning body such as an NTO, which is able to give a sense of direction by marketing the destination and acting as a distribution channel by drawing the attention of potential tourists and the travel trade to the products that the numerous suppliers in a country have to offer. While the outcome of the 2015 review did not resolve the funding issue, it did recognise the market failure argu- ment to justify intervention by the government, and the importance of the two national boards in promoting internal tourism in Britain and England. Administrative Framework There are considerable variations in the structure of the public administration of tourism, which in turn depend on the size of the tourist industry and the importance the government attaches to the various reasons advanced for public sector involvement in tourism. A generalised hierarchi- cal structure is presented in Figure 18.1. It demonstrates a chain of direction from the governing assembly, which could be a council of ministers, a congress or a parliament, downwards to the destinations, where tourism policy and plans are implemented. A list of some of the most common arguments put forward for government participation in tourism include: foreign exchange earnings and their importance for the balance of payments; employment creation and the need to provide education and training; tourism is a large and fragmented industry requiring careful coordination of development and marketing; the need to maximise the net benefits to the host community; spreading the benefits and costs equitably; building the image of the country as a tourist destination; 454 chapter 18 Public Sector and Policy Governing assembly Minister for tourism National tourist office Regional DMOs Regional DMOs Local DMOs Local DMOs Destinations Destinations Figure 18.1 The public administration of tourism market regulation to protect consumers and prevent unfair competition; the provision of public goods and infrastructure as part of the tourist product; protecting tourism resources and the environment; regulating aspects of social behaviour, for example gambling; and the requirement to monitor the level of tourism activity through statistical surveys. In most cases, where tourism is a significant element of economic activity, so that much weight is attributed to the arguments presented above, it is common practice to have a Ministry of Tourism. This is particularly true of island economies, which frequently form some of the world’s most attractive tourist destinations. The position of the NTO within this framework may be inside or outside the ministry. In the latter case, the NTO becomes a government agency or semi-governmental body. It usually has a separate constitution, enacted by law, and a board of directors appointed from outside government which, in theory, gives independence from the political system. However, the link is maintained through the NTO being the executive arm of government policy as agreed by the ministry and public money providing the major source of funds for most NTOs. The reality is that few governments can resist giving specific policy direc- tions for developments that are likely to influence political results in locations where the elec- toral outcomes are close. This allows local political parties at the destination to usurp tourism plans, either by frustrating developments or having projects inserted into plans that have a high political visibility but are of little economic worth and results in a trail of poor value for public money that often ends in financial insolvency. Good NTOs are attuned to this and build flexibil- ity into the planning process to deal with barely concealed electoral calculations, ensuring that they receive prior written instructions from the responsible minister before proceeding. Some NTOs, normally termed a convention and visitor bureau (CVB), are simply private associations whose constitution is determined by their membership, which may include govern- ment representation. Income is thus raised from a variety of sources and, similar to other busi- nesses, the existence of these bureaux is dependent on the demand for their services in the marketplace. In times of recession, such associations often have difficulty raising funds from the private sector to maintain their activities and need to have injections of public funds to continue with long-term projects.  Administrative Framework 455 Chairman and board of directors Director of tourism Marketing Development Administration Planning and research External relations International Products Administrative Market Public support research relations Overseas Human Finance Development Corporate offices resources planning affairs Legal Domestic Planning Organisational services liaison Computer Business tourism services Tourism services Advertising Figure 18.2 Structure of a national tourism organisation Since the 1980s, the upsurge in market economics has seen more and more governments urg- ing their NTOs to generate matching funds from the tourist industry. Methods to achieve this objective have included joint marketing initiatives and charging for a range of services, for example, market research reports and brokerage fees from arranging finance. However, the main obstacles to raising private sector revenue have always been the long-term and non-commercial nature of many of the tasks undertaken by NTOs. Added to this is the fact that when NTOs do embark on commercial activities they may be criticised by the private sector for unfair com- petition, because they are largely funded from taxation. Some countries, for example many of the island tourist destinations such as Bermuda, have recognised these difficulties and have levied specific tourist taxes on the private sector to pay for the work of the NTO – although where such taxes are not separately set aside for tourism, it can also be argued that the tourist industry is just another source of tax revenue. Structure of a national tourist organisation A stylised organisational layout for an NTO, illustrating its principal divisions, is presented in Figure 18.2. This type of NTO is at ‘arm’s length’ from the Ministry of Tourism by virtue of having its own chairman and board of directors. Where an NTO is a division of a ministry, which may have a wider portfolio of activities than just tourism, then it is usual for the director of tourism to report to the senior civil servant in the ministry rather than a board. Many NTOs have only marketing responsibilities and are designated as such, as this is considered to be their primary function, with tourism development being placed in the general portfolio of a national or regional planning authority. In these cases Figure 18.2 should not have a development divi- sion and research activity is likely to be included under the marketing division, but the industry view is that it is better served when both marketing and development are under one body, as in Figure 18.2. Clearly, the exact structure of an NTO will depend upon the objectives laid down for it by government and the tasks the organisation has to undertake in order to meet those same 456 chapter 18 Public Sector and Policy objectives. For example, VisitWales, the Welsh Assembly’s tourism department, sees its principal role as providing leadership and strategic direction to the tourism industry in Wales, targeting resources towards priorities that will most benefit