Overcapacity in the hotel industry

The overcapacity issue in the hotel industry has resurfaced and is currently dominating tourism headlines in the local media. The influential Malta Hotels and Restaurants Association (MHRA) has advised government, through a position paper entitled "Key Issues Facing the Tourism Industry", that the effect of oversupply is devastating on the room rates achieved, and is negatively impinging on the hotels' profitability.

Tourist arrivals will have to increase to 1.5 million a year to ensure the sustainability of the increasing bed stock. A number of accommodation establishments could moreover be driven out of business if all hotels in the pipeline come to fruition.

MHRA, according to media reports, have called for an immediate policy through which no permits are issued for new hotels on virgin land. The exception would be to allow existing properties to extend their bed stock if they can show that such an increase improves their current viability through an effective marketing strategy.

Their stance has drawn sharp reactions from bodies and individuals directly or indirectly involved in the tourism industry. The new Tourism Minister, Dr Francis Zammit Dimech, adopted a pro-active stance by drawing Cabinet's attention to the issue and by stressing the need to consolidate the market.

Malta Tourism Authority (MTA) chairman John C. Grech also agreed on the need to slow the rate of development, but warned against any draconian measures. MHRA's paper was subsequently taken to Cabinet, which however turned down the proposal to impose a moratorium on new hotel building applications since this was deemed as a drastic measure which could hamper the development of new markets.

The Federation of Associations of Travel and Tourism Agents (FATTA) agreed with MHRA's stance that the current rate of hotel development was unsustainable, but warned against the adoption of protectionist policies. A moratorium on new hotel applications across the board would give an artificial boost to the value of existing properties, to the detriment of potential investors, apart from opposing the free market policies harboured by the European Union. Limiting development applications to extensions of existing properties would moreover also create an uneven playing field for new genuine potential investors.

GRTU director-general Vince Farrugia also expressed his view on the matter. MHRA's "quality consolidation" proposal is weak on economic grounds in view of its possible insensitivity to the hotel industry's micro and macro environments, and the negative impacts on the direct, indirect and induced economic benefits to be derived from future tourism activity. Mr Farrugia argues in favour of more tourist arrivals, while urging the authorities concerned not to interfere with the supply side of economics by promoting protectionism.

MHRA should first and foremost be complemented for bringing this issue to the attention of the country's top echelon of decision-makers. The Association undoubtedly combines a strong influence with a forward looking perspective based on a qualitative approach.

I wonder whether the association has waited too long to make its voice heard this time, though. Their position paper on a potentially controversial issue significantly comes at the start of a new legislature, or better still avoids the politically sensitive final months preceding a general election.

Yet this situation has been brewing up for years, not months. Suffice it to say that the Carrying Capacity Assessment (CCA) compiled by the previous Ministry for Tourism in 2000 already indicated a concerning over capacity scenario when all new licensed accommodation establishments come on stream.

While on the subject of the CCA, I am confused about the hotel bed figures released by MHRA. The association estimates that there are currently 39,000 licensed hotel beds, excluding the licensed (and obviously unlicensed) self-catering element, and that if all hotel applications are approved and implemented, Malta will have up to 45,000 licensed beds within four years.

Yet the CCA report indicates that 41,456 beds were available on the market as at September 30, 2000 (excluding self-catering accommodation) and that a total of 49,500 will be available by the end of 2003. If one is to stick to the official figures released at the time by the Tourism Ministry, it becomes apparent that the 45,000 bracket has already been considerably exceeded, and that the alarm bells raised by MHRA refer to an already existing phenomenon that need not await the projects coming on board over the next four years. 49,500 beds will require even more arrivals than the 1.5 million tourists targeted by MHRA to keep the projected bed stock viable.

The notion of protectionism is another point raised by some of the major players. While understanding the arguments opposing supply-side intervention, I feel that the issue stems beyond the economic points of view raised by specific parties. Whether the total number of tourism beds should be capped or not is also a planning consideration directly linked to capacity, with all its interrelated infrastructural and environmental connotations.

Calvià in the Balearic Islands (Spain is an EU member state) has opted for a capping policy as part of its Agenda 21 for tourism programme that has received widespread consensus in international circles.

Arguments against the capping of beds on the basis of them opposing the EU's free market policies should therefore be toned down. Unless one directs the protectionism notion to MHRA's other stance to allow extensions to existing properties, for viability's sake, while impeding new development.

A case in point is a four-star hotel in Sliema which has just been given the go-ahead to more than double the existing number of rooms, and will now exceed 500 beds in total. What is the point of barring new investment to safeguard the industry's profitability while allowing significant extensions (as in this case) that will nonetheless accentuate even further the overcapacity problem? Isn't this protectionism?

It is also indicative that Cabinet, while opposing an official moratorium due to the perceived cascading repercussions, does not attempt to belie MHRA's basic stance that the hotel industry is suffering from an overcapacity situation. The very fact that Cabinet has accepted some of MHRA's other proposals (such as the introduction of a time limit to complete development) is an acknowledgement that Government also believes that the existing formula needs adjustment.

I do not favour a complete ban on new investment. The challenge lies in identifying new niches and at the same time avoiding the duplication of existing products, in channelling investment rather than stifling development. Enforcement, refurbishments and incentives to re-invest elsewhere are other crucial and complementary factors that need to be encouraged.