A minister’s short memory; A Govt’s short-term policy

Minister Martin Cullen spoke to The Irish Times Travel supplement about the hotel industry on Wednesday, post-Budget;

He warned that a lot of the Republic’s hotels, which have an overcapacity of “about 15 per cent”, “will probably go, through Nama or one way or another”. He said: “In fairness to [hoteliers] they are kind of focused. What we want them to do is to focus on their own business, to stop worrying about what the other fella is doing, to focus on how you can be more competitive.”

The Minister was clear about where the Republic’s tourism industry got it wrong: “We priced ourselves out of the market. Golf is a very good example. We had and still have a fantastic golf product, but charging guys €400 and €500 for a round of golf on the west coast of Ireland was crazy. That is all gone, because they lost their market, and we have got to go and rebuild that market…”

Eh.

At one point in the late nineties there was a shortage of hotel rooms, partially weakening Ireland as a tourism destination. This would likely have changed naturally as the economy developed, accompanying the influx of foreign direct investment. In those circumstances the industry would have developed in same way as has elsewhere; with individuals or groups with an interest in building a reputation (and sustainable profit) in the sector setting up hotels. That would have quickly filled any vacuum in the market that existed.

Instead, the Government of the time, led by Minister Cullen’s Fianna Fáil party, altered the policy. Matt Cooper covers what happened thereafter better than I could in his excellent book Who Really Runs Ireland? The Story of the Elite Who Led Ireland from Bust to Boom… and Back Again.

My emphasis;

The support for development of the hotel industry made sense at one point. There was a shortage of suitable stock of hotel bedrooms and associated facilities, which put Ireland at a disadvantage as a hotel destination. Unfortunately the availability of massive capital grants to offset against income from other investments persuaded many land-owners and builders – with no experience in how to run hotels of real interest in the provision of the necessary service – to enter the hotel construction game.

Tax breaks of 15 per cent of the capital costs for the first six years and then 10 per cent in year seven were allowed. Owners invested limited equity and borrowed the rest, then wrote off the capital allowances against rental income from other investments and watched as values for hotels began to increase. Any investigation as to whether chosen locations actually needed hotels was rarely done. Many investors also had a deal in place to sell the hotel for at least the original construction price, the profit being all the tax breaks received over seven years.

The scheme helped to add 16,000 new hotels bedrooms to the national stock between 1996 and 2004, but when [then Finance Minister, Charlie] McCreevy moved to close it off from the end of December 2002 he received plenty of lobbying from cash-rich developers who were planning their own hotels. He extended it to 2004 and there was a rush of applications from developers who wanted to qualify. A total of 217 hotel applications countrywide were lodged in the run-up to Christmas 2004, with the proposed addition of almost 15,000 bedrooms, almost as many again as had been built in the previous decade. The potential annual cost to the exchequer would be up to €100m for the following seven years, but the government argued that it could recoup the lost tax in VAT payments, tourist revenue and new jobs. This created a dreadful over-supply of hotel rooms and not enough business to go around.

Said over-supply is what needs to go. The minister is correct in saying it’ll to go “through Nama, or otherwise”. However, before anything “goes” through Nama, many will have been forced to “go” because of Nama.

At present a notable number of those developers who opened hotels to avail of the grants and tax breaks opened by Minister Cullen’s Government are treading water waiting for the Nama lifeboat. Many of these are now running their hotels – and oftentimes accompanying high-class golf courses – below-cost or with tiny margins, forcing other local non-Namable competitors to cut their margins, or what’s left of their margins. In many cases this is forcing what-would-be-viable hotels out of business.

Appreciate this is something of stereotyped example but put yourself in the shoes of the local hotelier who has run his place for thirty years, long before the Celtic Tiger. The Boom Times come along and you improve your services to catch the growing area of the market. Things are going well, until a property developer sets up shop down the road, putting millions into the new hotel to avail of the grants and tax breaks. Said developer knicks loads of the market share with a flash, well-marketed new spot, but has plans to dump after seven years so cares little about reputation building. He’s after a quick profit, you’re looking more long-term.

Then The Boom Times go bust, but instead of the developer restructuring and closing down his hotel business leaving the market to you, the prudent local, he keeps it open, running it at a loss, undercutting you in what would be a difficult market no matter who was in town. This is pushing you out of business, making your life far more difficult than it should be.

Nowadays the developer is waiting on a call from Nama, the local hotelier is waiting on one from his bank manager.

So maybe Minister Cullen should think about how a local hotelier could “focus on their own business, to stop worrying about what the other fella is doing, to focus on how you can be more competitive”, when the “other fella” is running below-cost, waiting on the ministers mates to come to the rescue. And maybe when we read the minister quoted as saying “they lost their market, and we have got to go and rebuild that market”, we should remember how, why, and who made it possible for the hotel industry to end up in turmoil.

We certainly shouldn’t forget who made the short-term gain.

Lehmans Brothers didn’t design those tax policies, or accept those applications.

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