the industry, as outlined in its objectives: to assist in raising the quality of the tourism offer in Wales; to stimulate growth in the demand for Wales and to position Wales as a must-see travel destination; to use effective partnership working to achieve mutual benefits for Wales; to encourage, support and reward innovation; to encourage a skilled and professional workforce equipped to deliver a quality Wales experience. For any organisation maintaining quality in the face of competition is important for retaining value. It is measured indirectly through physical and qualitative evaluation indicators as formalised in classification and grading schemes (discussed for the accommodation sector in Chapter 14). This being the case, quality evaluation will always be an inexact science and one that is resolved through expert judgement and opinion. Since NTOs do not own the tourism product they have to work in partnership with many other businesses to create a positive, distinctive and motivating identity for their country as an attractive destination in target markets. Innovation is commonly associated with new products and this is the basis on which public funding in the form of grants and subsidised loans are normally given. However, the concept is broader than this, since it may also encompass new methods of production, new sources of supply, new markets or simply improving the structure of the organisation. In sum, innovation is about new ways of doing things that add value to the business. It is clear that NTOs are generally set multiple objectives by their political masters, which makes it difficult to maximise any one of them. Thus trying to maximise the economic gain, particularly in the short term, may not be in the long-term interests of the host community and could be at variance with the objective of protecting the natural and built environment. Manag- ers have to become adept at creating optimal policies that satisfy a bundle of objectives, so as to minimise conflict. This makes it important that governments should not set NTOs objectives that may seriously conflict with each other. Too often governments talk of tourism quality yet measure the performance of the NTO in terms of numbers. Common examples of policy objectives that are most likely to be at variance with each other are: maximising foreign exchange earnings versus actions to encourage the regional dispersion of overseas visitors; attracting the high-spend tourist market versus policies to expand visitor numbers; maximising job creation through generating volume tourist flows versus conservation of the environment and heritage; and community tourism development versus mass tourism. Marketing function of NTOs Marketing is the principal responsibility of an NTO and therefore usually forms the largest functional area, especially when overseas offices are included. The marketing division formu- lates the NTO’s marketing strategy and is given the task of maintaining the website, producing the advertising campaign and publicity materials, interacting with social media, and promoting sales through the media and the travel trade. The latter is achieved through the provision of ‘familiarisation’ visits to the destination, circulating a regular newsletter and press releases and attending a series of travel trade shows, of which the most significant are the International Travel Exchange, Berlin and the World Travel Market, London. Overseas offices are responsible for exercising the functions of the marketing division in a manner that takes particular account of the preferences of the travel trade and the potential visitors in the countries or areas where they are located. They also act as ‘shop windows’ where potential visitors may obtain informa- tion and brochures about the host country, though ICT developments have reduced the necessity  Administrative Framework 457 for this. Many governments do not actively promote domestic tourism and so their NTOs have this section absent from their structure. Business tourism often merits its own section within an NTO because of its importance in terms of tourist expenditure and the different servicing requirements of meetings, exhibitions and incentive travel groups when compared with leisure tourism. Likewise, advertising is such a key activity that it may command its own specialist group to plan campaigns and deal with outside advertising agencies. Tourism services include a multitude of tasks, such as: operating a reservation system either directly through the website or, as is more common, via links to commercial providers; licensing and grading of hotels, restaurants and other suppliers (which may include price controls); handling tourist complaints, which may be formal procedures attached to licensing; programming festivals, events and tours; and managing tourist facilities provided either solely or jointly by the NTO, for example, tourist information centres (TICs) or tourist beaches as in Cyprus. Development function of NTOs The development division can only have truly operational involvement if it is given funding to engage in projects with the private sector and implement training programmes and activities. If this is not the case then it can only take on a coordinating and strategic role. The former is achieved by acting as a ‘one-stop shop’ for prospective developers through intermediation to obtain planning permission, licences and any financial assistance or incentives from the relevant authorities. In a strategic role the development division will acquire the planning functions that have been allocated to the planning and research division in Figure 18.2. The reason for the separation in Figure 18.2 rests on the fact that an operational development division is likely to be too heavily involved in day-to-day project management to be able to incorporate long-term development planning. The latter is a research activity and therefore best located in the unit equipped for this task. The planning services section is an important addendum to the role of an NTO in that it seeks to capitalise on the expertise of the organisation to provide advice and even undertake studies for the private sector and other public bodies, for example, drawing up tour- ism plans for local communities. The remaining divisions shown in Figure 18.2 are, to a large extent, self-explanatory. Admin- istration is responsible for the internal smooth running of the NTO and will normally adjudicate on legal matters in respect of tourism legislation, including, in some countries, carrying out prosecutions. External relations is a functional area of considerable significance because the NTO is frequently the representative of the government, both at home and overseas, and has to deal with a mass of enquiries from the public, the media and commercial operators, as well as taking an active stance in public relations to support the advertising and sales promotion admin- istered by the marketing division. It is for the latter reason that external relations may be allo- cated to marketing, although the tasks given to the division are usually much broader than those required by marketing, as is the case of liaison activities with a variety of public bodies and voluntary associations who have an interest in tourism. Given the complexity of the tourist product, more recent emphasis on the liaison role of the NTO has focused on building partnerships in line with models of community tourism devel- opment, so as to bring the various stakeholders together. If the institutional framework is to function in a manner that is socially compatible, then there is a prerequisite for local involve- ment in the development process to encourage discussion about future directions. Cultural conflicts need to be resolved through, say, staging development and using marketing commu- nication channels to prepare guests better for their holiday experience. From experience in less developed countries (LDCs), the greater the difference in lifestyles between hosts and guests and the less the former have been exposed to visitors, then the longer should be the period of adaptation. 