Wednesday, February 13, 2008

How to Stimulate Tourism in Cambodia

Prime Minister Hun Sen once said that Cambodia ought to develop other industries in order to ease its dependence on the volatile garment and tourist industries. Both are very susceptible to fluctuations caused by economic problems in Cambodia’s export partners or main tourist markets. The recent downturn of 46% of garment exports in the last quarter of 2007 proved him very much on target with his assessment. It would now be time to let actions follow words, to implement a policy for creating a secure base for at least one of those two industries.

But since these industries form the basis for Cambodia’s badly needed foreign exchange, there is not a whole lot the government can do to develop other sectors of the economy in the short run to balance these foreign exchange earners for Cambodia. They can only try to deflect the adverse impacts of foreign economic downturns or even recessions. Again, with the garment sector it will prove difficult to counter a slackening foreign demand.

The picture for the tourist sector, however, is very much different, as it has been shown that especially European tourists, even in the face of economic hardships in their countries, do not like to forgo their annual vacation. Southeast Asia has long been a very attractive market for Europeans, except for the periods of political unrest or instabilities, or natural catastrophes, e.g. the tsunami in Thailand and Indonesia. A look at recent events in Kenya, which is heavily dependent on tourism, is a case in point what political strife can do to this industry.

So first and foremost, political stability is the number one priority in attracting tourists from all over the world. The 1997 power struggle and the 2003 anti-Thai riots were recent events in Cambodia that undid all previous efforts in a budding growth industry. Tourists react instantaneously and choose other destinations nearby. And, tourists are not so much influenced by the form of government or ideologies as both Cuba and Vietnam prove as by a good price/product ratio and an environment with little crime. Cambodia has two formidable rivals in SE Asia when it comes to tourism, one is Thailand, and the other is Vietnam. Thailand can hardly be outdone by Cambodia, and Vietnam might prove difficult since is has many more excellent beaches along its coastline than Cambodia.

Besides its famous Angkor Wat, Cambodia currently seems to emphasize Casino resorts to lure Thai and Vietnamese high-rollers to Cambodia, apparently forgetting that these casinos don’t contribute to the economy overall. The government collected about $18.7 million in 2007 from casinos in taxes, and an undisclosed amount on the land leases. It can’t be too much since in 2007 the budget indicated only$8.5 million revenue for all government land leases. The casinos' profits probably exceeded that by a multiple of that amount. No money lost at the gambling table is ploughed back into the economy.

Normal package tourists, however, not only spend money on room and board but on excursions, restaurants, souvenirs, and last but not least on drinks. On average Western package tourists spend about $2000 (€1500) per capita in their host country including the cost of hotel accommodations. So-called backpackers are an entirely different story though.

Another aspect is length of stay. The minister of tourism stated in January that the average stay per tourist is between 3 and 4 days. They spend about $770 each. This is a far cry from what tourists spend in Thailand and how long they stay.

On researching the possibilities for an investment in the Sihanoukville area this writer’s agent also spoke with the director of the regional airport. This airport can at this time already accommodate jet airplanes up to Boeings 757/767 or the Airbus 330. The airport announced plans to lengthen the runway for 747s and larger airplanes, thinking a bigger airport would automatically attract direct international flights. When negotiating with international airlines, however, the airport management quickly found out that the future for those direct international flights is somewhat far off in view of the lack of a sufficient tourist infrastructure in the area. We learned that the announcement may have been a bit premature and the issue will be revisited in 2009, when new planned projects have at least been started.

Though there is an abundance of hotels they lack international standard with the exception of the three 5-star resort hotels operating there. The rest caters to the economy and local tourists. Besides room and board they don’t have much to offer. Western package tourist expect more, and this is what we are talking about – package tourists, because they are the ones spending the big bucks and leaving them in the country.

