THEME LOOK

The Inevitable Road to Sustainable

November 2018

Cem Avcıoğlu | Economic Research

1 This document was produced by Turkiye Sinai Kalkinma Bankasi A.S. (“Industrial Development Bank of ”) (“TSKB”) solely for TSKB Economic Research Department information purposes and for the use of registered broker or dealer, whether the registered broker or dealer is acting as principal for its own account or as agent for others, or a bank acting in a broker or dealer capacity as permitted by U.S.A. law. This document shall Cem Avcıoğlu | [email protected] not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is produced and distributed in the Republic of Turkey. This document does not constitute an offer of, or an invitation by or on behalf of TSKB or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources which TSKB considers to be reliable. No liability or responsibility whatsoever is accepted by TSKB for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. TSKB may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon either on their own account or on behalf of their clients. TSKB may, to the extent permitted by law, act upon or use the above material or the conclusions stated above or the research or analysis on which they are based before the material is published to recipients and from time to time provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this document. Any customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of TSKB. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior consent of Turkiye Sinai Kalkinma Bankasi A.S. This document does not constitute an offer to sell, or an invitation to subscribe for or purchase, any of the offer shares in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law. Persons into whose possession this document comes are required by TSKB and the managers to inform themselves about and to observe any such restrictions. No person has been authorized to give any information or to make any representation except as contained in this publication. In making an investment decision investors must rely on their own examination of the Company and the terms of the offering including the merits and risk involved.

2 Tourism’s contribution to Turkish economy

Developing countries have traditionally depended on raw material exports and a limited number of primary products. Combined with a narrow range of markets and volatility in export prices, this can give rise to difficulties in financing the imported investment goods required for industrialization and repayment of foreign debts. In that regard, Turkey, as with other countries accessing TOURISM natural endowments, prioritized tourism as a tool for socio-economic development starting from the 1980s Food Construction and has achieved rapid growth in terms of volume, value and physical infrastructure since then.

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3 According to calculations carried out by the World Travel and Tourism Council (WTTC), travel and Figure 1: Progress of Turkish Tourism Industry 2003-2017 tourism activities accounted for 3.8% of total gross 45 40 domestic product (GDP) and supported 1.6% of 35 total employment in Turkey. In addition to the direct 30 effects reflecting spending on tourism services like 25 20 accommodation and transportation, tourism creates 15 significant indirect impacts by drawing on inputs from 10 other sectors. The food and beverages, construction, 5 0 furniture, textile and insurance sectors exemplify the 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 channels through which tourism creates value. With Number of visitors (mn) Tourism Income (bn $) the incorporation of indirect and induced effects, the Source: Turkstat, TSKB Economic Research share of tourism in GDP rises to 11.6% and its share in employment reaches 7.4%.1 Figure 2: Role of Tourism in Trade Balance 70%

The sector has grown exponentially over the last 60%

15 years, with tourist arrivals growing from roughly 50%

16.3 million in 2003 to 38.6 million in 2017. Figures 40% provided from the United Nations World Tourism 30%

Organization (UNTWO) indicates that Turkey ranked 20% sixth among the most-visited countries in the world 10% in 2017. Figure 1 and Figure 2 depict the progress 0% of the Turkish tourism sector and its role in current 2003 2005 2007 2009 2011 2013 2015 2017 Tourism Income / Exports Tourism Income / Current Deficit balance. Source: Turkstat, CBRT, TSKB Economic Research

1 WTTC (2018). Travel & Tourism Economic Impact 2018 Turkey

4 A good performance, yet fragile

The Turkish tourism sector has witnessed downside volatility in particular periods due to the country’s geographical proximity to some conflict zones and security issues associated with it. However, Turkey’s firmly established industry has managed to cope with negative externalities so far, and any impact on tourism has appeared to be temporary. On the other hand, some aspects of tourism in Turkey could yet turn into serious threats to competitiveness, placing the viability of the sector at risk. The Travel and Tourism Competitiveness Report published by World Economic Forum (WEF) helps us gain a clear picture of the shortcomings in the Turkish tourism sector. The 2017 edition of the report features the Travel & Tourism Competitiveness Index, which benchmarks 136 countries according to their performance in 14 different pillars. Having been ranked 44th in the index, Turkey falls far short of the position implied by its status as one of the world’s top tourist destinations. Figure 3 shows Turkey’s ranking and score in each individual pillar.

The areas in which Turkey’s tourism industry performs weakly are closely linked to the concept of sustainable tourism. According to UNWTO, sustainable tourism can be defined as "tourism that takes a full account of its current and future economic, social and environmental impacts, addressing the needs of visitors, the industry, the environment and host communities.2 Throughout the remainder of our study, we will reveal some characteristics of the Turkish tourism sector and explain how they contradict the concept of sustainable tourism and pose an obstacle to tourism sector’s function as an enabler of inclusive and sustainable growth.