458 chapter 18 Public Sector and Policy Impact of the Public Sector In the light of public sector involvement with tourism, either directly through a ministry with responsibility for tourism and the NTO, or indirectly through, say, foreign policy, legal controls or the provision of infrastructure, the government has at its disposal a series of instruments that can be used to manage tourism flows to meet its policy objectives. The manner in which actions by governments influence tourism may be classified in two ways: demand and revenue management; and supply and cost management. Demand and revenue management There are primarily five policy instruments used by governments to manage demand: marketing and promotion; information provision and network development; pricing; controlling access; and security and safety. Marketing and promotion As has already been observed, marketing is the principal function of the NTO and its job is to create and protect the ‘brand image’ of the country/destination. The specific techniques are dis- cussed in Part 3 of this text, so it is sufficient here to point out that the key requirements for effective marketing are clear objectives, a thorough knowledge of markets and products, and the allocation of adequate resources. It would, however, be putting the ‘cart before the horse’ with- out the product, which is generally not under the control of the NTO, hence the importance of assigning the NTO some development powers. Typically, with many other calls on the govern- ment’s budget, finance officials are naturally parsimonious with regard to expenditure on mar- keting because of difficulties in measuring effectiveness. As a rule, the amounts spent by governments and other public organisations on destination promotion are only a fraction of what is spent in total by the private sector. One of the main reasons for this is that private enter- prises are competing for market share at the destination, whereas governments are interested in expanding the total market to the destination. The issue of marketing effectiveness is very pertinent to the earlier discussion on conflicting objectives for public sector managers. The latter normally have to satisfy a range of stakeholders, with the result that campaigns are often ‘me too’ watered down propositions that fail to differenti- ate from the rest of the ‘clutter’ in the marketplace and squander resources. Attempts to break through this may generate considerable controversy in the media that has political repercussions. Similarly, establishing destination identities is usually conceived as exercises in local pride, which fail as ‘promotional hooks’ for attracting tourists and in creating a distinctive sense of place. Information provision and network development The ability of tourists to express their demands depends upon their awareness of the facilities available, particularly attractions, which are a key component of leisure tourism. For a number of years there has been government interest in creating computer-based national reservation systems. NTOs in Europe have already been operating ‘Holiday Hotlines’ and out-of-hours tel- ephone information. In many countries, local tourist information centres (TICs) offer a booking service to personal callers, though still very much a manual system requiring TIC staff to tel- ephone accommodation establishments to check availability. For example, in Britain, the TIC network was used to develop the ‘Book a Bed Ahead’ scheme for the independent traveller touring different parts of the country. However, as more and more bookings are being made electronically, what is ideal is a fully networked computerised reservation system (CRS). The  Impact of the Public Sector 459 key to penetrating the source markets from the destination lies in using the CRS to link suitable accommodation to a range of ‘things to see and do’, so what is being sold is a complete holiday, not just accommodation. Although desirable, this does not necessarily mean complete packag- ing of other products: it is common just to use complementary suppliers in marketing and to couple this with the provision of good information on site. Others would go further and recom- mend a complete destination management system (DMS) that acts as a neutral facilitator and reservation system to the tourist industry, which would put small businesses on the same footing as the major corporate suppliers. Implementation of a complete DMS via the NTO or regional tourist association is no easy task: in the past, proposals at the local level have foundered on the unwillingness of small enter- prises to give commission, to make booking allocations available, competitive jealousies con- cerning the equity of how bookings will be distributed by operating staff and arguments over classification and grading – an essential ingredient for the inclusion in such a scheme, as in all tourist bureau publications. Such experiences suggest that a complete DMS cannot be imple- mented or sustained without a great deal of public sector involvement and cooperation, particu- larly if the ETC’s ideal of Europe as a single destination is to be realised. As discussed further in Chapter 22, various systems are now available to enable potential visitors to assemble their own itineraries. The usual role of the NTO is to act as a facilitator to bookings through provision of information on its web portal that gives links to agencies providing reservation services, so that end users and resellers can access the product of the destination. By this means NTOs enable end users and resellers to search, book and pay in a single application, as well as building networks to connect businesses and consumers to TICs. The reasons why people do not book online are to do with ease of booking, credit card security, trust in the supplier and lack of con- sistent information, which is becoming more evident with the growth in holiday fraud, ranging from airline tickets, most types of accommodation to tickets for events and festivals. However, it is now clear that even the smallest accommodation provider is requiring a website and email facilities because the chances of potential guests walking in without prior notification are dimin- ishing. In this respect, the adoption of ICT is crucial, for by lowering distribution costs for sup- pliers and reducing search cost for consumers, via the Internet in particular, market potential is widened. Experience has shown that the ICT phenomenon has radically increased the collective market share of niche products and flattened the sales distribution pattern, producing what has been termed by writers in this field ‘the long tail’ that allows many more products to sustain themselves