A bolt from the blue | George Micallef

For the Malta Hotels and Restaurant Association, the hike in VAT on hotel accommodation from 5% to 7% was a bolt from the blue. One of the main bones of contention was that most hotels have already signed contracts with tour operators on prices and charges for next year, and even for 2012.

Since tour operators account for 60% of hotel business, MHRA president George Micallef estimates that this will cost as much as €3.6 million.

A few hours before our interview, the MHRA president was still engaged in talks during which government expressed a willingness to “consider a transition period” on the new VAT rate in view of the signed agreements with tour operators.

Although the MHRA has agreed to pass information on to the Malta Tourism Authority (MTA) regarding price agreements reached with tour operators for the coming seasons, Micallef is far from satisfied.

“We will see what the consequences of this VAT increase will be a year from now… We hope that we are wrong,” he says in a laconic tone. “Our market is very much price-driven. We cannot simply increase the rate by 2%... source markets like the UK, Italy and Germany have their own problems caused by the international recession which makes them price conscious.”

The MTA’s budget for 2011 has been an increased to a ‘record’ €35 million, although the noticeable increase is for route development, from €2 million to €4.5 million. Most of this investment goes in the opening of new routes by low cost airlines like Ryanair, a move the MHRA had been lobbying for a long time. Will not this investment benefit hoteliers, and why shouldn’t they be willing to give something back in return?

Micallef qualifies the impression being given that the government is spending more money. “The government intends to spend €35 million next year, which is exactly what we have spent this year… so there is no increase.”

What happened was that the budget earmarked for 2010 was €31 million, but this was increased by another €4 million, mainly as a result of investment in new routes. Micallef says that the government has retained the same spend (of €35 million) for 2011.

Micallef recognises that this investment has had very positive results for the industry as a whole, but he puts the increase in spending within a context. “Last year we were experiencing an unprecedented recession… it was obvious that we had to invest more money”.

Added to the difficult international situation, the hotel sector was also burdened by what Micallef describes as an “astronomical” increase in utility tariffs which have ate into the profitability of the hotel business. “In the absence of the increase in tourism we had this year, a lot of hotels would have simply closed down.”

He cites Eurostat figures showing that Maltese hoteliers register the lowest profitability rates among their competitors, and disagrees with the notion that investment in tourism is an expense which has to be recovered.

“I do not think one should look at this as an expense… We have presented, time and time again, plenty of studies which confirm the return for Government from every tourist that comes to Malta. Conservatively, we estimate that on average, each tourist spends €98. If the government has invested €4 million more, we estimate that government has earned at least €10 million more. This is not a bad deal”.

He also rebuts the argument that hoteliers are the sole beneficiaries of increases in tourism. “This money is not being collected from tourists or tourist operators. Only two-thirds of tourists coming to Malta stay in hotels. A third of tourists coming to Malta will not be paying the increase in VAT.”

The latest bone of contention concerns the way Finance Minister Tonio Fenech claimed that the government had been in talks with the MHRA for the past two years. MHRA was proposing a 50-cent tax on every night a tourist spends. Eventually, the MHRA called for this measure to be suspended, and for alternative methods to be found.

Micallef qualifies Fenech’s version of events.

“We had objected to the government’s decision to impose a 50-cent charge on every tourist night as this discriminated against hotels; any such charge should be introduced on all tourists staying in Malta – and not just those staying in hotels.”

He insists that in March the government had agreed with the MHRA to introduce a €3.50 departure tax to be paid by all tourists leaving Malta. “We argued that if you collect this tax from every tourist coming to Malta, you would obviously collect more money and therefore we should find a way how this can be collected”. 

But the finance minister has now declared that such a travel tax would have had to be levied on Maltese travellers leaving Malta.

Micallef insists that government had ample time to come up with a solution. “We had agreed on the proposal in March and on that occasion the government was committed to introduce it in June.”

For the next five months the MHRA kept asking what had happened to the proposal. It was only towards the end of August – a full five months after the agreement – that the government informed the MHRA that such a measure would discriminate against non-Maltese EU citizens.

Micallef acknowledges that at this point the prospect of raising VAT rates was mentioned by the government. “The government said that in the absence of this tax it might have to up the VAT rate… it was just a mention which we dismissed straight away.”

A month later, the MHRA submitted another proposal to government on how it could collect this tax. “We suggested ways it can be collected even in hotels to avoid the Maltese having to pay this charge at the airport.”

