Part I
To become the next ‘hot’ investment opportunity, we need to offer the best incentives available anywhere.
1 Hotel investment fund
The Government needs to establish a hotel investment fund (HIF) of between US$1billion to US$5 billion of equity financing to be used to invest in new hotels on both islands.
It can start by transferring all its existing hotel investments into the fund making up the balance with cash. Raising equity capital for hotel projects is difficult at the best of times. Throughout the Caribbean, there are numerous projects that never get off the ground because prime real estate owners did not have access to equity funding.
These funds should have a fixed low rate of return and could be offered for the first ten years of the project.
The average equity investment from this source should be in the range of 25% of the equity requirement, but should not exceed 49%. This minority shareholding leaves the entrepreneur in control of his project.
Earnings from these investments are returned to the HIF for future investment in other new tourism projects. At the end of ten years, the owner would be required to purchase the government’s investment on very reasonable terms, thus freeing up capital for reinvestment back into the sector.
2 VAT exemption on all materials used in new projects
To attract outside investors to the islands, the cost to build a new plant must be on the same terms as exists in other Caribbean countries.
Failure to remove VAT from new construction means that it costs 12% more to build a new resort in T&T when compared to other Caribbean destinations where VAT does not exist.
Since hotels or land developers do not generate significant VAT invoices, they have no way of recovering the VAT.
3 No duty on FF&E (furniture fixtures and appliances)
All taxes should be removed from the purchase and importation for FF&E on all new and refurbished projects. This is a common practice in all Caribbean destinations.
Although it exists in T&T for hotel investments, it is not available to villas and condominium projects that form a significant part of current trend. The concession should be accessible every 3-5 years.
The key to access this benefit is that the unit must be in an approved rental pool for a minimum of three years.
4 Infrastructure rebate
If a developer is required to put infrastructure in place that would normally be the state’s responsibility, he should be entitled to a tax credit or grant, equal to 100% of the expenditure.
This benefit should also relate to the cost of conducting EIA studies, pre feasibility studies, as well as construction of sewers, roads, water, drains and electrical infrastructure, etc.
5 Tax credit of 25%
This amount, 25%, should be allotted to individuals or corporations on equity investments in new capital approved projects in the tourism sector. They should be deductible in the year that the investment is made.
This would attract equity investors who would normally place their funds elsewhere, perhaps in the stock market where the return is higher or on fixed deposits where the return is certain.
Since it is not expected that any equity investment in the hotel industry will pay dividends in the first 5 years of operation, this tax credit substitutes the lost return during the early days of the enterprise, making the investment competitive.
6 Five-year tax holiday on profits earned from new Investments in the service sector.
Many service institutions are key to the development of a vibrant hotel industry. These include: restaurants, dive shops, boutiques, etc. The tourism authorities will have to develop a list of targeted service companies that are necessary to drive the development of the sector. Concessions should be limited to a fixed number of startups in each sector.
7 Training grant
There should be a 50% matching funds (grant) on all training of workers for new projects.
One of the great challenges in getting projects off the ground is the lack of skilled workers in both the construction and service industries.
Companies need to be encouraged to invest in these areas. All great service companies have continuous training programs, the benefits of which are clearly visible when we interact with them.
Incentives to existing tourism facilities
To encourage growth and the re-vitalisation of existing hotel operations, it is necessary to carry over some of the incentives suggested for new projects. These incentives are additional to what is already offered.
1. TRAINING GRANTS as with new projects, existing hotels and service providers need the 50% matching training (grant) to keep their service outstanding. Perhaps the greatest challenge to the industry is the need to continuously train staff. T&T is not known for great service. To overcome this challenge, the country needs to encourage continuous investment in training. These programs should be approved by the tourism authorities, with the grants distributed on the attainment of the certified skills.
2—DUTY & VAT-FREE CONCESSIONS DUTY and VAT-free allowances on all approved upgrades to existing plant and equipment. This should be a benefit offered on a continuous basis and should be available to all approved industry service providers, accessed every 3 to 5 years depending on the item. This is particularly important to non hotel companies that service the tourism trade.
3. DUTY FREE ON CONSUMABLES. There is a new trend in the region to offer duty-free concessions on consumables for hotels, restaurants and bars which are all now being defined as export industries. This is particularly being requested by all inclusive hotels (such as Sandals) who are constantly looking at ways to improve profit margins. In granting this type of concession, one has to look at the total offering of tax incentives made available to the enterprise before deciding on eliminating the import tax on consumables.
4. TAX HOLIDAY ON REFURBISHMENT. All too often, incentives are directed at encouraging new development with little thought given to revitalising the existing stakeholders. Today, much of the tourism plant on both islands is tired and needs to be refreshed. A 10-year tax-free holiday on earnings should be offered for existing hotels that undertake major refurbishment. These costs can run as high as 25% of the original capital employed. This incentive will encourage owners to reinvest their profits back into their properties.
5. FOREIGN EXCHANGE FINANCE. Around 0.1% of all foreign exchange earned should go into a grant to be used to support the running cost of the islands hotel and tourism associations. These trade associations are the life blood of the industry. This benefit rewards productivity and helps build a sustained fund to grow the industry This incentive rewards performance of those who build the foreign exchange earnings of the country. It will also help reduce the leakage of foreign exchange.
6. PROMOTION AND MARKETING FUND. For the next three years, all of the hotel room tax earned by the state is placed in an advertising and promotion (A&P) fund and bumped up to a max spend of $100 million. It is to be jointly spent by the tourism authorities and the two main hotel associations. This fund will provide a level of stability in terms of sustainable promotion of the destination.
It places marketing funds in the hands of those who have the most to gain, and makes the industry responsible for its own performance. It also ensures that these funds are spent in the most productive way. At the end of the first three years, the guarantee should be removed leaving the room tax collected as the only source of marketing funds. No cap should be placed on this fund for the next ten years.
Whatever changes are agreed to, it is important that the process become dynamic. The new system of incentives must be easy to operate and easy to modify and update, because the industry is constantly evolving. Cutting-edge incentives today can become uncompetitive and obsolete overnight.
KEVIN KENNY