in the marketplace. Nor should travel and social media sites (referred to as eWOM sites) such as TripAdvisor, Facebook and Twitter be ignored, as they are powerful distribution channels for highlighting positive and negative feedback. Placing written and video blogs are a way of maximising online distribution. The modern tourist is able to use portable technologies such as a tablet or smartphone to view the destination, take advice from TripAdvisor, and book online. Interactivity with the customer to find out what they want and say through website con- tacts, social media chat rooms, emails and mobile phone messaging offers a new dimension to the traditional promotional mix, pushing the latter down the scale of relevance. The evidence suggests that when planning for tourism the creation of trails or tourist circuits will enhance the visitor experience as well as regulating tourist flows. The establishment of a network of TICs and tourist information points (TIPs) at transport terminals and prominent tourist spots will both help the visitor and assist in dispersion. It is not often appreciated that it is the poorly informed visitor who is likely to contribute to crowding and traffic congestion because of a lack of knowledge about where to go and what there is to see at the destination. Normally, visitors will first look for the main attractions and then move on to lesser attractions as their length of stay increases. Giving prominence to the variety of attractions available, restricting advertising and informing excursion operators of times when congestion can be avoided are examples of the way in which information management can be used to try to relieve pressure on sensitive tourist areas. In some countries, NTOs use the provision of information to influence tourists’ behaviour. This may come about through editing the information in the tour operator’s brochure so that it does not generate unrealistic expectations about a destination and presents the tourist with an 460 chapter 18 Public Sector and Policy informed view of the culture of the host community. An alternative approach is a poster and leaflet campaign aimed directly at the tourist to explain the ‘dos and don’ts’ of acceptable behaviour – for example, several island resorts offering beach holidays produce leaflets on standards of dress and the unacceptability of wearing only swimsuits in shops, banks and so on. Pricing There are several ways in which the public sector may affect the price the tourist pays for stay- ing at a destination. The direct influence arises out of state ownership, notably in the case of attractions. Many of the most important attractions at a destination fall within the public domain (an issue that is examined in some detail in Chapter 13, which is specifically about attractions). The trend in market-orientated economies is for governments to introduce charges for publicly owned attractions. Many of the world’s airlines are still owned by governments, though the trend is increasingly towards privatisation or, if not, the liberalisation of air policy, particularly in response to the rise of low-cost airlines (see Chapter 17), which, as noted earlier, has raised issues concerning greenhouse gas emissions. It is not uncommon in less developed countries to find state ownership of hotels and souvenir shops. Thus in some countries the key elements making up holiday expenditure are directly affected by the public sector, to the point of total control in the situation that existed in the former centrally planned economies of Eastern Europe. Indirect influences come from economic directives such as foreign exchange restrictions, dif- ferential rates of sales tax, special duty free shops for tourists and price controls. Exchange restric- tions are commonly employed in countries where foreign exchange is scarce and the tourist is usually compelled to change money at an overvalued exchange rate which serves to increase the real cost of the trip. Tourists are discouraged from changing money on the black market by threats of legal prosecution and severe penalties if caught. Counterfeit merchandise is also coming under scrutiny as destinations are tightening up the enforcement of copyright and trademark laws, par- ticularly in Europe. Being fined abroad is one thing, but when returning home tourists run the risk of having their bargain priced goods confiscated and destroyed by customs. In the worst instance, the trademark owner can demand a statement of guilt, which comes with high fees. The case for price controls is advanced in terms of promoting the long-term growth of the tourist industry and preventing monopolistic exploitation of tourists through overcharging, a practice that can be damaging to the reputation of the destination. The argument for price regu- lation is illustrated in Figure 18.3. Initially the destination is receiving V1 visitors, paying an D2 S1 D1 Price/cost per visitor DL2 A B P2 SL1 P3 P1 C SL1 DL2 S1 D2 D1 0 V3 V1 V2 V4 Visitors Figure 18.3 Price controls  Impact of the Public Sector 461 average package price of P1 for their stay, with equilibrium being determined at the intersection of the demand schedule D1D1 and the short-run supply curve S1S1. Demand expands to D2D2, which gives the opportunity for suppliers to raise prices to P2, at the market equilibrium point B. This arises because significant parts of the tourism sector, such as airlines and hotels, are open to revenue or yield management systems, whereby market adjustment is more likely to be through price than quantity. These systems are designed to improve performance in situations where the product is relatively homogeneous and perishable, demand is seasonal, capacity is fixed in the short run and suppliers have the ability to segment the market. In simple terms this is described as ‘making money while you can’, as in the case of London hotels which moved to full-rate tariff during the 2012 Olympics and similarly in Rio 2016. This can be counter-produc- tive in circumstances where the number of competing destinations and the holiday price con- sciousness of travellers ensure that demand in the longer term is more sensitive to price than in the short run, as illustrated by the slope of DL2. The price control argument says that by keeping price at P2 existing suppliers will make excess profits, but this could be at the expense of the destination’s market share. This is shown on Figure 18.3 as a new market equilibrium position at A, where visitor numbers have fallen back from V2 to V3. The destination is perceived as ‘pricing itself out of the market’. There is no doubt that destinations are aware of their price competitiveness and some NTOs compile a tourist price index for their own country as well as others, in order to assess their relative market position. Where governments regulate prices, the objective is to set their level at, say, P3 which is sufficient to encourage the long-run growth in supply as shown by SL1 and com- mensurate with market expansion to an equilibrium point such as C, giving a growth in visitor numbers to V4. Producers, on the other hand, are prevented from making short-term excess profits. Where price controls are enforced, they are normally a further stage in an overall market regulation package, which commences with the registration and licensing of establishments. In the case of hotels this will include classification and possibly a quality