But he claims that the government never gave any reply to its latest proposal. He even says there was not even a mention of the VAT hike during a meeting held on 19 October. It was only that same week, Friday 22 October, that “we were slapped with the VAT increase for the first time” during an MCESD meeting.

Micallef claims that the government has violated a long-standing verbal agreement on changes to VAT to be preceded by an 18-month notice period, to enable the industry to take stock since it negotiates its hotel prices nine months in advance of the two seasons (May-October and November-April).

“We had discussed this with John Dalli when he was finance minister in 1999. Every minister since then, including Fenech, had respected this agreement.”

But does the MHRA truly understand the government’s argument? That it has to recover its increased expense on tourism?

“Everybody agrees that everyone benefits from tourism, not just hoteliers but also retailers and banks… so you can’t just single out the hotels, tell them ‘I want to recover the money I’ve invested to get more tourists to Malta, from you!’ That is why we thought the best way was to collect this revenue directly from tourists without affecting accommodation prices.”

He also hints that the government abuses of hoteliers who cannot just uproot themselves at the slightest sign of trouble, the way other foreign investors are in their power to do.

“The investment in the hotel industry is nearly all Maltese… we cannot just pack up and leave. When you have foreign investment it is easy for them to leave for somewhere else. We are a labour-intensive industry that generates a multiplier effect, so one would expect that a bit of assistance. We were not given direct assistance last year.”

Unlike the manufacturing sector, which received €12 million in direct government assistance to safeguard jobs during the crisis, no such assistance was given to the tourism industry.

But doesn’t the government do exactly that by assisting low cost airlines with the route development scheme?

“Everyone benefits, not just hoteliers… Surely we are benefiting as a main stakeholder but you can’t say that we are the sole beneficiaries. A third of tourists do not even stay in hotels.”

The increase in independent tourists who book their flights and accommodation directly instead of relying on tour operators has also changed spending patterns, which required the hotel sector to restructure.

“To compound the problem of profitability, independent travellers tend to spend less money in hotels and are more likely to book on a bed-and-breakfast basis. This means less revenue for hotels.”

But while less money is spent in hotels, still more is being spent in other parts of the economy. This leaves hotels with the costly need to restructure to compete with other destinations. “The independent traveller is a different kind of client. They want a good, well-located hotel but not one which necessarily has all the facilities one expects of a resort hotel.”

Micallef also says the MHRA has repeatedly told the government to address unlicensed establishments that take in tourists, and collect rightful dues from there. An estimated ‘unlicensed’ 2,000 beds alone exists in Gozo in farmhouses and flats. “Apart from competing unfairly with legitimate businesses, they are not paying VAT to government,” Micallef points out.

Adding to the industry’s worries are reduced flights from the UK by Air Malta for its summer 2011 schedule.

“We do not want to tell Air Malta what they should do. But as a major stakeholder we expect to be informed… Decisions are being taken as we go along but we still do not know the end result of the strategy. The more we know the better chance we have to mitigate the negative impact of these decisions.

 “Coupled with the economic problems the UK has, the rate of the sterling and our increase in VAT, all this does not augur very well.

“The question now is by how much can we manage to replace the business lost in terms of seats by Air Malta? Will there be an increase in seats from other airlines to enable us to stabilise the price so that we are not pushed to increase our prices because of a decreased supply?”

And if this happened in the UK, which he describes as the “mainstay of Air Malta’s operations”, will this happen to the rest of the routes?

Micallef refuses to comment on the future of Air Malta. “What is happening to Air Malta has happened to all legacy airlines. The market is becoming more competitive. But it would be presumptuous on our side to say what Air Malta should be doing…”

Still, Micallef does not believe that privatisation would be the best option for a company which still accounts for half the seat capacity to Malta, and which unlike a private company, has to account for the national interest.

Is there a risk of Malta becoming dependent on low cost airlines?

Micallef says this risk would be more contained if LCC factor is spread among more airlines, rather than rely on one low cost airline.

But Micallef defends low cost airlines from the charge that they are being subsidised by taxpayers’ money. “What was offered as support for open to everyone, even Air Malta could have applied for this assistance. And this money is given on the basis of the number of passengers they actually bring to Malta. If they come with an empty plane they do not get any assistance.”

Micallef finds it difficult to predict how tourism will fare in 2011. “The only indicator we can have is seat capacity, as bookings tend to come very late. Air Malta’s decision to cut the number of flights is in itself worrying and creates uncertainty. But it does not mean that new airlines won’t be able to take the business.”