Sunday, June 14, 2015

Jordan’s tourism sector crisis. The solution does not start with dropping hotels’ electricity rates.


Jordan’s tourism sector faces a crisis that is affecting some more than others. The government decision on lowering electricity rates for hotels does not solve the crises. Rather, it merely adds to distortions and amounts to unfair subsidies.  
Jordan’s tourism sector plays an important role in the economy. According to the Ministry of Tourism and Antiquities (MOTA), tourism receipts exceeded 3.1 billion JODs in 2014, growing by 6% over 2013. In 2014, Jordan received 3.99 million overnight visitors, a 1.1% growth over 2013. 

Some 60% of overnight tourists visiting Jordan chose to stay in hotels in 2014. Hotel guests totaled 2.4 million in 2014 while around 1.6 million tourists stay in apartments rather than hotels. Hotel guests stay an average of 2.1 nights only generating over 5 million hotel nights in 2014.  

Amman is the prime tourism destination in Jordan followed by Aqaba, Dead Sea and Petra. In 2014, Amman’s share of total hotel nights was 59% and its share of total guests stood at 54%. Aqaba followed with 22% share of both nights and guests. Dead Sea came in third at 14% of guests and 12% of hotel nights. Petra was in 4th place, with a share of 7% of guests and 6% of hotel nights. Between them, the four main destinations of Amman, Aqaba, Dead Sea and Petra accounted for 98% of hotel nights and hotel guests in 2014. 

2014 was a good year and it was reflected in the results of hotels listed on the Amman Stock Exchange. Seven publicly traded companies that own 13 hotels generated revenues of 142 million JDs in 2014, a 5% growth over 2013. Operating profits increased by 6% and reached 42 million JDs. 

Unfortunately, 2015 has not started well for tourism in Jordan. According to MOTA, tourism receipts in the first 4 months of 2015, dropped by 15% to reach 880 million JODs down from 1032 million JODs. Tourists numbers also dropped by 13% while tourist coming in groups dropped by 41%. This drop was also reflected in the results of the publicly traded companies: In the first quarter of 2015, the aggregate revenues of the 13 hotels at ASE dropped by 17% to stand at 25 million JODs while operating profit dropped by 44% to stand at a mere 4.3 million JODs. 

In May, the government announced actions aimed at energizing the tourism sector. The measures included waiving taxes on plane tickets and waiving visa fees for tourists that stay longer than 3 days and visit the tourism sites. Moreover, the government decided to reduce the electricity charges for hotels in Jordan by 50% to become 91 fils down from 181 fils. The official calculations suggest that the electricity rare reduction will amount to 28 million JDs every year.

The visa reduction measures which encourage more tourists to arrive in Jordan are good, yet the massive electricity rate drop is all advised. The reasons are straightforward: 

The rate drop disproportionately favors hotels less hit by the current crisis than hotels suffering from very low occupancy rates. After all, hotels will low occupancies will have reduced electricity consumption by default as most of the hotel rooms remain empty.

The new rate sells electricity at below its actual cost. This means that the government is subsidizing hotels only while neglecting the other main components of the tourism service sector (restaurants, clubs, malls, recreation parks, etc). Moreover, it neglects that 40% of tourists choose to stay in furnished apartments not hotels. These now pay 4 times the electricity rates paid by hotels. 

The rate drop further distorts the electricity sector by illogical rates that make the rate paid by hospitals and schools four times that paid by a five stars hotels.
In the short term, absent a thorough rebalancing of the electricity rates in the country, the better decision is for the government to keep the electricity rate for hotels as they are. While directing the surplus it generates from the tourism sector electricity bills (around 28% which is the difference between 181 fils and actual cost of around 140 fils per KWH) towards the marketing and promotions budget of Jordan’s tourism sector. The root cause is the drop in tourist numbers, and the root cause solution should be to drive up tourist arrivals not reducing rates for some players at the expense of others.

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