grading system. Price regulation can be found in almost all instances where the government manages capacity and therefore restricts competition. Worldwide, the most common example is the licensing and metering of taxis and this is where Uber, that organises private individuals to offer rides in the ‘sharing economy’, has fallen foul of the regulators in several countries, as well as raising pro- tests from licensed taxi organisations in major cities. Where competition exists then the argu- ment put forward in Figure 18.3 hinges upon whether supply adjusts more quickly than demand. There have been many examples of Mediterranean resorts where the growth of bed capacity has outstripped demand and so the problem for the authorities has been more an issue of controlling standards than prices, as well as trying to prevent ruinous competition among hoteliers. In mar- ket economics there is a basic ideology that is against regulating prices and, where opportunities for suppliers to make excess profits in the short term do arise, control is often exercised infor- mally through exhortation that it will not be in the long-term best interests of the destination. This has been termed ‘maintaining rate integrity’ through long-term pricing strategies, so that visitors do not feel that they are being exploited at a time when there is a high demand for the destination. On the other hand, the art of revenue management from the firm’s perspective is to continuously adjust to the price sensitivity of diverse market segments, tackle pricing wars with the competition and effectively manage distribution channels. The more visitors book online, the less is the need for businesses to publish fixed price lists and the easier it is to extract the optimal price to fill up capacity. Controlling access Controlling access is a means of limiting visitor numbers or channelling visitor flows. At an international level, the easiest way for a country to limit demand is by restricting the number of visas issued. Prohibiting charter flights is a means by which several countries have conveyed an image of exclusiveness to the market and, in some instances, have protected the national air carrier. At the destination, controlling access is usually concerned with protecting popular cultural sites and natural resources. Thus visitor management techniques may be used to 462 chapter 18 Public Sector and Policy relieve congestion at peak times and planning legislation invoked to prohibit or control the development of tourist infrastructure (particularly accommodation) near or around natural sites. (Visitor management techniques are explored in more detail in Chapter 13.) Safety and security There have always been issues of criminal activities targeted at tourists, particularly in countries where there are large disparities between ‘the haves and have-nots’. Older age groups are per- ceived as being more vulnerable, which is compounded by the fact that many tourist environ- ments are designed for open access and some are from the past when the security of guests was not high on the agenda. Increasingly, tourist enterprises have tightened security and visitors have been given advice to make them ‘streetwise’. Governments have also instituted special tourist police, as in Egypt and Brazil, and tourism victim support services, for example in Ire- land and Holland. On the supply side, the cash-rich nature of tourism operations makes them a convenient channel for money laundering from organised criminal gangs, or simply from individuals evad- ing taxes or trying to find a safe haven for their money abroad because they have no confidence in the domestic financial system due to corrupt practices. Casinos, real estate transactions and purchases of luxury items such as jewellery are distinct favourites for money laundering activities. Unfortunately, terrorism is much more difficult to deal with, because its causes have little to do with tourism. It is associated with political and religious fanaticism, civil wars and rich–poor income gaps that result in political turbulence in the form of mass protests, for example anti- globalisation movements, and occasional riots and shootings, in which innocent tourists may become targets. What was special about the destruction of the World Trade Center, New York in 2001 (9/11) was that tourist destinations were largely caught unawares, as few had crisis man- agement plans to deal with the consequences for international travel flows – a situation that has now been put right in the principal destinations. On the other hand, dealing with terrorist threats also raises difficulties, in that stringent entry policies and procedures arising out of the increas- ing frequency of terrorist attacks create perceptions of an unwelcoming country in the minds of prospective tourists, contributing to a downturn in visitor numbers. Photograph 18.1 Political upheaval in a country affects people’s perception of its safety as a tourist destination.  Impact of the Public Sector 463 Supply and cost management Government activity on the supply side is concerned with influencing the providers of tourist facilities and services, as opposed to demand management policies aimed at guiding the tour- ist’s choice, controlling the costs of stay or stimulating/regulating visitor numbers. We have already stressed that the development of tourism should be regarded as a partnership between the private and public sectors. The extent of government involvement in this partnership depends upon the prevailing economic, political and social policies of a country. Where the government envisages a particular direction for tourism growth or wishes to speed up the process, it may intervene extensively in the marketplace by setting up a tourist development corporation (TDC) and assigning it the responsibility for building resorts. A well-known example of this process is the building of new resorts in Mexico, but many countries have instituted TDCs at one time or another, for example, Egypt, France, India, Malaysia, New Zealand and a number of African countries. In theory, once the resort has been built, the development corporation’s function ceases and the assets are transferred to the private sector (at a price) and the local authority. This is the general trend in market-orientated economies, but in countries where there is a strong degree of central planning the TDC often maintains an operational role in running hotels and tours. Beyond this, governments may also establish a development bank with duties to provide special credit facilities for tourist projects and on-lend funds made available by multinational aid agencies. This is common in LDCs where capital funds are short and local capital markets are weak. The methods that are frequently used by governments to influence the supply side of the tourism industry are: land-use planning and environmental control; building regulations; market regulation; market research and planning; taxation; ownership; education and training; and investment incentives. Land-use planning and environmental control Control over land use is the most basic technique and arguably the one that has the greatest influence on the supply of tourist structures. All governments have a form of town and country planning legislation whereby permission is required to develop, extend or change the use of almost every piece of land. As a rule, the controls are designed to