Sunday, November 30, 2008

Thirty-five years is more than enough

Idhikeeli is starting a campaign against the bill the government has submitted to the People’s Majlis to extend the period of tourist resort lease to 50 years.

We believe the bill, if passed by the Majlis, will further broaden the gap between the rich and the poor in the Maldives. The government has said that it has no intention of increasing the lease rent or bed tax along with this plan to extend the lease period. Similarly, the government has not come up with a plan of taxing the tourist resorts, whether in the form of a GST, or a corporate tax.

The only benefit that the government will receive is a short-term one by selling revenue stamps for the extension of lease period to 50 years. The projected revenue from this has been already included in the budget for 2009. However, we feel this is only a temporary measure that would raise some revenue for the government but does not justify providing the control of tourist resorts to the current owners for 50 years.

One argument that proponents of extending the lease period come up is that it will encourage investors to invest in the tourism industry. They also point out the difficulties that resort developers have faced recently in securing investment for the newly allocated resorts.

In 2007 and 2008 the previous government had selected several uninhabited islands for resort development and awarded them to the parties that won the bids. This was an unwise decision in economic terms as the government was trying to increase the supply in the industry without taking into consideration the availability of finance for development, supply of trained labour, and various other factors that would affect the industry. The previous government was doing this because, to finance a severe budget deficit, they wanted to raise revenue by charging advance rent from the parties that won the bids.

However, under the previous government the financial sector in the Maldives had been tightly restricted. Only handful commercial banks from the neighbouring Sri Lanka, India and Pakistan are operating in the Maldives in addition to Bank of Maldives. Several offers by prestigious commercial banks to set up office in Maldives failed because of bureaucratic hurdles and corruption. Thus the resort developers had only limited options to secure finance. They had to approach either the commercial banks in the Maldives or commercial banks in neighbouring countries.

When 30 or 40 resorts were awarded and competing for development finance from a limited pool of lenders, it is inevitable that some of the developers would face shortage of funding. This problem had got nothing to do with the resort lease period. Rather the root problem lay with the foolish decision by the previous government to lease so many islands within a short time span, and the restrictive financial climate in the Maldives.

Unable to pay the advance rent or secure funds for developing the resorts, many new businesspeople had no choice but to sell the resorts to existing and wealthy resort owners. Hence, rather than create a new class of businesspeople, most of the new islands also landed in the hands of existing resort owners.

The already wealthy resort owners in the Maldives have benefitted immensely from the policies of the previous government. Most of them pay only a token amount as a lease rent. Lease rent has been increased every ten years but still the resorts that were awarded years ago pay only a small amount to the government compared to the lease rent of a new island that would be put on tender now.

Under the current regulations the lease period of a resort is 25 years. The owners can request an extension of the period to 35 years if they are investing more than US$10 million. A company that sells shares to the public has the option of leasing the resort for 50 years. The current plan by the government, if passed by the Majlis, will remove all these restrictions and allow the government to lease any resort for 50 years.

The Return on Investment (ROI) period for an upper market tourist resort developed in the Maldives now is 7 years, according to financial analysts. Hence, with a 35 year lease period the investors have enough time to gain a return on their investment and earn lucrative profits.

We believe there are no concrete economic and financial justifications for extending the lease period of resorts to 50 years. We feel this will create further inequalities in the distribution of income and will act as a barrier for a new class of businesspeople to gain a foothold in the tourism industry. Hence, we are starting the campaign “35 years is more than enough” to lobby against the government’s plan to extend the lease period to 50 years. We have created a facebook group for the campaign. Please join.

To promote the activities of Idhikeeli, we have also created a page at Facebook. If you support Idhikeeli, become a fan.
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