Tourism Investment and Regulation Review Final Report Tourism Investment and Regulation Review Final Report Tourism Investment and Regulation Review Final Report 3 August 2011 . L.E.K. C ONSULTING L.E.K. C ONSULTING L EVEL 36, A URORA P LACE L EVEL35, F RESHWATER P LACE 88 P HILLIP S TREET 2 S OUTHBANK B OULEVARD S YDNEY NSW 2000 S OUTHBANK VIC 3006 A USTRALIA A USTRALIA t: 61.2.9323 0700 t: 61.3.9270 8300 f: 61.2.9323 0600 f: 61.3.9270 8350 lek.com lek.com Table of Contents 1. Executive Summary 1 2. Background and Context 5 2.1 Study objectives 5 2.2 Context 6 2.3 Scope of study 9 2.4 Related tourism studies 9 2.5 Government activities relating to tourism 11 2.6 Tourism industry characteristics 12 2.7 Case for regulatory reform 15 2.8 Principles for government reform 18 2.9 Guidelines for recommendation development 18 3. Tourism Investment Barriers 19 3.1 Outcomes of consultations 19 3.2 Key barriers to tourism investment 21 3.3 Assessment of barrier importance by asset class 24 3.4 Identification of areas which may warrant reform 25 4. Reform Recommendations 27 4.1 Planning, development approvals and local development controls 44 4.2 Labour supply 66 4.3 Accommodation supply 70 4.4 Supply in high natural amenity areas 84 4.5 National collaboration 93 5. Impact of Reform 95 5.1 Stylised projects 96 5.2 Cost / benefit impact of recommendations 98 5.3 Impact of additional tourism expenditure on state and national economies 106 5.4 Net community benefit 113 6. Appendix 115 6.1 Consultations and sources 115 6.2 Incentive review 117 6.3 Case studies 119 6.4 Economic modelling supporting evidence 129 1. Executive Summary Over the last decade Australia’s tourism performance and competitiveness has faltered. ABS data show that over the last decade, domestic overnight trips have fallen from 72 million to 64 million (7.8 percent); tourism’s share of capital expenditure has decreased from 3.5 percent to 3.0 percent; and Australia’s share of global international arrivals has declined from 0.69 percent to 0.57 percent (17.3 percent). Yet the importance of tourism and its growth potential in Australia is widely accepted, while the net benefits to the community are well documented. Tourism directly contributes circa $34 billion to GDP and employs over half a million people. Beyond weighty economic statistics it is increasingly understood that tourism offers an important range of benefits in education, environmental sustainability, natural amenity, opportunities in indigenous communities and regions, and provides a sense of place along with national pride. Government policies, regulations and incentives have a significant impact on the tourism sector and can play a key role in encouraging tourism growth. While governments at all levels impact tourism, their focus has been skewed towards promoting the demand side of the sector with the supply side lacking in attention. There is a strong view among industry leaders that investment in tourism supply over the past decade, particularly in accommodation and attractions, has been insufficient to grow the sector. L.E.K. Consulting has been engaged by the Investment and Regulatory Reform Working Group of the Tourism Ministers Council to review the relationship between regulation and investment in the tourism sector. The main objectives of this study are to: • Identify the key regulatory barriers to tourism investment; and • Formulate reform recommendations to lower these barriers, with the aim of increasing investment in an efficient manner. L.E.K. has drawn upon a number of supply side focused studies and consulted with over 80 stakeholders in the industry. This report concentrates principally on two tourism sustaining segments: accommodation and attraction development. The supply side of the tourism industry is highly fragmented, with the majority of tourism operations being small and medium enterprises, resulting in a structure which negatively impacts industry co-ordination. The regulatory footprint on tourism is heavy, broad, and high relative to other sectors and countries. L.E.K. believes that when the industry structure is overlaid with a disproportionate regulatory burden, negatively impacting investment, the case for regulatory reform is very strong. Page 1 Consultations with industry have uncovered three major investment gaps in the tourism sector: • A deficiency in short-term accommodation in metro areas, particularly hotels; • A viable stand alone business case for attractions is difficult to mount; and • Regional areas suffer from a lack of quality accommodation stock. Five core barriers to investment have been identified by L.E.K. through consultation and its own rigorous analysis. 