protect areas of high land- scape and amenity value: for example, it is now common to restrict the proximity of buildings to the shoreline in coastal developments. The case is that the environment has an intrinsic value, which outweighs its value as a tourism asset. Its enjoyment by future generations and its long- term survival must not be prejudiced by short-term considerations. But (as noted in Chapter 13) it is possible to have conservation through tourism, by recognising the two-way flow between tourism and the environment. Zoning of land and compulsory purchase are commonly used as a means of promoting tour- ism development. One of the key aspects of land control is that before any detailed site plans and future land requirements for tourism are published, the appropriate administrative organisa- tion and legislation is in place in order to prevent speculation, land division or parcelling. Deal- ings or speculation in land prior to legislative control have been a common cause of failure in tourism master plans. Building regulations Building regulations are used to supplement land-use control and typically cover the size of buildings, height, shape, colour and car-parking arrangements. For example, Mauritius has a 464 chapter 18 Public Sector and Policy rule that restricts coastal developments to two levels, roughly the height of palm trees, which permits adequate screening from the seaward side. Car parking is a matter that is not always given the attention it deserves in some resorts. To private sector operators, car parks are often considered unproductive space and so there is a tendency to avoid having to provide them, leaving visitors little alternative than to park their cars in nearby streets. This may only serve to add to traffic congestion and the annoyance of local residents. In addition to structural regu- lations, many countries also have protective legislation governing cultural resources such as historic buildings, archaeological remains, religious monuments, conservation areas and even whole towns. Market regulation Governments pass legislation to regulate the market conduct of firms in matters of competitive practices and also to limit the degree of ownership in particular sectors of the industry to prevent the abuse of monopoly power. Governments may also regulate markets by imposing on suppli- ers obligations to consumers. This does not have to be legislation; it could be industry-enforced codes of conduct of the kind laid down as conditions for membership of national travel trade associations, though in Europe such codes have passed into the legislation of member states as a result of the EU Package Travel Directive (see Mini Case Study 16.1). The latter is regarded as basic consumer protection and does not stop ABTA in Britain having its own code of con- duct. ASTA in the United States has a similar code of responsibility as shown in Table 18.1. One of the economic criteria dictating the optimal working of markets is that consumers should have complete knowledge of the choices open to them. For if consumers do not have the right to safety, to be informed, to choose or of redress and firms are not behaving according to the accepted rules of conduct, then resources will be wasted, which may be seen to be ineffi- cient. The economic aspects of a consumer policy are shown in Figure 18.4. As the level of Table 18.1 ASTA’s Core Responsibilities for a Travel Agency 1. Accuracy. ASTA members will be factual and accurate when providing information about their services and the services of any firm they represent. They will not use deceptive practices. 2. Disclosure. ASTA members will provide in writing, upon written request, complete details about the cost, restrictions, and other terms and conditions, of any travel service sold, including cancellation and service fee policies. Full details of the time, place, duration, and nature of any sales or promotional presentation the consumer will be required to attend in connection with his/her travel arrangements shall be disclosed in writing before any payment is accepted. 3. Responsiveness. ASTA members will promptly respond substantively to their clients’ complaints. 4. Refunds. ASTA members will remit any undisputed funds under their control within the specified time limit. Reasons for delay in providing funds will be given to the claimant promptly. 5. Cooperation. ASTA members will cooperate with any inquiry conducted by ASTA to resolve any dispute involving consumers. 6. Confidentiality. ASTA members will treat every client transaction confidentially and not disclose any information without permission of the client, unless required by law. 7. Affiliation. ASTA members will not falsely represent a person’s affiliation with their firm. 8. Conflict of Interest. ASTA members will not allow any preferred relationship with a supplier to interfere with the interests of their clients. 9. Compliance. ASTA members shall not have been convicted of a violation of any federal, state and local laws and regulations affecting consumers. Pleas of nolo contendere, consent judgments, judicial or administrative decrees, or orders, and assurances of voluntary compliance and similar agreements with federal or state authorities shall be deemed convictions for purposes of these provisions. Source: American Society of Travel Agents  Impact of the Public Sector 465 Wastage Protection cost Cost A 0 L Protection level Figure 18.4 Economics of consumer protection protection increases, so wastage or compensation payments decline, while at the same time the costs of protection increase. The optimum amount of protection is where the two schedules intersect at point A, which defines level L on the axis below. This is the economic rationale: on social or political grounds the state may legislate to ensure nearly 100% protection. But the economic consequences of such an action could be to raise the supply price of the good or service to the point where the market is substantially diminished. At the consultation stage of the EU Package Travel Directive (1990 and 2013) amendments were accepted to some of the proposals on the grounds that their compliance would significantly raise holiday prices or restrict trading. Market research and planning The tourist industry usually expects the public sector to collect statistical information and carry out market surveys. There have been steps towards the creation of tourism satellite accounts as advocated by UNWTO, but generally not enough is being done, when compared to the tradi- tional statistics collected for the extractive and manufacturing sectors of national economies. Inadequacy means that it is impossible to measure accurately the impact of tourism policy, or monitor trends in the marketplace – and the result is an incalculable loss of unrealised potential. The NTO is naturally concerned with understanding demographic and lifestyle changes in its source markets – for example, the increasing environmental awareness – and how they affect the image of the country. For their own part, governments are interested in monitoring changes in the industry and carry out research to identify the social and environmental benefits and costs of tourism. The emerging research themes that suggest themselves from the new tourism trends discussed in this text are: changes in the demographic structure and lifestyles upon tourism demand; product management and innovations