Figure 3: Turkey's Performance in Competitiveness Pillars 125 5,43 6

100 4,86 4,74 4,74 4,49 5 4,26 4,32 4,31 4,05 4,10 75 3,86 3,68 3,54 4 50 2,98 25 3

0 2 ICT readiness Natural resources Safety and security Health and hygiene Price competitiveness Price Business environment International openness Air transport infrastructure Environmental sustainability Environmental Tourist service infrastructure Ground and portinfrastructure Prioritization of travel & & tourism travel of Prioritization Human resources and labour market labour and resources Human Cultural resources and business travel business and resources Cultural Ranki ng Score on a scale of 1 to 7 (1 low - 7 high, right axis) Source: WEF, TSKB Economic Research

2 UNWTO, Retrieved October 2018 from http://sdt.unwto.org/content/about-us-5

5 A good performance, yet fragile

Turkey’s main tourism product is sun-sea-sand-based mass tourism, with large-scale facilities located in coastal areas. The sector’s existence is highly dependent on the ‘Turquoise Coast’ located in the southwestern segment of the Anatolian peninsula. The coast is well-known for some of its destinations such as İzmir, Aydın, Muğla and and welcomes more than 20 million visitors each year. In 2017, the coast accounted for 62% of the overnight stays in Turkey. Figure 4 details the regional distribution of tourism activities in Turkey.

In some developed economies, recycling awareness is extremely high where people are more careful to seperate their waste, whereas in some other countries - including Turkey - recycling behavior is comparatively undeveloped. Factors encouraging recycling, cross-culture differences among societies and socioeconomic factors including education and legal regulations, should be better understood in order to better assess the situation.

Along with fishing, tourism is one of the main economic sectors in the Mediterranean to have been negatively impacted by pollution while also contributing to the problem. In Turkey’s case, the development of large-scale tourism projects in coastal areas has gathered momentum, spurred on by the low taxes, free land assignments and credits brought by the Tourism Incentive Act in 1982. This period has seen the rise of tourism as a vital sector, the exploitation of new areas and heavy tourism construction. The two immediate effects of new tourism developments were deforestation and increased land prices. The latter resulted in the local community gradually giving up their agricultural activities.3

Figure 4: Regional Distribution of Overnight Stays in Accommodations (2017)

Antalya: 48.3% | : 15.0% | Aegean Coast: 13.7% | Others: 23.0%

Source: Ministry of Culture and Tourism, TSKB Economic Research

The – the “Poster Boy” for mass tourism

The democratization of information led by advances in information technologies in the last two decades has not only led to more intense competition among destinations and suppliers (hotels, tour operators and airlines), but also reshaped demand. A “new tourist”, who is more sensitive to environmental and social issues, has emerged amidst global concerns over climate change and cultural diversity.

The new tourist seeks to satisfy the needs beyond basic ones like accommodation and services. In order to attract these tourists, an increasing number of destinations concentrate on developing a broad range of leisure and recreation opportunities, which allow travelers to be immersed in local nature, culture, heritage and routines.

3 Atik, M. Et al. (2009). Land Use Changes in Relation to Coastal Tourism Developments in Turkish Mediterranean

6 Another negative effect of coastal development is observed in marine biodiversity and ecosystems. Over 200 million tourists (around 20% of global international arrivals) visit the Mediterranean each year and studies conducted in the area suggest that 40% to 50% of the land-based litter in the region is generated from recreational/tourism activities.⁴ According to the United Nations Environment Programme (UNEP), the Mediterranean contains 7% of the worldwide total of micro-plastics, despite accounting for only 1% of the Earth’s water surface. Turkey leads the ranking of polluting countries at 144 tons per day and is responsible for 20% of the total amount of waste generated by the region. Figure 5 shows amount of waste produced by each Mediterranean country.

Figure 5: Plastic Waste Littered by Mediterranean Countries (tons/day)

144 126

90 77 66 47 39 39 25 21 13 12 8 7 4 4 3 2 2 1 1 BIH Syria Gaza Egypt Malta Turkey Alger ia Cr oatia Albania Tunusia Slovenia Montenegro

Source: UNEP, TSKB Economic Research

The success of the Turkish tourism sector rests on the quality of its natural and cultural resources. One of the tools to mitigate the negative effects of mass tourism is the Green Star Certificate, which entered into force in 2008. The certificate encourages enterprises to undertake investments in energy, water and material efficiency, waste management, renewable energy and a sustainable landscape through economic incentives, ensuring that the energy expenses of Green Star certified hotels are paid partly by the government. Today, eco-friendly enterprises form around 31% of the total bed capacity (Figure 6). Considering that these investments contribute to the long-term viability of the tourism business in both financial and environmental aspects, it is clear that there is still room for improvement. However, in addition to the alterative measures, Turkey must pursue alternatives to mass tourism and geographical diversification in order to obtain the whole gamut of economic benefits that tourism may offer. Figure 6: Environmental Friendly Accomodation Enterprises in Turkey (October 2018)