Airlines need to operate at an approximately 65% load factor in order to be profitable. Looking at 3 weekly flights of 250 seats each at an average load factor of 65% this will result in 25,350 arrivals per year. In introducing new routes airlines must also look at the airport facilities. Sihanoukville does not offer any technical assistance, ground operations, etc. at this time. Airlines need to have a support system in place to handle their flights. To put this on the ground they will need those 3 flights a week to make it affordable. Besides tourists, Sihanoukville airport will probably see only few other arrivals, such as businesspeople.

This translates into roughly 1,000 hotel rooms required to accommodate those arrivals. Currently there are about 252 rooms or suites in the 5-star category with full amenities, and about 200 rooms in the medium category without much in the way of amenities.

There is talk about another project for 1000 rooms by the Sokha group and just recently a Greek casino operator announced a resort with an undisclosed number of rooms near Ream Beach, but judging from the investment amount of $10 million it is a safe assumption that it will not have more than 50 to 80 rooms. In other words, you are still lacking about 500 rooms for just those 3 flights. But it is as yet unclear when these projects will begin, let alone be completed.

As outlined in another article previously a destination needs have the full complement of hotel categories to be competitive internationally, particularly with Thailand in Cambodia’s case. Ideally, this would roughly break down into 20% 1-2 star, 50 % 3-5 star, and 30% 4 –5 star accommodations. Amenities required include all kinds of beach activity, evening entertainment, and facilities for children.

Cambodia is now a destination for sightseeing tourists, backpackers, and, unfortunately, sex tourists. This needs to change. The goal must be to attract families as package tourists to complement the sightseeing tourists to Angkor Wat. After all, even those 25,000 projected package tourists, once the flights have been started, would spend about an additional $50 million in Cambodia. In comparison to the $1.4 billion spent by the 2 million tourists that came to Cambodia in 2007 this is a rather modest amount. But it would only be the beginning. Eventually, the goal should be to have an equal share of package and sightseeing tourists. The outlook by the World Bank projects the number of tourists at 3 million by the year 2011, so the majority of them should be combination sightseeing/beach resort tourists.

Again in comparison: in 2007 Thailand posted $16.13 billion in revenues from tourism. Each tourist spent $1,135, not including miscellaneous expenses, such as souvenirs, outside restaurants, etc. Thailand, however, is still recovering from the effects of numerous bombings in the South, and the military take-over of the government. One can clearly see what the situation could be like for Cambodia.

Currently there are approximately 100,000 visitors to the beaches in Sihanoukville, although one can sometimes read estimates of up to 200,000. If the majority of the foreign tourists could be converted into package tourists the area would need a lot more upgraded and new hotel rooms than the 1,000, and revenue would rise accordingly. Package tourists would be an addition rather than a replacement for existing tourist arrivals.

But to change this, hotels in the right category must be available. Giving present hotel operators incentives to upgrade their hotels to meet international standards can do this. Some of them have ideal locations in Sihanoukville, especially on Ochheuteal Beach. It would be for the government to encourage the private sector to either build more resort hotels, or convert the existing ones. Those incentives could be a lower tax rate for a number of years, no tax on foodstuffs, combined or collective advertising with the tourism ministry abroad.

There is large number of guesthouses in the $10 to $20 a night category, many of them operated by foreigners that cater to backpackers. Some of them are located right on the beach. Prime locations ought to be reserved for beachfront medium-priced, upscale and high-end properties in order to generate the better revenue for the country. That is not to say they should be evicted, but since they usually rent the premises, the owners of the properties must be encouraged to upgrade as well. As far as tourism goes Cambodia must lose its image as a ‘cheap’ destination, rather it should elevate its image to an ‘affordable’ destination.

Another problem area is the sex tourist business. Since this part of the business cannot never be completely eliminated the local government must nonetheless clean up the city and assign special sections of town, perhaps out of town, to those businesses – the ‘red light district’. Establishments in which prostitution is openly tolerated and conducted only deter family tourists.