in distribution facing the industry; improving the attractiveness of destinations through product development in a sustainable way by moving towards the idea of being ‘carbon neutral’; and the strengthening of public/private sector partnerships. When dealing with products that belong to the tourism sector, the transformation of invention to innovation cannot be compared to the processes seen in manufacturing. Manufacturing starts with product innovation (invention and introduction of the product), qualitative process innovation (the setting up of the manufacturing systems), and quantitative process innovation (improvements 466 chapter 18 Public Sector and Policy and rationalisation of the production system for mass supply). Tourism products start with the quantitative process innovation by taking established products and using them to increase the efficiency of current service production, which, in turn, leads to qualitative changes in the pro- duction system and then wholly transformed or entirely new service experiences, which are the output of the tourism industry. Thus some of the most successful visitor attractions are the result of brand extensions of products that are the output of another industrial process, as, for exam- ple, the amusement parks of the Walt Disney Corporation and the Universal Studios Recreation Group (see Chapter 13). Taxation There are two main reasons why governments levy specific taxes on the tourism sector. The first is the classic argument for a tourist tax, namely to allocate to the supply price the external costs imposed on the host community through providing public amenities for tourists. The second is for purposes of raising revenue. Tourists are seen as part of the overall tax base and, from a political perspective, they are not voters in the destination country; therefore the welfare burden that taxes impose on consumers, which has to be considered for the domestic population, does not apply to tourists. Where residents and tourists consume goods jointly, then if tourists were less sensitive to price rises, it is possible for the tax revenue raised to more than outweigh the loss of benefit to domestic consumers, but the nature of consumption taxes such as VAT is that international tourists are able to claim back the tax, as it is meant to be non-price distorting internationally (Jensen and Wanhill, 2002). With the growth of tourism worldwide, there has been an escalation in the number of coun- tries levying tourist taxes and in the rates of taxation, drawing the inference that governments principally see such taxes as a source of revenue. It is not unreasonable that the tourist industry should pay taxes as in any other business and international organisations such as the UNWTO and WTTC (Myers et al., 1997) have argued that tax payments should be made in accordance with the following guidelines: Equity: the fair and even-handed treatment of travel and tourism with respect to the other sectors of the economy. Efficiency: the development of tax policies that have a minimal effect on the demand for travel and tourism, unless specifically imposed for the purpose of regulating tourist flows to, say, environmentally sensitive areas (see Chapter 13). Simplicity: taxes should be simple to pay and administer, so as not to disrupt the operation of the travel and tourism system. The point is that if on the one hand governments are trying to boost tourism growth because of its contribution to GDP and employment, it makes little sense to have a ‘confiscatory’ tax regime that does the reverse. A study by the WTTC (2013) has shown that travel and tourism taxes in the United States represented 3.2% of all taxes collected, compared to a direct contribu- tion of 2.7% by the industry to the GDP of the US economy. Since tourism businesses are more labour intensive on average when compared to the rest of the economy, then any adverse impacts on employment are much more pronounced within the travel industry. Being aware of the competitive nature of the leisure tourism product and conscious of market share, the industry is opposed to the increasing number of discriminatory taxes on tourism, the most common forms of which are visas, airport departure taxes, ticket taxes and taxes on hotel occupancy. In the main these tend to be fixed amount (lump-sum) taxes rather than percentage (ad valorem) taxes thus, for example, in 1994 the United Kingdom introduced the lump-sum Air Passenger Duty (APD), which is a ticket tax, citing the environmental case. Subsequently many other countries have done the same although a much better environmental case could be made for such a tax if it was placed on aircraft flights rather than individual travellers, in order to encourage better use of aircraft capacity. In 2009 four geographical bands, A, B, C, and D, were introduced that were calculated on the distance from London to the capital city of the destina- tion, but since 2015 C and D have been integrated into B. So there are now two bands, A,  Impact of the Public Sector 467 0–2,000 miles and B, more than 2,000 miles. A further study by WTTC (2012) indicated that abolishing APD would create up to 91,000 jobs and add £5.4 billion to GDP in today’s prices, through lower prices expanding demand. The principal argument against tourism taxes is that they are not normally hypothecated to improvements in travel infrastructure, but submerged in the general tax take (which the industry already pays into via corporation tax, sales taxes, property taxes and income tax payment made by employees and shareholders), thus raising the price of the tourist product with no noticeable improvement in quality. Moreover, where a country has a large domestic tourism industry, a hotel occupancy tax makes it less costly for domestic tourists to switch demand to destinations abroad, as well as being more expensive for inbound tourists. Opposition can be effective; thus in 2002 the regional government of the Spanish islands of Majorca, Minorca and Ibiza intro- duced a tourist tax of €1 per night on all visitors. This was a way of raising funds for environ- mental projects, but after protests from hotel owners about the added cost of vacations on the islands and the burden of collecting the payments from guests, the bed tax was scrapped a year later. The political appeal of tourist taxes is that in the main they fall most heavily on people who do not vote on either the taxes or those who impose them. Most of the anti-tax lobby is generated by the suppliers who are concerned about competitiveness. When it comes to raising revenue, casinos can be a very profitable source: governments have been known to take as much as 50% of the ‘drop’, which is the amount of money taken in from the tables. However, there are clearly many other issues to do with regulation and ethics when it comes to expanding casinos and generating tax revenues in this way. Although a tourist tax may be paid by the tourist on the ticket, at the hotel, or at the airport and collected from the organisations concerned, the incidence as to who bears the tax will depend on the responsiveness of demand and supply to a price change. In Figure 18.5, the impo- sition of a tax raises the supply price by moving the supply curve from S1S1 to S2S2, which in turn reduces the quantity of, say, room sales demanded from Q1 to Q2. However, the amount of tax income raised P2ACD does not all fall on the