500.000 50% 450.000 45% 400.000 40% 350.000 35% 300.000 30% 250.000 25% 200.000 20% 150.000 15% 100.000 10% 50.000 5% 0 0% Antalya İstanbul Aegean Coast Rest of Tu rkey

Bed Capacity in Total Bed Capacity in Certified Enterprises Ratio (right axis)

Source: Ministry of Culture and Tourism, TSKB Economic Research

⁴ UNEP (2015). Marine Letter Assessment in the Mediterranean

7 Overtourism, rebellious tourists, rebellious locals

Global tourism activity has been growing steadily for decades, and we now see phrases like “overtourism” entering the popular lexicon. Pointing to the “diminishing quality of life for local residents due to tourism”, the term was coined in 2012, but very quickly went on to attract the attention of international media in response to the developments in popular European cities like Barcelona, Rome, Venice and Dubrovnik. In this regard, a new understanding of tourism considering the creation of places for people not only to visit, but also to live, has started to gain a foothold.

8 Current business models offer way into the regional Turkish economy, with even less reaching the immediate local area.⁶ The figure only a limited contribution to local is in line with UNEP’s estimation that in all-inclusive economies package tours, 80% of travelers’ expenditures go to airlines, hotels, and other international companies, In Turkey, all-inclusive package tours have been and not to local businesses or workers. On the other the fastest growing segment of mass tourism. All- hand, the Turkish tourism sector owes its growth inclusive packages include flights, airport transfers, in foreign tourist arrivals mostly to collaboration accommodation and unlimited food and beverage with international tour operators and the model of services in large-scale resorts. In this system, tourists mass tourism. Figure 7 depicts the change in the make upfront payment and mitigate the risk of composition of facilities in recent years. exceeding their holiday budget. In that regard, the system provides convenience and value for money.⁵ Figure 7: Distribution of Bed Capacity by Facility Types Since the tourists enjoy access to most of their requirements, they have almost no incentive to take 2017 part in activities outside the facility they are staying in. In addition to this, in countries like Turkey, Morocco 2012 and Tunisia, where mass tourism is the main driver of the industry, tour operators put pressure on hotels to 46% 50% provide low-cost options as a result of their business models that dictate small margins per visitor and high volumes. Leakage caused by international tour operators is one of the main elements of reduced trickle-down effect on local economies. According to a research study conducted by Tourism Concern, 5 Star Hotels and Resorts Other Facilities a UK-based charity campaigning for ethical and Source: Ministry of Culture and Tourism sustainable travel across the globe, only 10% of tourist spending from all-inclusive holidays finds its

5 Tourism Concern (2015). The Perceived Impacts of All-Inclusive Package Holidays on Host Destinations 6 Tourism Concern, Retrieved October 2018 from https://www.tourismconcern.org.uk/campaign/all-inclusives/

9 Tourism behind labor market of workers. For enterprises, losing these workers mean high turnover, inconsistency in service fluctuations quality and reduced customer satisfaction. In that regard, current structure of the sector brings not Another structural bottleneck to sustainable only reduced income through tourism but also growth through tourism is seen in the labor market. a competitive disadvantage. The fluctuation in Tourism is more labor-intensive than most of the tourism employment is shown in Figure 8. non-agricultural sectors and uses a relatively high proportion of low-skilled labor. For that reason, tourism is an important source of employment Focus: A new business model for disadvantaged people in rural areas and it has «The all-exclusive system» potential to reduce migration to urban areas. Sun- sea-sand based mass tourism in Turkey hinders the As mass tourism slowly shifts to independent tourism, sector’s economic contribution in two ways. interest in types of niche tourism has been increasing. This includes rural tourism, ecotourism and adventure holidays to name but a few. The number of enterprises Despite the efforts to attract tourists during the marketing these themes is growing by the day and high season using special pricing offers, the this new trend in tourist preferences are giving rise to tourism season in Turkey is concentrated in the unique business models such as all-exclusive hotels. June-August period. In order to meet swelling The all-exclusive system uses an unbundled pricing in demand, employees are commonly offered short- all services provided to visitors, including water and term contracts or are forced to work informally. At electricity. Thus, it limits energy and material waste by the end of the high season these workers apply promoting minimal usage of resources. Initiatives such for jobs in other sectors. This causes loss of skill, as all-exclusive hotels form the environmental aspect experience and career opportunities on behalf of responsible tourism.

