Sustaining Canada’s tourism sector through COVID-19 Analysis and options March 27, 2020 Draft discussion document 24th August 2018 Last Modified 2020-04-14 2:35 PM Eastern Standard Time Printed Context Last ModifiedLast 2020 McKinsey & Company provided fact-based research and analysis to support the development of the findings presented in this report, in collaboration with Destination Canada - 04 - 14 Eastern 2:35 Standard PM Time The situation around COVID-19 is highly dynamic, evolving rapidly, and subject to significant uncertainty, a lack of reliable information and other events completely beyond McKinsey or Destination Canada’s control. McKinsey’s services are being provided on an expedited basis and may not have the benefit of certain detailed analyses in performing the services. This document does not constitute legal, medical, accounting, tax, or other regulated advice, such as professional advice normally provided by licensed or certified practitioners This analysis is intended to complement two other elements of Destination Canada’s response Printed to COVID-19 that are under development in parallel: . An overall economic impact assessment of COVID-19 on Canadian tourism by Tourism Economics; and Analysis and and Analysis options presented here are 27, as2020 current of March . Destination Canada’s Phased Approach to Recovery Analysis and options presented here are current as of March 27, 2020 2 Executive summary As a result of COVID-19, and even with the benefit of government supports for businesses announced up to and including March 27th, 61,000 tourism businesses (57% of total) are projected to fail within the next 60 days, and 1.66 million tourism sector employees could be laid off (~83% of total). Pre-COVID-19, tourism was Canada’s 5th-largest sector, responsible for 10% of Canadians’ jobs and 2% of GDP The tourism sector is unlikely to quickly “bounce back” once the pandemic has ended. The disease has struck on the cusp of the busy summer season (June-August) that is ModifiedLast 2020 responsible for 36% of the tourism sector’s annual revenues and all of most tourism businesses’ profits. Should progression of the pandemic and consequent emergency orders continue past the July 1 holiday weekend, it is unlikely that tourism businesses will be able to profitably restart before the end of the summer season. Therefore, businesses that survive the next 60 days will likely struggle to remain viable over the next 12-14 months until the 2021 summer season begins - 04 - A two-stage approach to government intervention could address these structural issues, while positioning the sector for a rebound: 14 Eastern 2:35 Standard PM Time Stage 1: A sector-specific federal government intervention package worth ~$15B would sustain 51,000 businesses (60% of those that would otherwise fail if there is no Sustain summer season). At the low end, in the event of no summer season, support of $7B is projected to be sufficient to preserve ~18,000 businesses and ~87,000 jobs the tourism (respectively 21% of businesses and 22% of jobs that would otherwise disappear). At the high end, support of $20B is projected to be sufficient to preserve ~75,000 sector businesses and ~294,000 jobs (respectively 87% of businesses and 72% of jobs that would otherwise disappear). In order to quickly get funding to the tourism sector, and in order to ensure that it has the greatest benefit, an intervention package worth $15B could be composed of: ▪ $5.6B in loans and loan guarantees and a 10% wage subsidy for large businesses that act as “anchor tenants” for major tourism centres ▪ $3B in direct cash injections and loans for medium-sized businesses ▪ $6.2B in direct cash injections for small businesses The Government could also consider support for workers and communities, such as: ▪ Extended Employment Insurance benefits and training supports for laid-off tourism workers Printed ▪ Grants to communities and Indigenous communities that are particularly dependent on tourism Stage 2: A second phase of support (not costed) after the immediate threat of a pandemic has ended will be necessary to sustain and restart, or even rebuild, the tourism Prepare sector, once it is safe for tourism sector employees to return to work. In particular, anticipated reductions in visitor volumes could present an opportune time for for recovery infrastructure upgrades and upskilling programs. Canada’s entire tourism sector (businesses, workers, whole communities) could be seriously depleted, with critical gaps in the value chain, that will require substantial new investment to enable recovery. Analysis and and Analysis options presented here are 27, as2020 current of March Existing and recently announced support programs are unlikely to meet the needs of the tourism