tourists in the form of a higher price. Price rises from P1 to P2 only and the larger share of the incidence of the tax P1BCD falls on the sup- plier in the form of reduced profits. Tourists contribute P2ABP1 of the tax revenue. The less sensitive tourists are to price (something that can be reflected in a much steeper demand sched- ule DD), the greater is the ability of suppliers to pass on the tax in the form of a higher price and therefore the larger will be the share of the tax burden falling on the tourists. However, from S2 D S1 A Tax P2 Price P1 B D C S2 D S1 0 Q2 Q1 Quantity Figure 18.5 Distributive effects of a tourist tax 468 chapter 18 Public Sector and Policy Tables 4.4 and 4.5 in Chapter 4, we know that international tourism is both price and income elastic, so the burden of taxation falls on the travel trade, which explains why there is such opposition to these taxes. Ownership Mention has already been made of state ownership of attractions, natural amenities and some key revenue-earning activities such as hotels, modes of transport (especially airlines) and sou- venir shops. It is possible to add to this list conference centres, exhibition halls, sports and lei- sure complexes (including casinos) and the provision of general infrastructure. The latter may include banks, hospitals, public utilities (water and energy supplies), telecommunications, road networks, transport terminals, and education and training establishments. The arguments for public ownership of these facilities rest on their importance as essential services for any eco- nomic development, the fact that outside investors would expect such provision and economies of scale in production. Traditionally, public infrastructure and transport networks have been regarded as natural monopolies; the minimum scale of production is such as to make it impos- sible for more than one firm to enjoy all the economies in the market, so that even if they were not publicly owned these organisations would need to be publicly regulated. However, changes in technology are undermining the natural monopoly concept in telecommunications and power generation, reducing further the need for public ownership. Education and training The provision of an educated and trained labour force to meet the demands of a modern econ- omy has been a task that has fallen to many governments and is regarded as capacity building. In common with other planning activities, this requires an assessment of the current occupa- tional distribution of the tourism workforce, which is then mapped onto the general educational level of each occupational group. Overall forecasts of economic activity for the tourist industry are then turned into workforce needs, which are compared to projections of supply from exist- ing trends in the education system, enabling the estimation of surpluses and deficits. It is then possible to lay down a strategy for the implementation of projects in the education and training sector to bring demand and supply as close together as might be deemed practical, given the somewhat loose linkage between education and the skills base of the labour force. Actions to augment this may be the provision of low-cost housing for key workers in resort areas, as well as immigration policies to add to the quality of the workforce. Investment incentives Governments around the world offer a wide range of investment incentives to developers (Wanhill, 2005). They may be grouped under three broad headings: 1. Reduction of capital costs. This includes capital grants or loans at preferential rates, inter- est rate relief, a moratorium on loan repayments for, say, x years, provision of infrastructure, provision of land on concessional terms, tariff exemption on construction materials and equity participation. 2. Reduction of operating costs. In order to improve operating viability governments may grant tax ‘holidays’ (5–10 years), give a labour or training subsidy, offer tariff exemption on imported materials and supplies, provide special depreciation allowances and ensure that there is double taxation or unilateral relief. The latter are government-to-government agree- ments that prevent an investor being taxed twice on the same profits. 3. Investment security. The object here is to win investors’ confidence in an industry that is very sensitive to the political environment and economic climate. Action here would include guarantees against nationalisation, free availability of foreign exchange, repatriation of invested capital, profits, dividends and interest, loan guarantees, provision of work permits for ‘key’ personnel and the availability of technical advice. The administration of grants or loans may be given to the NTO, a government-sponsored investment bank or the TDC. Tax matters will usually remain the responsibility of the treasury  Impact of the Public Sector 469 or the ministry in charge of finance. Less-developed countries are often able to attract low-cost investment funds from multinational aid agencies, which they can use to augment their existing resources for the provision of development finance. It may be taken that policies to ensure investment security are primary requirements for attracting tourism developers. The objective of financial incentives is to improve returns to cap- ital so as to attract developers and investors. Where there is obvious market potential the gov- ernment may only have to demonstrate its commitment to tourism by providing the necessary climate for investment security. Such a situation occurred in Bermuda during the early 1970s and so, in order to prevent over-exploitation of the tourism resources, the Bermuda government imposed a moratorium on building large hotels. The impact of financial incentives on the amount of investment is illustrated in Figure 18.6. The schedule SS represents the supply of investable funds while D1D is the schedule of returns to capital employed. D1D slopes downwards from left to right as more and more investment opportunities are taken up – the declining marginal efficiency of investment. In the initial situa- tion, equilibrium is at A with the amount of investment being I1 and the rate of return i1. Conditions of market failure imply that the community benefits from tourism investment are not entirely captured in the demand function D1D. Optimal economic efficiency is where the demand function includes these external effects, as represented by D2D. The government now implements a range of financial incentives that have the effect of raising the rate of return per unit of capital to i2, moving the marginal efficiency of investment schedule to D2D. The new return i2 equals (1 + S)i1, where Sis the effective rate of subsidy. If the amount of investable funds available for tourism is limited at I1, then the impact of incentives serves merely to raise the return to investors by raising the equilibrium point to B. The loss to the government treasury is the area i1 AB i2 which equals the gain to private investors. There is no doubt that many countries have been forced by competitive pressures for foreign investment into situations that are similar to those above. Countries can become trapped in a bidding process to secure clients and as a result the variety of financial incentives multiplies together with an escalation of the rates of benefit, without evaluating their necessity or their true D2 S Return on capital i2 B D1 i3 C i1 A S