Fabian Demicoli

Proposed ban on new hotel buildings: Dangerous economic intervention

During my intervention at the national conference held at the
Radisson Hotel this week on the theme "A proposed strategy to maximise Malta's
competitive potential," I expressed my objections to the conclusions of the
position paper by the Malta Hotels and Restaurants Association (MHRA) on Key
Issues Facing the Tourism Industry

The main conclusion of the MHRA was
that the government should adopt a policy of 'quality consolidation' on the
issue of permits for new hotels. Once the euphemism is removed, MHRA is
effectively saying that the government should stop the building and opening of
new hotels and new holiday complexes. The MHRA is also saying no to the further
spread of tourism facilities: the areas that now gain from tourism continue to
enjoy their earnings, while new areas aspiring to get a piece of the cake are to
stay out of tourism earnings.I normally support MHRA positions as I
believe that over the years MHRA has proved itself extremely effective in
sustaining an ever growing tourism industry. I have also assisted in the
development of economic arguments that helped MHRA in the quest for a sound
tourism industry in Malta.But not this time.

I believe that the 'quality
consolidation' proposal is too weak on economic grounds and that it is too crude
in its advocation of a hold on further hotel development. I would have been
willing to symphatise if the economic arguments were right on at least four
scores: three on the supply side, one on the demand side.No to
supply-side restrictionsThe three tests I would have liked the MHRA
paper to present on the supply side are at three different levels. In the first
instance, I would have liked to see an assessment of what could be the impact on
holiday complexes or hotels of additional bed stock in each individual
establishment. There are accommodation establishments whose bedstock can
increase while still providing an increasing return on investment, as any
increase would further stretch operation costs and thus reduce the cost per unit
and enable a resulting competitive gain through better pricing. The ban would
effectively make them less competitive.The second exercise should have
seen a detailed impact on the whole sector. In the first instance the gain, or,
loss, on the accommodation sector itself i.e. whether an increase in bedstock
would enable further consolidation for effectively the same marketing effort or
whether a further increase would extend costs so much, including pressures on
labour costs and the costs of other supplies whose availability may also be
constrained, that rather than additional economic gains, would on the contrary
lead to economic loss or diminution of existing gains. The sectoral analysis
should have extended to the impact of additional bedstock on other auxiliary
economic activities: bars, restaurants, car-hire, retailing, services etc. Can
these auxiliary sectors continue to expand and become more competitive if they
were to suffer a ban on new hotels and complexes and apartments for tourist

In the third instance, I would have liked to see the MHRA study
the impact of a hold on the increase of bedstock on the gross domestic product.
Tourism is not simply about hotels, bars and restaurants. The performance of
tourism is measured in terms of the contribution to GDP of such sectors as
property income, manufacturing, especially the furniture and bedding sector,
transport and communication, agriculture and fishing, marketing services, and of
retail and wholesale. Tourism also has great impact on the contribution to GDP
of government enterprises like Maltacom and Enemalta and the contribution of the
financial sector.It also affects government income through payments of
VAT and income tax and through a multitude of government fees and charges. Would
an increase in bedstock have a negative return on the rest of the economy as it
has to suffer more costs as the infrastructure gets further extended and there
is an increased cost on the environment through the additional construction
traffic movements caused by the further expansion of the main supply side issue
in the tourism sector? MHRA should have given a detailed cost-+benefit analysis
on which its conclusions are based. There's too much that depends on

MHRA has failed to indicate in any way that an increase in
bedstock would have a diminishing economic return either on the hotels and
complexes themselves, or on the whole tourism sector and on the economy as a
whole. It has also failed to provide sufficient arguments to win me over to the
idea of abandoning my strong objections to any interference with the supply side
of economics. Economic history has shown that the negatives of such policies far
outweigh the positives.We in Malta have done well in clearing out of old
rigidities through gradual liberalisation and privitasation and the creation of
regulators. It has been one long painful transition but liberalisation in Malta
has been a huge success. We have now reached a stage where politicians are all
eager to appear not to interfere with the market mechanism. In the sector I am
most involved with we have striven hard to find solutions to areas of economic
activity were supply was restricted. It is never easy. MHRA should think it over
and over again before recommending restrictive practices in their sector. Lets
now not look backwards.

Are we at the end of the road?

The other
economic argument that I would have liked to see MHRA present is on the demand
side: is MHRA saying that Malta has reached the end of road and that we cannot
attract more than the 1.1 million tourists we are attracting at present? Has
MHRA swallowed, bones and all, the faulty arguments of the tourism-capping
brigade who are so fearful that more tourists will be bad for our health and

The figures do not support MHRA. Present bedstock at 39,000 would
require 1.78 million tourists a year if hotels aim for an idyll 100 per cent
occupancy rate. Should they aspire for a more reasonable 65 per cent occupancy
rate plus an additional five per cent to give them the funds they need for
further upgrading and for re-investment, 1.2 million tourists are enough. Is
MHRA telling us that 1.2 million tourists a year are beyond our reach? I do not
believe it. I am sure people, more expert than I, do not believe it

Should the 45,000 bedstock target based on projects currently in
hand, and assuming also that there is no retreat from existing bedstocks, is
reached, Malta would effectively need 1.35 million tourists a year to hold to
profitable rates of occupancy in the accommodation sector. Should more bedstock
come on stream, than Malta would effectively need around 1.5 million tourists a
year. And it's always a net, rather than a gross absolute increment. Are we
really saying that 1.3 million tourists is bad for us? I do not believe it. And
are we saying that 1.5 million tourists a year is an impossible target? Do we
really want to believe this when we know that this industry is the fastest
growing economic sector in the world?

Let's advertise more and

One needs to remember that there is still much to do in tourism.
There are areas in Malta that deserve tourism development as a reasonable
economic activity that would help raise the standard of living of people in
these areas. There is much more to do in the field of product development. With
more reasonable development and with a rational strategy towards the
environment, there is no reason why we have to adopt defeatist policies that
were the cause of so much economic pain in the past. Lets not convince ourselves
that in terms of tourism we are at the end of the road. We are not.

In my
view the solution to present problems is one and only: we must find more funds
to rapidly increase our marketing efforts. It's sickening how poor our
advertising efforts are compared to the potential of the market. There is
presently no better return to money spent by government than the money spent on
tourism marketing. The answer is simply: make the demand grow and manage better
the supply side, but steer away from restrictions. This after all is in the
essence what a competitive strategy for Malta is all about.

Mr Farrugia
is director general of GRTU, a member of MCESD and a former chairman and chief
executive of NTOM, the predecessor of MTA.


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