Economic Analysis of the Caribbean-Brazilian Tourism Market São Paulo, Brazil, November 26, 2013

1. Economic Analysis of the Caribbean-Brazilian Tourism MarketSão Paulo, Brazil, November 26, 2013 Therese Turner -Jones IDB Representative, Jamaica

2. Motivation • Caribbean tourism is highly concentrated in terms of visitor origin. • Brazil offers a big, fast growing country with travelling population However, • Challenges arise from accessing new markets • Upfront investment and recurrent guarantee liabilities. • Fiscal challenges in many countries. • Specific details of cost/risk sharing for guarantee and marketing cost essential for benefits to countries.

3. Is it worth it? Benefits Costs Marketing Guarantee Future liabilities • GDP • Revenues • Employment • New trade routes • Freight possibility

4. Cost-Benefit Analysis • Success depends on • Number of visitors (NV) • Spending per visitor • Value for money, experience • Influences marketing spend in subsequent years. Benefits = NV·$ + NV·$· Tax Rate Cost = MARKETING + GUARANTEE (depends on guarantee agreement and load factor)

5. Assumptions • One additional weekly flight with capacity of 220 • US$800 for Jamaica and Bahamas, US$700 for TT and Barbados. • Full guarantee for Barbados, 85% capacity guarantee for Jamaica and Trinidad and Tobago and none for Bahamas. • Spending is US$3000 for one week. Different taxation for different spending categories. • US$1 million for marketing in first year, then US$500,000. • Capacity 90% and 65% in high and low season.

6. Baseline results Under high and medium loading scenario, no fiscal burden on government. Guarantee and marketing costs lead to losses under low scenario. Except for Bahamas, 65% or higher capacity is needed to avoid negative fiscal impact.

7. Sensitivity Three major assumptions and its influences • Load factor of flights • Marketing expenditures (research before and on relationship with travel agents) • Guarantee • Wide range from 100% seats guaranteed to partial (e.g. below 85%) to fixed amount per seat. • Marketing • New initiative will require substantial first time investment. However, amounts should decline over time and could be shared with hotels, travel providers (PPP)

8. Risks and possibilities Under the baseline, the initiative would add 0.1% in GDP and US$405K of revenue. However, airlines might insist in a full guarantee of all seats, which would add almost US$2 million in cost. While Brazilian tourists have relative high spending power, Tobago might attract lower budget travelers. Suggestion: Type of guarantee and targeting of potential visitors will determine economic and fiscal impact of initiative. GDP and Fiscal Effects under different scenarios

9. Risks and possibilities Under the baseline, the initiative would add 0.2% in GDP and US$800K of revenue. If Brazilians spend similar to current tourists, revenues would not be sufficient to compensate for additional cost. Airlines might insist on a full guarantee , which would add almost US$1.2m. Ideally, GOJ would ‘subsidize’ each seat. Suggestion: Type of guarantee central. Marketing is burden but might be lower in following years. GDP and Fiscal Effects under different scenarios

10. Risks and possibilities Under the baseline, the initiative would add 0.5% in GDP and US$4 m of revenue. Bahamas has potential for two weekly flights and attracting Miami visitors. Airlines might insist on a guarantee, which would add US$1.5m in cost. Current Brazilian visitors spend above baseline. Suggestion: Potential to use marketing for two weekly flights or to market short trips from the US. Specific targeting of visitors similar to current ones could increase benefit. GDP and Fiscal Effects under different scenarios

11. Risks and possibilities Under the baseline, the initiative would add 0.5% in GDP and US$500K of revenue. Marketing would also benefit existing flight. The current guarantee scheme concentrates risk on government. Savings could be achieved by changing it, for instance restrict it to 85% load. If capacity is not achieved, additional incentives could be given, adding US$800K cost. Suggestion: Marketing could increase load factor of the existing flight. Savings could also be achieved by using different guarantees (up to 85%). At the same time, experience shows that additional incentives might be needed. GDP and Fiscal Effects under different scenarios

12. Opportunity costs • Cost-Benefit cannot be seen in isolation as marginal impact is important for decision. • What would be effect of same marketing and guarantee scheme for existing, mature markets (USA, Canada, UK)? • General rate of return of government expenditures. Versus exploring new market • Private sector focuses more on mature markets. • Accessing new markets is costly, requires front loaded investment and has externalities (everyone benefits whether they pay or not). • Public good character. • Diversification. • Externalities in terms of trade routes, knowledge about Caribbean.

13. Conclusions • Brazil offers new opportunities for the Caribbean to diversify visitors, both in terms of origin but also characteristics. • Our results indicate that there are potential benefits from the initiative under realistic assumptions. • New market probably requires upfront investment and some kind of guarantee. These expenditures have characteristics of a public good. • Creative solutions needed to share burden and risk, PPP, regional PR campaign. • However, potential liabilities for government as well as incentives for airlines/travel agents depend on details of the guarantee.

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