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Tourism land use changes: A double-edged sword for businesses

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Altering land use rights to boost tourism may not always yield positive economic outcomes due to legal complexities and stakeholder conflicts, a study reveals.

Changes in land use rights to encourage tourism can have unexpected negative consequences for tourist businesses, according to Dr Michael Lin of the School of Hotel and Tourism Management (SHTM) at The Hong Kong Polytechnic University and co-authors. Noting that the impact of land use regulation on tourism has historically been understudied, the researchers performed an impact assessment of a unique form of tourist business in Namibia. They found that although regulatory changes had expanded access to land use rights, the economic outcomes for these ventures were not entirely positive, due to legal complexities and conflicts between stakeholders.

How we use land is central to how our societies function. Societal progress therefore frequently involves changes in land use, and in modern civilisation this is generally accomplished by official legislation. As the authors note, “land use change through a formal and regulatory framework is relatively recent, dating back to the mid-17th century, and the more comprehensive regulations to the early 20th century”. Being inherently tied to distinct local features, the fate of the tourism sector is particularly closely intertwined with land use legislation.

The economic consequences of land use changes are conventionally gauged through regulatory impact assessments. In societies worldwide, tourism is a key pillar of the economy. According to the researchers, however, “despite the importance of land use in tourism, there remains a critical gap in the literature of the assessment of changes in land use regulations”. This lack of understanding contrasts with the well-established literature on the impact of land use legislation in other economic contexts, such as agriculture, and may lead to regulatory changes being made by policymakers who are blind to their potential effects.

In both the developed and developing worlds, the reallocation of land for touristic usage is intended to support the economy. However, it is often a source of conflict, which “usually involves citizens opposing tourism development, and businesses supporting it for the reasons of economic growth”. However, even when efforts to redirect land use towards tourism succeed, economic growth is not guaranteed. The authors draw particular attention to a dearth of research investigating how small tourism businesses respond to regulatory changes, and whether the effects are positive.

Small and medium-sized enterprises (SMEs) are the bedrock of tourism, accounting for 70% of businesses in the sector, and are especially important in developing countries. Lacking the power and resources of larger firms, they are also particularly sensitive to regulatory changes. Tourism SMEs, as the researchers observe, are generally “dependent on debt financing due to limited access to other sources [of funding]” and tend to rely on fixed assets as collateral. Land is a major type of fixed asset, and therefore land use changes directly intersect with tourism SMEs’ attempts to grow using external financing.

The researchers’ focal country, Namibia, is an African nation that has seen a boom in land use allocation for tourism. “In 1990”, the authors note, “when Namibia gained independence, the government inherited an unbalanced distribution of land ownership”. This situation initially stifled economic growth by restricting communities’ ability to tap the country’s huge tourist potential. In the last two decades, however, the state has taken legislative steps to remedy this, including increasing the amount of land with communal access. Such land can legally be used for commercial ends, notably including tourism.

Specifically, a 2002 law opened the possibility of touristic land use under the auspices of communal conservancies, a type of local body governed by communal authorities. “This resulted in the development of Communal Joint Venture lodges through a partnership between the communal conservancies and the private sector”, the researchers tell us. The 46 Lodges now operating in Namibia employ numerous workers from local communities and have been supported by international development agencies. However, the Lodges’ ability to secure market financing and thus cement their long-term viability remains unproven.

To delve deeper into the Lodges’ situation, Lin and coworkers performed an impact assessment to investigate “whether the changes in land use regulations in Namibia impacted the Lodges’ ability to source market financing to continue growing, and their financial performance to stay competitive”. In other words, can these public–private joint ventures – which effectively represent a home-grown Namibian form of tourism SME – attract hard-nosed investors and become genuinely self-sufficient hospitality businesses in a market economy?

Interviewing representatives of key stakeholders in Namibia’s tourism sector, including banks, government departments, investors and law firms, the researchers acquired a wealth of expert opinion on the relationship between land use regulation and Lodge financing. They also personally visited a number of Lodges to obtain financial performance data, encompassing “a relatively well-rounded profile of operations in communal conservancies”. These statistics bolstered the study’s qualitative findings by providing a window into the financial status of the Lodges.

From the interviews with stakeholders, four themes emerged regarding the barriers to providing financing for Lodges: “unclear business viability; lack of acceptable collateral; poor quality of project proposals and financial information; and availability of alternative financing”. For example, the Lodges’ viability as tourism enterprises was hampered by the unclear legal boundaries of the sublease arrangements between conservancies and investors, while the relatively short (10-year) lease terms gave investors little confidence in their long-term prospects.

The legal robustness of the joint venture agreements was another sticking point for investors. “There was no explicit legal basis for the transfer of land use rights in communal conservancies for commercial purposes”, the researchers point out. This gave investors doubts about whether land use agreements would actually be upheld, making leases an ineffective form of collateral for obtaining financing for the Lodges. Meanwhile, financial institutions expressed doubts about some of the investors, noting that they were often owner–managers or “lifestyle” investors with little business acumen, thus providing inadequate operational data.

In their early days, communal conservancies received support from international agencies, often on relatively lax terms. While this had once played a vital developmental role, the continued availability of such “soft” alternative financing was now seen by banks as a safety net, preventing the Lodges from presenting as viable to investors. Those who did choose to invest encountered a complex web of parties expecting payment, often becoming subject to both lease fees and the land taxes passed on by conservancies, dubbed by one investor as “paying [twice] for the same product”.

Among the many other hurdles to investment were human resource issues and the terms of partnership agreements. These overlapped in the widespread stipulation for lodges to “hire from within the community, and not necessarily seek out the best trained, most productive staff from elsewhere as other non-joint venture lodges could”. Such terms made sense for conservancies, which often gained little economic benefit other than employment of locals, but clashed with the needs of private investors as they impaired the quality of service offered by the ventures.

The study’s conclusion is stark. Even if well-intentioned, “land use regulations can negatively impact the growth and competitiveness of small tourism and hospitality enterprises through increased risk, lower financial performance, and unclear legality”. The authors call for caution by lawmakers who rule on land use changes, which can be a double-edged sword. They also note that possible agency conflicts – such as those between the governors of and investors in Namibian Lodges – must be considered as part of a holistic economic impact assessment of such laws, which will be crucial for devising better regulations in future.

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Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.

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