Tourism Equity Fund a welcome step but it’s no silver bullet for transformation
Until now most of the government’s grants and support schemes have targeted manufacturing sectors
The R1.2bn Tourism Equity Fund (TEF), which was recently launched by the government in collaboration with SA’s major banks, is not a silver bullet that will transform the sector overnight, but it is a step in the right direction.
Globally and in SA the tourism sector was among the first and worst-hit sectors when the Covid pandemic struck, due to travel restrictions, curfew and capacity limitations that come with lockdowns. The sector may also be among the last to fully recover when restrictions are finally lifted.
Considering that before Covid the tourism sector contributed 8.6% of SA’s R5-trillion GDP, or R430bn, R1.2bn pales into insignificance. Using the benchmark of the BEE Codes of Good Practice and the Tourism Sector Charter, which aims for 30% ownership of the sector, the amount feels inadequate too. But used correctly and targeted at the correct segments of the industry, the fund could help many players survive the short-term effects of Covid and transform the sector in the long term.
The TEF is to be welcomed because most of the government’s grants and support schemes have targeted manufacturing sectors, with little or no support for service-based economic sectors. This anomaly exists though the services-based sectors are job intensive.
The tourism sector is not a beneficiary of the department of trade, industry & competition’s Black Industrialist Scheme in its current form, as the beneficiaries of that scheme are required to be involved in the manufacturing sector of the economy, as outlined in the Industrial Policy Action Plan.
In leaving the services-based sectors out of grant funding schemes, the government in effect left out many previously disadvantaged players who could participate in the tourism sector. As SA maps out its recovery from the pandemic it should use the opportunity to bring previously disadvantaged players into the various sectors of the economy, including tourism.
One of the main barriers to entry in hotel development is funding. Funding tourism investments requires a substantial equity contribution, a minimum of 40% unencumbered cash and assets. A standard 100-room hotel, for instance, costs about R150m, which equates to an upfront unencumbered cash contribution of R60m before accessing debt finance. How many black entrepreneurs have that amount of money available to invest in a new hotel development?
Without the support of schemes such as the TEF, transformation of the tourism sector in line with the National Tourism Sector Strategy and the amended tourism broad-based BEE (B-BBEE) sector code is proving difficult to achieve. The rollout of the TEF means black entrepreneurs can play a meaningful role in owning the real assets in the tourism and leisure sector of the economy.
The optimum financial model for funding a tourism asset such as a hotel development is an appropriate funding mix of a minimum of 60:40 debt to equity ratio. Thus, if the R1.2bn is leveraged to the maximum of 60%, the available funding pool will be R3bn, which can be distributed among black entrepreneurs so they can own productive assets.
This is the right time to develop new products that will be ready to trade in the next 18-24 months, as we believe the worst of the pandemic will be behind us when they are ready to start trading. This is also the perfect time to consolidate and acquire reasonably priced assets that have become available at a discount. Financial support such as the TEF can help black entrepreneurs acquire these assets.
Advancing empowerment in the broader economy and tourism sector will require an unequivocal commitment by the government and the private sector, including new, more ambitious targets. We do not have this sense now.
Advancing empowerment will also require access to a bigger pool of concessionary funding, grant funding and participation of development finance institutions to structure their funding models to suit the typical cash flows of hotels. Traditional asset finance products, often referred to as vanilla products, are unsuitable to attract black participants in the tourism industry.
A newly built hotel, for example, normally takes three years to start generating positive cash flows. If such a development is funded by a vanilla asset finance/loan, the initial losses will require a capital and interest repayment moratorium for at least 18-24 months. Most financial institutions require loan repayments before the hotel can start generating revenue from paying guests. Financial institutions will need to be more innovative and flexible to allow new entrants into the tourism market.
The tourism sector clearly requires a stimulus package, as does the rest of the economy. Hotels have high fixed monthly costs and had no revenue to cover these during lockdowns. Upon restart of operations revenues may take time to sufficiently cover costs as most of the properties will have a slow ramp-up to pre-Covid trading statistics.
Hotels, which were facing disruption even before the pandemic, have to offer something special and authentic. In recent times hotel models have been turned upside down — selling a bed and serving breakfast is no longer a successful operating model in the new normal. Guests are now only prepared to spend their money for long-lasting authentic experiences to play, dine, meet and socialise in a safe environment.
The long-term recovery of the tourism industry depends on how long it takes to roll out the Covid-19 vaccines globally to achieve effective immunity so travel restrictions can be lifted and borders opened. This is likely to happen first in developed economies, expected in the first quarter of 2022, and then in middle-income, emerging-market popular tourism destinations such as Thailand and South East Asia, the South American countries, and SA.
This is why it is important for the SA government to get the vaccine procurement and rollout programme right. In the short term we will have to rely on health and safety protocols and Covid testing.
The tourism sector is one of the most important sectors in terms of contribution to GDP, employment and foreign income, and is therefore vital to SA’s economic recovery.
• Letjane is MD of property development and management company Akani Properties.
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