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Financing community-based tourism: 9 ways to get taken seriously

Hermione Nevill's picture



Reducing risk is the only way for community joint-ventures to get serious with commercial banks. Without commercial finance, this niche tourism sector might never deliver on its potential. Photo: World Wildlife Fund
 
Over the last 20 years, joint-ventures between local communities and the private sector have grown up as a feature of the sustainable tourism development agenda. Typically, the community provides the land, the heritage or the wildlife asset base while the private sector brings the capital, management know-how and business networks. When they work well, these partnerships contribute substantially to local economic and social development, as well as providing professional, unique and authentic tourism experiences for visitors.
 
Lena Florry is an Area Manager for Wilderness Safaris, the private-sector partner in a community joint venture (CJV) lodge in Namibia. ”What we have here at Damaraland really changes our lives,” she says. “Previously, in our village, I was herding goats. Now we have good jobs and a much better life.” Crucially, Lena is also a member of the local community and takes personal pleasure in sharing the model’s success story with the camp’s US$500-a-night paying guests.
 
Typical benefits include income for communities through lease or contract agreements, employment and supply-chain opportunities, skills and knowledge transfer from the private sector, and usually a kind of joint “tourism asset protection” like wildlife preservation or heritage protection. In Namibia, for example, community conservation generated about US$7 million in returns for local communities in 2013, and the elephant population doubled in 20 years.
 
While much emphasis has been placed on the development impacts of this model, the actual health of the businesses has often been overlooked. As long as the ventures continue to deliver a development dividend – such as contributions to a community fund, or increased biodiversity – all is believed well. For the venture’s supporters, it may then come as a surprise when applications for commercial finance are rejected.
 
“We would like to finance the sector,” says Christo Viljoen at First National Bank (FNB) Namibia. “But our biggest challenge is to determine the financial viability of the community joint-ventures. We find the risks involved are not properly addressed in the business plans.”
 
Banks report that risks typically have to do with corporate governance, low-quality financial data, collateral, the level of experience of the sponsor, and a host of structural problems in the CJV business – not least, the balance between the development dividend versus the profitability of the business. All these factors help to undermine a firm’s viability. A business that cannot demonstrate financial viability – and, thus, show how it will pay back a loan – cannot be financed.
 
This presents a very real problem.  Without the means to make necessary investments in the business (such as refurbishment or expansion), the quality of the tourism product deteriorates, occupancies and rates decline, and funds for the community and for wildlife protection drop.
 
In an effort to help the various stakeholders increase the financial viability of CJVs, reduce risk and increase loans, the World Bank Group and the World Wildlife Fund released “nine tips” at the recent tourism trade show ITB Berlin 2015. Dr. Hannah Messerli of the World Bank’s Trade and Competitiveness Global Practice said, “We believe that destinations that address these issues are more likely to provide comfort to the banks in lending.”

The tips range from drawing up more equitable contracts, strengthening corporate governance and being creative about collateral to collecting better sector data.
 
Despite the uncertainty of securing future commercial financing for the sector, appetite for the model is growing worldwide. “Namibia’s market-based conservation model has inspired hope for countries and communities around the globe,” said Chris Weaver, Managing Director of WWF–Namibia. “Twenty different countries, from the United States to Mongolia, have sent delegations to come and learn from Namibia’s experiences and successes.”

As this model takes greater root around the world, proponents might take note of the “nine tips” and help prepare CJVs that can stand on their own feet, representing viable business that can be taken seriously by commercial financiers.
 
Back in Damaraland, Lena is open about her dreams: “My community – we want to own this lodge one day, and run it for ourselves.” With a 40-percent equity stake already, turning that dream into a reality may not be far off – providing that sufficient money can be raised.
 
"Getting Financed: Nine tips for community joint ventures in tourism": https://openknowledge.worldbank.org/bitstream/handle/10986/21698/959240WP00PUBL050NamibiaonlineFINAL.pdf?sequence=1