Tourist trap? Investing in tourism infrastructure


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Tourists in a Wetland park in China
What is infrastructure? It’s a fairly simple question with no distinctive right or wrong answer. A text book, or in this case Investopedia, might define infrastructure as “the basic physical systems of a business or nation”—such as transportation, communication, sewage, and water and electricity networks for a start. One’s definition of this asset class is often dependent on their appetite and understanding of risk. A toll bridge under a public-private partnership (PPP) with an availability-based payment structure will require a high cost of initial investment, but returns steady yield with relatively low maintenance costs and a semi-sovereign risk profile. A crematorium by contrast might be less expensive to build, but carries significant operation and maintenance costs—and although death and taxes are two of life’s great certainties, natural gas prices and predictable consumers are not.

For many investing in infrastructure, low volatility and predictable cash flows are the main attraction. For those procuring infrastructure, it’s about delivering an affordable public service to promote social and economic development that facilitates local prosperity.

Tourism’s place at the table
So where does tourism factor into this discussion? Tourism is clearly a driver for some infrastructure, but it also represents a significant risk for its potential lack of certainty. After all, why people use infrastructure is key to its attractiveness. If one observes that people need to commute to earn a living—and that few outside the “one percent” would consider doing this by wing and jet engine—then a tolled suburban road network should perform better in an economic downturn than a tolled airport expressway.

For hard evidence on this casual observation, compare the recent experience of the AirportlinkM7 in Brisbane, Australia with that of Chicago Skyway in the United States—two road concessions managed in part by the Australian firm Macquarie.

BrisConnections, the SPV for AirportlinkM7, entered into voluntary administration following a failed restructuring process earlier this year. The 6.7 km, multi-lane, free-flow toll road crashed because its financiers accepted traffic risk and predicted that 135,000 vehicles would use the tunnel each day when it opened in 2012—ramping up to 160,000 within 18 months. The actual number turned out to be 53,000 vehicles per day, and in fact only 85,000 used the tunnel when the connection was briefly offered for free.

Meanwhile, the privatization and financing of Chicago’s existing Skyway Bridge has been far more successful—largely living up to its expectations. The 7.8-mile toll road was originally built in 1958, with a long history of performance. Moreover, the traffic on the Skyway has remained consistent throughout the financial crisis because it relies on a steady stream of commuters who live in Indiana but work in Chicago. Commuting is an essential activity, and therefore offers more certainty to investors.

Measuring risk
The cloud of uncertainty is an obstacle to investment in tourism infrastructure, but global statistics suggest it doesn’t have to completely fog it out. Data from the UN World Tourism Organization (UNWTO) says international tourism receipts continue to grow. Expenditure on accommodation, food and drink, entertainment, shopping and other services reached an estimated US$1159 billion in 2013 – exceeding the long-term trend and reaching 5% in real terms (taking into account exchange rate fluctuations and inflation).

The broader industry seems resilient despite global uncertainty and several high-profile economic and natural disaster challenges in recent years. The long-term trend provides optimism for further expansion, yet tourism projects really do need to be closely examined on an individual basis.


John Kjorstad

KPMG Global Services

Join the Conversation

Scott Wayne
October 08, 2015

John Kjorstad rightfully emphasizes the critical role of tourism in driving infrastructure investment. Tourism demand, in fact market demand in general, can provide the rationale for investments in infrastructure, as well as other destination development related investments. No destination, whether in a developed or emerging market, has a perfect "crystal ball" to determine precisely what that demand will be. There's a certain leap of faith, albeit as well researched as possible, that is needed. In other words, build a new airport and the visitors will come -- a sort of "Field of Dreams" approach of "If you build it, they will come." Maybe...hopefully...lots of important questions before taking the "leap": Will the airlines come? They will if they can fill seats. The seats will sell if there are hotels, restaurants, activities, attractions, etc that attract visitors -- all of which can be considered forms of "tourism infrastructure." All of this is what could be called "hard infrastructure." The "soft infrastructure" is equally important -- the human resources to staff and operate much of the infrastructure. Some destinations do not place the same investment priority in the soft infrastructure, which leaves them scrambling to properly run their services and compete with other destinations. So, infrastructure in its various shapes and forms is certainly critical, but it is just one piece of a complicated jigsaw puzzle of pieces that need to be tied together to ensure sustainability and competitiveness.

Kai-Alexander Kaiser
October 03, 2015

The point that all major public investment projects should be subject to rigorous cost-benefit analysis is appreciated, including for demand uncertainty stemming for different forms of economic and social use, including tourism. Also, care must also be taken to not overplay tourism for a countries economic fortunes and jobs potential. The blog focuses on major "gateway" tourism infrastructure, but in the cases such as the Philippines tourism potential can also server as a driver for smaller but equally vital smaller projects. PPP’s are part of the story, but regular public investment spending also deserves particular scrutiny.
Under its Tourism Road Infrastructure Program (TRIP), the government of the Philippines has recent pushed for last mile connectivity investments in 4,000 km of "last mile" access roads, across 460 sub-projects (see also Given poor road network connectivity across the archipelago, the program has been designed to decongest domestic and international tourist beyond a few gate way destinations. An important public sector governance feature has been to introduce more robust gatekeeping criteria for funded projects, especially as local governments have chronically underinvested, and also have the private sector play a greater role in prioritizing public infrastructure. Beyond the technical analysis of projects, this also serves to counteract the historical capture of notably local road financing by local politics.
In short, tourism as a national industry can also serve to motivate reforms of smaller to medium scale infrastructure programs. Larger gateway connectivity projects clearly merit close scrutiny in the face of uncertain tourism-related demand forecasts. But the Philippines TRIP also highlights the need to effectively deal with prioritizing portfolios of smaller projects, especially if they shape global visitor perceptions. "It's More Fun in the Philippines" is the country's tourism slogan, on the infrastructure side back by the message "not generally bad road trips", a perception that has arguably weighed on many local destinations but also the country as a whole. For a cost benefit analysis point on view, the challenge is how to effectively scrutinize individual projects in the context of a larger program, whether PPP or not.