sector: ▪ The 3-month 75% wage subsidy does not help tourism companies which are unlikely to yet have had seasonal workers on their payroll; it also does not help tourism companies with the 60- 65% of their expenses that are non-labour, and which are relatively fixed (such as utilities and rent/mortgages) ▪ Deferrals of GST/HST payments are not helpful when tourism operators are not generating any revenue on which they could pay tax ▪ The Small and Medium-Sized Enterprise Loan Guarantee program for $40B in funding through BDC and EDC is unlikely to be helpful to most tourism businesses, which have limited cash flow to support additional debt; also, in most cases, BDC and commercial lenders do not lend to tourism businesses because of their seasonal cashflows ▪ Canada Emergency Business Account offering $25B in interest-free loans is similarly unlikely to be helpful to tourism businesses because of their limited cash flow to pay debt 3 There are two phases for support that the tourism industry will likely require 1 2 Last ModifiedLast 2020 Stage 1: Sustain the tourism sector Stage 2: Prepare for recovery Estimated cost ~$15 billion to sustain ~60% of businesses projected to run out of cash in Not estimated – depends on duration of public health measures and desired - 04 - the event of no summer season scale of impact 14 Eastern 2:35 Standard PM Time Description Provide support to the tourism sector that addresses gaps in eligibility, Position the industry for a rebound and future growth by using the slowdown in amount and duration of already announced measures that are accessible to activity for long-term investments that would not otherwise be possible all businesses Replenish gaps in supply that emerge as a result of insolvencies Keep Canada top-of-mind as a place to visit while public health measures are in place, and reintroduce marketing ahead of demand returning Potential Small Direct cash transfer to businesses ranging from $5-75K Marketing promotions to keep Canada top-of-mind as a destination, and to measures businesses per business depending on the duration of the pandemic encourage travel once it is safe to do so Printed Medium Total $ per business ranging from $50-700K depending on Temporary reductions in fees and taxes on travel (e.g., visa applications, businesses the scenario split out as: airport fees) . Cheque issued to business = 75% . New credit = 15% Backstop travel and health insurance to improve availability and . Re-finance debt = 10% accessibility Large Loan as a share of revenue for businesses ranging from Training and upskilling to improve the knowledge and skills of employees in Analysis and and Analysis options presented here are 27, as2020 current of March businesses 5-25% the tourism sector Employees Expanded availability of support programs to workers in Community projects to sustain employment in communities dependent on the tourism sector who would not otherwise qualify tourism, and prepare them for the return of tourists Communities Grants to communities hard-hit by the pandemic Infrastructure and tourism product investments to improve tourism Indigenous Grants to communities hard-hit by the pandemic experiences once travel does resume communities 4 Scope of this analysis Scope Pages Potential Identify a range of potential stimulus levers that can be used to support the Canadian tourism 50-60 Last ModifiedLast 2020 stimulus sector, based on past government stimulus packages (in Canada and in other developed countries) levers in response to other disease outbreaks (e.g., SARS, MERS, H1N1) and economic downturns (e.g., 2001, 2008-2009). This would include identifying levers that: - 04 - – have the most immediate stimulant effect (and which thus would be best for supporting the 51 14 Eastern 2:35 Standard PM Time summer season); and – would best support small- and medium-sized tourism operators, who are likely not as well- 22-23 positioned to weather a downturn as larger operators Potential Develop a range of potential response packages that the government could pursue, depending 32-39 response on the amount of stimulus available. packages These recommendations would include: – identifying which stimulus levers would be most effective, given the amount of stimulus; 33-36 Printed – projecting the impact of these packages in terms of revenue, tax receipts and employment; and 33-36 – proposing a range of potential levers that can be used to support the Canadian tourism sector, 4 including sequencing and timing for components of each package Response Assess the response to coronavirus of jurisdictions competing with Canada for foreign 86-90 from other visitors, and identify what Canada would need to do to effectively compete with those jurisdictions jurisdictions (e.g., level of marketing,