In order to avoid inflicting material damage on present owners and small businesspeople those conversion should be done in phases, or by normal attrition, something like the gentrification in inner cities in the developed world.

The emphasis on casinos must be abandoned. Casinos attract a certain clientele, which normally is not in line with the development of regular recreational tourism. The city of Las Vegas started as a pure gambling Mecca before it changed its marketing thrust to encompass families as guests. Why should casinos occupy valuable beachfront land? Casinos can be located at any place in or outside town. People who want to gamble and take in a show will go where the action is, no matter where it is located.

It is vital for the development of a viable tourism industry to attract not only big hotel corporations with luxury properties but also individual and local hotel owners that can give the property a special touch and local ambience. The Sheratons and the Holiday Inns are interchangeable, the medium-sized local resort, in contrast, should preserve its Cambodian character. This segment mostly makes up the 40 – 50 % of the 3-4 star categories. And, being the entrepreneurs whose bottom-line is directly determined by their own management, they will put their maximum effort into marketing and running their property. It is a well-know axiom that private enterprise is always a lot better at promoting businesses than a government ever can.

One big obstacle for the development of the important segment of mid-market properties is the outrageous land prices in Sihanoukville. Although beachfront properties are irreplaceable, and can, therefore, command premium prices, second or third line properties are still priced at around $200 a m2 for smaller lots. Cambodia must get away from its concept of ‘bigger is better’. Yes, the individual land owner, and in essence as such is a speculator, loves the multinationals. They fork over millions of dollars into his pocket in one single drop.

But there are many smaller companies in Europe and North America that would be interested in developing family-style resorts. For them those exorbitant land prices are prohibitive. After all, if the cost of land is $2.0 million, and the cost of the resort itself is $2.0 million, that split of 50/50 in cost makes it unprofitable. In comparison for luxury resorts in the U. S. and the Caribbean land prices make up only 13 – 15 % of the total cost of the resort.

Some regulatory work might be advisable in this respect, in fact is necessary. It might even make good and sensible policy for the government to buy back or expropriate valuable beach front property in the public interest, or offer incentives, such as subsidized or fixed, reasonable prices for land purchases targeted for tourism development, tax exemption for imported furniture, fixtures, and equipment (FFE), tax rebates for vehicles, e. g. minivans, used in the business.

There is plenty of ocean-side land available but it seems to be in the hands of a few select people. These people usually own a large chunk of land they want to sell in one piece. But smaller properties do not need 30 ha or so. They can do with 1, 2, or 3 ha. In fact, many of the smaller Thai resorts occupy less 1 ha (e. g. on Koh Samui). Though Cambodia enjoys a free-market economy where the government should not interfere with the mechanisms of the marketplace, it should nonetheless implement at least some regulations through which the impact of development would benefit the Cambodian people as a whole and not just a few. After all, wouldn’t quite a few jobs be better than having rich people getting richer through originally government-owned land.

The Cambodian embassies abroad should network with local chambers of commerce to publicize Cambodia’s need for foreign tourism investments, targeting small, medium, as well as big business.

Of course, last but not least, access roads need to be built and electrification is just as vital as diesel-powered generators are not really environment friendly and too costly to operate. In general, environmental concerns must be addressed. Solar or wind power should be encouraged with tax breaks or tax moratoria as well as import duty exemptions.

Most of the countryside is still not electrified. This leaves only Sihanoukville as a site for further immediate development, but there is a natural limit imposed by the availability of suitable land.

Once the foundations for a greater number of package tourists have been laid the government needs to create a tourist board that markets Cambodia as a destination in overseas countries. There are many trade shows, from Berlin to Las Vegas, where this can be done very effectively. Representative offices in the main markets to support tour operators and travel agents are another effective tool for this. The Internet offers proven avenues of promoting Cambodia.

Though this catalogue certainly is not all-inclusive with every measure Cambodia’s government should or is able to take, it could be a rough blueprint. It was written by a tourism expert with 20 years of experience in the industry.

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