H OSPITALITY AND T OURISM A DVISORY S ERVICES

1. HOSPITALITYAND TOURISM ADVISORYSERVICES Tourism Infrastructure and Product The Ministry of Tourism Government of Israel November 2006 e Quality in Everything We Do

2. Agenda • Introduction • Physical Infrastructure • Organizational Infrastructure • Investment Environment • Summary

3. 1 Introduction

4. The Primary Research • Researching Israel’s Tourism Infrastructure and Product • Interviews with 104 tourism industry stakeholders in Israel • 135 site inspections of tourism infrastructure • Survey interviews with a total of 8,400 respondents in 8 countries • Total of 18 focus groups in 8 countries • 51 interviews with international tour operators in 8 countries • Research at 2006 ITB Trade Show

5. The main goal is…To offer a high quality tourism product and a modern tourism infrastructure that would support growth in inbound tourism

6. The main obstacles…Aging infrastructureLimited fundingLimited cooperation

7. 2 Physical Infrastructure

8. Destination Israel • Putting things in prospective… • Demand In 2005: • 1.9 million international visitors – 26.4% increase over 2004 • 85% from Europe and North America • 58% from US, France, UK, Germany and Italy • Supply in 2005: • 334 hotels – 46,700 guestrooms • 7,700 rural guestrooms (Zimmerim) • 29 youth hostels – 6,190 beds • 60 National Parks and Nature Reserves; 200 museums; 35,000 known archeological sites; 5 World Heritage Sites; numerous religious and historical sites; natural, sports and entertainment attractions

9. Hotels • Lodging Supply… • Largest lodging markets: • Eilat: 10,828 rooms (23%) • Jerusalem: 9,218 rooms (20%) • Tel Aviv: 5,865 (13%) • Dead Sea: 4,011 (9%) • Tiberias: 3,961 (8%) • Top 5 combined: 33,883 (73%)

10. Hotels • Lodging Demand… • Top 5 lodging markets by share of total international person nights: • Jerusalem: 31% • Tel Aviv: 24% • Eilat: 11% • Tiberias: 5% • Dead Sea: 5% • Top 5 combined: 76%

11. Hotels • Lodging Demand… • International person night in 2005 versus 2000: • Haifa: + 20% • Herzeliya: + 20% • Tel Aviv: + 2% • Dead Sea: - 25% • Jerusalem: - 28% • Netanya: - 43% • Eilat: - 54% • Tiberias: - 60%

12. Hotels • Lodging Demand… • Spending per international person night in 2005: • Herzeliya: $125 • Tel Aviv: $95 • Dead Sea: $81 • Haifa: $77 • Eilat: $76 • Jerusalem: $70 • Tiberias: $48 • Netanya: $37

13. Hotels • Some general observations… • Dated and relatively unsophisticated • Generic in appearance • Do not incorporate unique architecture and design • Do not reflect current trends in hotel development • Do not fully capitalize on their surroundings • In need of renovation • Limited variety in product • Few international brands • Highest quality: Eilat, Jerusalem and Tel Aviv • Lowest quality: Netanya, Haifa and the Dead Sea

14. Hotels • Recommendations First Priority: Renovate Existing Hotels • Faster and requires smaller capital investment than new development • Once several hotels in each sub-market are renovated, others may follow suit in order to remain competitive • Higher-quality lodging product would: • Improve traveler’s experience • Promote perception of high-value • Improve Israel’s standing relative to other destinations • Encourage repeat visitation • Facilitate efforts to attract major international hotel brands

15. Hotels • Recommendations Second Priority: Develop New Hotels • New lodging development could induce overnight demand • Develop lodging products that currently are under-represented in Israel • New development should meet market needs: primarily high-quality moderately-priced 3-4 star hotels and architecturally-distinct hotels • Develop architecturally distinct, flagship luxury hotels, with broadly recognized international brands – Tel Aviv and Jerusalem • New hotels should offer a sense of place, incorporate local architecture and design and capitalize on their surroundings

16. Hotels • Recommendations Attract Well Known International Hotel Brands • Attract well known international hotel brands to increase awareness and visibility of Israel as an international destination • Applies to both conversions and new developments • Major hotel brands could induce high-rated demand and raise the standards for existing hotels • International brands are important to American travelers

17. Hotels • Present vs. Future

18. Sites and Attractions • Some general observations… • Unmatched concentration of unique attractions in small geography • Jerusalem is the “anchor” attraction • Most attractions currently have excess capacity • Many are in need of renovation and further development • Many are poorly maintained • Majority do not include high-quality tourist-oriented facilities and amenities • Public infrastructure in some tourist areas is in poor condition • Insufficient awareness of attractions • There are examples of well-developed attractions • According to focus groups and trade interviews: limited interested in casino or theme park

19. Sites and Attractions • Recommendations First Priority: Further Develop Existing Sites and Attractions • Further develop, expand and upgrade existing attractions in order to make them truly exceptional • Improve facilities, incorporate new technologies and multimedia tools, add and upgrade amenities and generally enhance the visitor experience • Upgrade and better maintain public infrastructure in tourist areas: Old City of Jerusalem; Tel Aviv beachfront; Eilat promenade; Tiberias city center; etc. • Capital investments by the public sector, public-private partnerships, private donations, corporate sponsorships, etc.

