The tourism sector and the resource boom – the situation is bad now, without a plan it will only get worse

Competitiveness in tourism is defined as the ability of a destination to optimize its attractiveness for residents and non-residents, to deliver quality, innovative, and attractive tourism services to consumers (i.e. providing value for money) and to gain market share in domestic and global markets.

The report begins with an analysis of the current situation of tourism in the country, looking at three key value chains – business, island, and coastal or beach tourism. The report finds that Mozambique is a highly uncompetitive tourism destination in most of its leisure tourism value chains. Of all tourist arrivals to Mozambique in 2013, the majority (55%) are either for business purposes or for visiting friends and relatives (VFR).  While these segments  have always dominated the Mozambican tourism industry, the influx of foreign investment into the oil & gas and mining sectors positions these segments to be unique beneficiaries of the current extractive boom. Despite this, the tourism industry is unbalanced and uncompetitive and is characterized by the following:

• Stagnation of the leisure tourism market and growth in the business and VFR segments, with a concomitant shift in private sector tourism investment (i.e. from resorts to business hotels and facilities.);
• Main leisure tourism product (island tourism) is sold primarily as a complement to the tourism products in South Africa, Botswana, and Namibia, which do not have a comparative product;
• Predominance of regional visitors, particularly from South Africa, who represent approximately 45% of the total market. This makes the Mozambican tourism industry highly vulnerable to economic and political shocks in the region;

The most comprehensive data on tourism competitiveness is the World Economic Forum’s (WEF) Travel and Tourism Competitiveness Report.  The most recent edition of the WEF Report ranked Mozambique 125th out of 140 countries, behind Tanzania, Namibia, Malawi and Zimbabwe.  In eleven of the fourteen indicators of competitiveness used by the WEF, Mozambique ranks below the 50th percentile for all countries.  Each of these indicators represents a potential constraint to improved competitiveness, meaning that Mozambican firms suffer hindrances throughout the business enabling environment. When taken as a whole, these constraints result in increased operational costs, diminished revenue and thus reduce profitability, and determine whether a firm is able to remain in the market.

Quantitative evidence of the effect of constraints at the firm-level does not exist for Mozambique and is essential to a profound debate about how to prioritize policy reform for the sector. The report SPEED is currently developing seeks to address this gap.

Based on the research undertaken the team established baseline values which give a sense of the magnitude of the cost to firms of the current business enabling environment.  33.2% of the industry’s total operating costs are due to competitiveness constraints.  1.34 billion MZN in profit was not realized due to the adverse effects of these constraints.  22 constraints were identified during the research and plotted into a model which will be used for developing scenarios which will consider the potential effects of Dutch disease (typified by exchange rate appreciation and increased labor costs). Constraints included: visa costs and complexity; cost and unreliability of air travel; transaction and inventory holding costs; taxes and duties; sector marketing; costs of supplying electricity and clean water; land use rights; road infrastructure; availability, quality and capacity of local suppliers; safety and security; harassment of tourists from point of entry onwards. Therefore even before factoring in the effects of currency appreciation, the industry is already in precarious financial health and barely achieving operating profitability.  Industry revenue net of operating costs and taxes is only 0.11% of annual revenues, implying that the inclusion of capital and investment costs would likely reduce this margin to zero.

Competitiveness constraints translate into additional costs for sector firms. From a firm perspective, every additional step to secure property rights, provide clean water, and ensure the safety of its customers translates into higher costs of doing business.

Competitiveness constraints translate into opportunity costs for sector firms. Enabling environment constraints have a significant impact on firms’ abilities to service as many customers as possible.  The volume of business forgone due to these constraints represents an opportunity cost to firms who in an ideal business enabling environment would have chosen to transact that business.

Based on the model, Scenario A was developed which envisages no change in the tourism industry’s competitive situation and applies the 4% real appreciation of the Metical as forecast by the IMF.  Predictably this affects the industry through three financial channels: revenue, operating costs, and taxes.  The net effect of appreciation is to push the industry as a whole into the red (from a 1,850,308 MZN profit to 23,920,345 MZN loss).  This implies that currency appreciation as a result of the onset of Dutch Disease would result in tourism firms either leaving the formal sector or exiting the market completely.  Larger firms that are able to more easily bear the costs of competitiveness constraints would remain and the number of competing firms in the market would decrease. This would increase the possibility of anticompetitive behavior among the surviving firms and harm foreign and domestic consumers. Thus, the tourism industry would become profoundly uncompetitive, small, and inefficient.  It would not serve as a source of future employment for Mozambicans and would be a diminishing contributor to the country’s GDP growth.

Two other scenarios will be developed in collaboration with CTA to understand the mitigating impact of removing some of the identified enabling environment constraints. The preliminary results of these scenarios will be presented at the workshop organized by SPEED on September 18, 2014.   It is expected that a discussion will follow to find mechanisms to push for policy reform that could secure a bright future for the industry in the face of the natural resource boom.