Tourism funding

Deciding how to fund tourism is tricky: On the one hand there are a fairly well-defined group of firms who gain most of the benefits. On the other hand, a large, ill-defined group of firms benefit somewhat from tourism and promotion of New Zealand as a destination is common property. Once you’ve spent money on a promotional campaign and people decide to come to NZ, you can’t restrict access to those tourists to the firms that paid for the campaign. However, tourists’ spending is rival since each dollar can only be spent at one place. The problem with common resources is that nobody has the incentive to provide them.

Ordinarily you might ask the government to sort out the problem, but then the government is basically subsidising an advertising campaign for the tourism industry. One answer is for a tourism industry body to fund advertising campaigns for its members jointly. The problem here is that nobody has an incentive to join such a body, since they get the benefits of promoting NZ as a destination whether they’re in it or not. Furthermore, the industry rightly points out that its advertising is subsidising revenue for all businesses who have some custom from tourists.

John Key’s solution is to match industry advertising spending dollar-for-dollar. I like the way this boosts spending to take account of the benefit to firms outside the tourism industry. Hopefully it increases tourism spending to somewhere near the optimal level. What concerns me is that there is no mechanism built in to the scheme to prevent freeriding from industry participants. nor can I see any convincing mechanism by which participants in the scheme could punish those who choose to freeride. I’m curious to know how the Tourism Industry Association deals with the problem.

  • You raise an interesting debate. I would first raise the question, what is the real ROI on NZ’s tourism budget? I would suggest that if we were genuinely able to find the answer we would be somewhat disappointed.

    The tourism industry is being crushed by publicly funded institutionalised self serving bureaucracy that is out of proportion to the industry it is supposed to serve.

    Of the $70 million existing budget, how much goes into marketing and how much is consumed by TNZ, Min of Tourism, Qualmark et al with domestic and overseas offices, staff, consultants, fractionalised inefficient promotions and bureaucracy.

    The tourism industry is at risk of becoming too dependent on the productivity of others and needs to become more innovative and self reliant. Quite simply, in my opinion the New Zealand taxpayer is not getting an acceptable ROI for their tourism spend.

    How many tourists come to NZ because government tourism expenditure and would by far the majority have come anyway?

    Can the private sector step-up if the government froze or reduced funding? I would like to think so. John Key’s solution to match industry advertising spending dollar-for-dollar is a great initiative. There will be an initial outcry from an industry that has become soft from corporate welfare but it will be a good test to see what commitment there really is.

    The tourism industry’s direct commitment of funding will encourage the private businesses to connect more with promotional spending and start to question and measure the benefits.

    The world is getting smaller and the internet now allows individual and grouping of business owners to communicate and make an impact. We have to believe that Kiwi tourism businesses will step-up and become innovative in order to attract world attention and continue to provide a world class product that others will talk about via social networks.

    The time of publicity funded one-off coke style nationalistic promotions should be behind us. They create localised emotion, attract accolades from within the industry, but do not effectively reach the end user.

  • Deciding how to fund tourism is tricky. Actually no its not. The firms in the industry can pay for it, without any money from the government. Think about advertising in almost any area. One firm’s advertising may well have positive externalities for other like firms. So what? My advertising of my beer will help me, but it may also help grow the beer market in general which will help others in the industry. I still pay for my advertising. The government should not be paying the bill for that advertising.

  • Robbie

    The argument for government intervention would be market failure. If there are substantial spillovers to advertising, and that advertising is non-excludable, then we could expect market failure.

    What we’d have to believe is that those advertising spillovers are far greater than in any other industry that the government doesn’t intervene in (eg beer). I think you can make the case. While Export advertising may grow the beer market, it probably sees most of the benefit of that. When I bring someone to NZ to stay in my luxury hotel, I also create profit for Air NZ, taxis, restaurants, maybe other hotels etc.

    If this is the case, then a matching system would probably be better than a flat budget. Its size would be linked to the size of industry. The amount of advertising would also be broadly right, as long as you go the ratio of matching right(why not, say, $2 matched for each $1 spent if the spillovers really are that large?).

    There’s some research floating around that suggests that for each $1 spent on airfares, $6 is spent at the destination. If that were the case perhaps there is an argument for public ownership or subisdy of a national carrier. Howeer we’d need to be broadly satisfied that these spillovers existed, that we would target marginal tourists that wouldn’t come otherwise, and that their spend would be the same as the average tourist.

    For what it’s worth, Air NZ spent about $100m on marketing last year, which was about $14m more than all of Vote tourism. Of the $86m allocated to vote tourism, 88% is for marketing, the remaining 12% is for policy advice and miscellaneous ‘implementation’.

    It’d be great to see figures on ROI of tourism spending. I don’t believe we can say it’s inefficient just because not every dollar is spent on advertising.

  • Nargus

    … to offer a slightly different tack … while tourism is the most obvious beneficiary of destination marketing spend (Tourism NZ, Air NZ, and the regional tourism organisations – RTOs), it is not the only beneficiary or beneficial outcome.

    While the RTO model by definition fuels regional parochialism, it would seem reasonable for them to be satisfied in part, at least, that international arrivals and spend to NZ were being delivered, that is, perhaps the greater good should be a KPI for regional destination marketing spend.

    Even with this aggregated destination marketing spend appearing to be a big number, NZ is uncompetitively investing in this space. By way of example, Positively Wellington Tourism spends about $5.6m pa (assuming their latest mill gets through the system), Tourism Auckland spends about $3m pa … compared to South Australia around AUD 45m, Queensland closer to AUD 60m … the result is that NZ gets less than 1.0 % of annual global arrivals!!

    In addition to direct ROI by way of visitor arrivals and spend, this investment in promoting brand NZ (particularly under the 100% PURE NZ banner)is helpful in terms of delivering brand NZ profiling in our major export markets, our major immigration markets (talent attraction), our major FDI markets, and by the creation of a rallying call for NZers (which assists with talent retention); witness the William M Mercer ranking of Auckland as the world’s fourth highest ranking lifestyle city. While these coincidental returns are clearly less obvious and material than visitor sector returns, they would seem noteworthy nonetheless.

    By itself the tourism payback for this destination marketing spend is 20% of foreign exchange earnings (ahead of diary) (refer the Tourism Satellite Account – Stats NZ), GDP equivalent to 10% of the NZ economy, and employment of around 10% of NZ total employment … a return that is not to be sneezed at.