Figure 8: Employment in Tourism throughout the Year (2017) Does sustainability actually pay off? 400.000 3,0% 350.000 2,5% 300.000 Financial feasibility is an emerging and important 250.000 2,0% theme within the growing body of literature on 200.000 1,5% sustainable tourism. The results obtained from recent 150.000 1,0% 100.000 research studies suggest that the tourist segments 0,5% 50.000 with a higher understanding of sustainability can form 0 0,0% a market in which destinations can benefit. Table 1 summarizes the results of studies providing evidence

Insured Workers in Accomodation Sector Share in Total (right axis) from this standpoint.

Source: Social Security Institution, TSKB Economic Research

Table 1 Author Period Country Results

* The tourist segment with high levels of "sustainable intelligence" is willing to pay more to visit a Pulido-Fernández & López- more sustainable tourism destination 2013 Spain Sánchez (2016) * 27% of the respondents states willingness to pay extra if the destination's commitment to sustainability would increase the price * Although sustainable tourists do not spend significantly more money per day or have longer lengths of stay than less-sustainable counterparts, the overall impact of their combined differences Nickerson, Jorgenson & Boley 2009, 2011 USA is significantly different. (2016) * Marketing to sustainable tourist segment is beneficial to the environment, socio-cultural features and the economic aspects of a destination Moeller, Dolnicar & Leisch 2007 Australia * Tourists with lower environmental footprints have higher individual expenditures (2011)

10 Concluding remarks

All in all, the global tourism market is constantly growing and competition from rival countries is getting tougher, particularly in the Mediterranean region. The economies in the region have a high level of dependence on tourism income, which relies on natural resources. Although alternatives to mass tourism have emerged, demand for this model is set to continue for the foreseeable future. Turkey’s new economic program for the 2019-2021 period attaches tremendous importance to tourism. The program seeks to diversify tourism products and source markets, while lengthening the tourism season.

We believe that Turkey’s efforts in sustainable tourism should be used in both alterative and innovative ways as set out below:

i) Geographical diversification of tourism should be encouraged in order to reduce environmental pressure on southwestern coasts and to spread the economic and social benefits of tourism across the country ii) Investment in existing facilities in the energy, water and material efficiency, waste management, renewable energy and sustainable landscape sectors should be supported, especially in large cities and environmentally vulnerable regions iii) Enterprises that are open and offer employment throughout the full year should be encouraged iv) Enterprises that source locally or which plan to establish links with local businesses should be supported

11 Table 2 depicts that advances in sustainable tourism would provide wide-ranging projected benefits in terms of economic growth, rural development, job markets and the tourism industry. Furthermore, in line with the fact that travel and tourism has a role to play in each of the 17 Sustainable Development Goals, sustainable tourism efforts in Turkey would further contribute to six of these goals.

Table 2 Author Projected Benefits Through Sustainable Tourism Related SDGs

Viability and stability of tourism sector Higher tourism revenues through access to niche markets Economic Growth Protection of natural resources and economic activities related to them Reduced pressure on infrastructure and transport system

Reduced economic leakage, higher trickle-down effect Local Economies Job generation in rural areas Increase in production through local procurement

Job consistency Employees Lower working hours, increased job satisfaction Training and career opportunities

Tourism Industry Stability of service quality thanks to limited loss of skill Lower training costs Reduced operating costs with the use of efficiency systems Limited amortization and structural costs arising from high seasonality

12 Economic Research Department [email protected]

Meclisi Mebusan Cad. No: 81 Fındıklı İstanbul 34427, Türkiye T: +90 (212) 334 5041 F: +90 (212) 334 5234 234

This document was produced by Turkiye Sinai Kalkinma Bankasi A.S. (“Industrial Development Bank of Turkey”) (“TSKB”) solely for information purposes and for the use of registered broker or dealer, whether the registered broker or dealer is acting as principal for its own account or as agent for others, or a bank acting in a broker or dealer capacity as permitted by U.S.A. law. This document shall not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is produced and distributed in the Republic of Turkey. This document does not constitute an offer of, or an invitation by or on behalf of TSKB or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources which TSKB considers to be reliable. No liability or responsibility whatsoever is accepted by TSKB for the accu- racy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. TSKB may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon either on their own account or on behalf of their clients. TSKB may, to the extent permitted by law, act upon or use the above material or the conclusions stated above or the research or analysis on which they are based before the material is published to recipients and from time to time provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this document.

Any customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of TSKB. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, me- chanical, photocopying, recording, or otherwise, without the prior consent of Turkiye Sinai Kalkinma Bankasi A.S.

This document does not constitute an offer to sell, or an invitation to subscribe for or purchase, any of the offer shares in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law. Persons into whose possession this document comes are required by TSKB and the managers to inform themselves about and to observe any such restrictions. No person has been authorized to give any information or to make any representation except as contained in this publication.

In making an investment decision investors must rely on their own examination of the Company and the terms of the offering including the merits and risk involved.

13 Economic Research Department [email protected]

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