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Hotel Consulting and Development Group

News

2003-06-03

Several countries have used government intervention as a means of stimulating tourism. The government intervenes through legal measures, either via subsidies, tax incentives or long-term loans.

Government intervention in the rate on development of tourism, a number of measures of legislative character stimulating development of tourist infrastructure, in particular, of hotels is usually undertaken. Thus state bodies and the financial establishments recognize that investments in tourism create new workplaces, and also generate revenues in hard currency. In the majority of the countries is immediately made a decision for the benefit of attraction of the foreign and internal investments and loans by an establishment for them of tax incentives. Among such measures first of all it is possible to quote the following:

- Aid in the allocation of construction sites suitable for hotel and tourism infrastructure development;

- City tourism and state tourism bureaux, which can furnish potential investors with needed market research statistics;

- High investment yields under heavily privileged government conditions and options for reimbursement moratoriums in case of government financial aid,

- State support in urban planning infrastructure development (roads, irrigation, beaches, motorways, sewage).

- Tax and customs exonerations for deliveries of the equipment under the project which is not made in the country.

To other privileges it is possible to underline the absence of the taxes on profit (Estonia, UAE, and harmonisation in the whole taxation (Baltic States. In spite of the fact that the direct financial support of the hotel projects on the part of the state is shown to a minimum, in some countries the tourist infrastructure uses essential privileges of financial character:

- In Turkey hotels- a tourist complex relies on a generous 40 % subsidies from the state, which enables a given hotel facility to establish competitive prices. The tourist zone also provides the option for tourists of using either the local currency or foreign currency such as Euros or Dollars.

- In Israel up to 30 % hotel sector investment yields can be accounted for as direct deductions and tax privileges (under condition of achievement of the certain volumes of attraction of the tourists);

- In Mexico – the tax free zones around of the resorts of Cancun, are created, where US dollars are used in transactions instead of the local currency (the Mexican peso).

- In Spain the plan of increase of competitiveness Spanish tour product has been adopted, where the priority direction allocates reconstruction and modernization of hotels in the major resort areas, development of village tourism in areas without beaches (Valencia), the Baleares and the Canary Islands – Zones that reduces cost not only tourist services (including hotels), but also is reflected in cost of other products, including exoneration of excise tax on luxury items such as cigarettes and petrol. The government invests large sums on development of regional and local infrastructure. In Tenerife for example, proceeds from the tourism boom have in part financed the construction of four-lane motorway and the extension of airport to successfully counter increases in air traffic.

- In Morocco – Muhammad VI proclaimed a decree, to promote and subsidise tourism development projects in the kingdom. This is based on direct government subsidies priority tourism schemes such as entertainment parks, hotels and resorts.

The schemes used to stimulate investment in developing countries are in part engineered to reduce the degree of risk associated with foreign direct investment as well a creating a favourable investment climate for tourism related projects. The synergetic effect of investment promotion schemes include the management of the hotel business in hard currency, creation of jobs, transferring professional savoir-faire to community. Occasionally, Tourism development schemes in some countries require that the architectural appearance of the hotels blend into the local architecture, as evidenced in Morocco, Spain, or Indonesia.

Other government support measures for project investments in the hospitality industry conducive to the creation of a favourable investment climate include:

- Information and consulting help future investors. Correctly to estimate prospects of the project, the investor should have the information hotel market behaviour over several years to better understand the dynamics inherent to the given location. To extract these items of information differently, than from official state sources or at specialized consulting companies, it is not obviously possible.

- Granting governmental subsidies. Under governmental guarantees a number of hotel assets in the countries of CIS, for example, "Shodlik" in Tashkent is constructed. The similar form of co-operation suits the foreign investors and is most widespread in business practice of the countries with a transitional and/or developing economy.

- Development of the legislation protecting interests of the investor. Protection of interests of the investor implies an establishment of tax privileges and guarantees with regard to the distribution of profits.

Certainly, not all of the above listed measures can be used in Moscow, since the policy of the federal authorities now is directed on reduction of tax privileges and refuses to grant any state guarantees to the potential investors. As a whole in a number of regions of Russia, in particular, in Moscow, it would be possible to attract investments in hotel sector on existing conditions, assuming that processing of construction permits is facilitated and becomes more transparent. Before the site has gained clearance of all outstanding legal permits and paperwork, the average time frame for such processing can require up to one year.

In this context it is possible to offer the following measures promoting investments in hotel and tourism development schemes:

- To facilitate the tendering and construction permit documentation

- To reduce the investor obligations to the development of local infrastructure (roads, drains, side-walks, utilities connection etc.

- To consider create a financial incentive in hotel construction by creating long-term low interest loans on 10 to 15 years at an initial rate of 5%, and using the real estate under operation as reimbursement collateral for most perspective objects

- To implement a tax break for the projects under first grade priority (as a delay of payments of the tax on profit for 3 years).

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