1. Tourism investment produces poor aggregate returns compared with other sectors due to such factors as cyclicality and seasonality, a fragmented value chain, high labour costs in a labour intensive industry, increasing overseas competition and poorer access to financing. 2. A complex range of regulations, including planning and building regulation, labour supply, taxation, liquor licensing, food hygiene and occupational health and safety, is challenging and costly for operators. Planning schemes are particularly challenging for the industry because generally they do not recognise the scope and role of tourism development and tourism is not well understood, resulting in complications at the approval stage along with higher costs. Unintentionally, tourism is disadvantaged by regulations which also, in many cases, were designed before tourism became a significant economic activity. 3. Process requirements can add costs and delays to investment proposals within a complex approvals regime where many councils lack the resources or experience to deal effectively with tourism developments. 4. A lack of commercial sophistication and industry co-ordination leads to the same regulation having a more detrimental impact on tourism than other industries. 5. As a corollary to fragmented sector composition, the industry suffers from a lack of public sector engagement at the highest government levels. When coupled with a paucity of data, information and market understanding on supply side issues, this lack of public sector engagement and vision acts to inhibit the development of tourism. Page 2 L.E.K. has analysed each of these barriers to examine areas where reform may be warranted while discarding areas outside the scope of government to resolve. Five broad areas for reform have been identified. 1. Planning, development approvals and other regulation such as local development controls. Nine related planning framework and development approval reforms are recommended to facilitate tourism investment. If adopted, these recommendations will create a more efficient and effective regulatory framework. Proper consideration of tourism will reduce costs and stimulate investment in tourism accommodation and attractions, both in regional and metro areas. 2. Labour supply. There is a mismatch between labour supply and demand in tourism and the Labour and Skills Working Group. (LSWG), created by the Tourism Ministers’ Council, is examining this problem. It is recommended that an extension of the working holiday visa programs and a review of the 457 visa process be considered by the LSWG. 3. Accommodation supply. The report recommends that investment in short term accommodation supply is supported by mixed use developments with Floor Space Ratio (“FSR”) and other concessions; by the use of state-owned historical buildings and sites; and by capital works deduction incentives. These initiatives will lead to increases in stock especially in metro areas and to increases in accommodation refurbishment particularly in regional areas. 4. Supply of tourism in high natural amenity areas. This report recommends that investment in tourism in high natural amenity areas is supported by broad management objectives for administrators; by schemes for tourism development in National Parks; by review of development approval processes; and by increases in the default lease and license durations. These recommendations approximate the regulatory landscape in New Zealand, commonly regarded as best practice. The desired outcome of these reforms is to achieve a shift to a “partnership” model between National Parks public land administrators and tourism operators (a goal currently targeted by Australia’s National Landscapes program). Increases in sustainable accommodation and experiences in high natural amenity areas will result. There will be improved access for the public. This partnership model should boost environmental education and advocacy and provide increased private funding towards conservation objectives. 5. National collaboration. There is need for enabling mechanisms to develop and implement supply side tourism strategies. Federal and state collaboration on agreed tourism investment priorities, the regulatory reform agenda and a tourism investment knowledge bank is recommended. A dedicated tourism economic modelling capability should be established. Page 3 L.E.K. has carried out independent, pragmatic modelling of the economic impact of the relevant recommendations using data from existing research and analysis, along with case examples. In addition, L.E.K. has developed a set of 15 stylised case studies and in each instance the analysis demonstrates the project would benefit from the reform recommendations, especially in hotels in metro and high natural amenity areas. Bearing in mind the overall objective of reform is to create value for