20. Amenities • Some general observations… • Israel has ample high-quality amenities • Examples of markets that generally offer high-quality amenities: • Tel Aviv • Jerusalem • Eilat • Examples of markets that do not offer sufficient amenities: • Dead Sea • Tiberias • Netanya • Haifa • Herzeliya • Akko • Nazareth • Safed

21. Amenities • Recommendations Develop Amenities in Underdeveloped Areas • Develop additional amenities in submarkets that currently lack high quality/value amenities: • Food and beverage • Retail • Nightlife

22. Attractions and Amenities • Present vs. Future

23. Transportation • Recommendations • Reform aviation policy • Make airport security more tourist-friendly • Provide better information resources on public transportation • Make public transportation more tourist-friendly by improving signage, providing schedules and system maps in English, etc. • Consider needs of international tourists in future development of mass transit • In the short-term increase number of direct charter flights to Eilat • Improve taxi service

24. Future Development • Recommendations • Development efforts should be concentrated in Israel’s primary tourism areas • Make those destinations truly exceptional • Specific areas that have substantial growth potential include: • Jerusalem • Tiberias • The Galilee • Tel Aviv • Akko

25. 3 Organizational Infrastructure

26. Organizational Infrastructure What organization are involved in Israeli Tourism? • National Government Organizations e.g. Ministry of Tourism, Ministry of Finance, Ministry of Transportation • National Public Sector Organizations e.g. Israel Nature and Parks Authority, Israel Antiquities Authority • National Private Sector Organizations e.g. Israel Hotel Association, Israel Incoming Tour Operator Association • Regional Public Sector Organizations e.g. Red Sea Resort Tourism Administration, Western Galilee Tourism Trust • Regional Private Sector Organizations e.g. Tel Aviv Hotel Association, Jerusalem Hotel Association

27. The Ministry of Tourism • Some key observations… • No clear strategy and methodology • Little long-term planning • Reactive not proactive • Bureaucratic and thus slow moving • Limited expertise in financial evaluation of development projects • Approves projects without securing maintenance budgets • Promotes developments that do not always meet market demand

28. The Ministry of Tourism • Recommendations Reform the Ministry’s Operations • Reform the Ministry to become less bureaucratic and more responsive to changing market conditions • Adopt more business-like mentality • Focus on streamlining processes, reducing hurdles, establishing goals and objectives, measuring success and demanding accountability

29. The Ministry of Tourism • Recommendations Long-Term Strategy • Adopt a clear research-driven strategy for the development and marketing of Israeli tourism • The strategy should set short, medium and long-term goals and establish tools to measure success • Adopt long-term planning and budgeting, as well as clear methods for economic and financial analysis

30. The Ministry of Tourism • Recommendations Clear Criteria for Assessing Investments • Establish clear criteria and processes for assessing investments in tourism • Include clear and systematic financial analysis/screening • Evaluate investments based on fit with Israel’s overall tourism strategy, financial viability, economic impact, guaranteed availability of funds for ongoing maintenance, etc.

31. Coordination with Public and Private Sector • Some key observations… • The Ministry has limited coordination and cooperation with public and private sector: • Other government ministries • Municipalities • National public and private organizations • Regional public and private organizations • No established forum for regular cooperation

32. Coordination with Public and Private Sector • Recommendations Establish a Forum for Cooperation • Establish a forum for the Ministry to work with the private sector and other public sector organizations • Hold regular, frequent and systematic meetings in which ideas could be exchanged and opportunities and challenges discussed • Include the Tourism Ministry, the Finance Ministry, the Israel Hotel Association, the aviation sector, the Israel Incoming Tour Operators Association, relevant municipalities and other organizations

33. Regional Organizations • Some key observations… • Multitude of public and private organizations involved in the tourism industry on regional level: • Regional Tourism Associations • Regional Hotel Associations • Regional Tourism Development Organizations

34. Regional Organizations • Some key observations… • General characteristics: • Small, employ few employees and have limited budgets • Responsible for small geographic areas (micro-regions) • Limited international reach / marketing • Focus on the domestic market • Overlap with other regional organizations • Limited interaction and coordination with other organizations • Compete rather than cooperate with other organizations

35. Regional Organizations • Recommendations Consolidate Regional Organizations • Encourage the consolidation of small regional organizations • Create incentives for small organizations to merge and disincentives for those organizations that refuse to merge • New integrated organizations should have larger budgets and better marketing capabilities • Regions of focus: the Galilee, the Northern and Central Coastal Regions

36. 4 Investment Environment

37. Visitation Investment Facilitation Economic Returns Public Sector Private Sector Marketing Destination Development Earned Media Tourism Investment Policy • A demand-side perspective is an insufficient basis for a tourism strategy • The product (supply-side) matters! • Traditional paradigm: Marketing => Visitation => Economic returns • Israel requires a paradigm with a new focus… the investor. Holistic Strategy

38. Investment Catalyst #1: TIB • Establish a single Tourism Investment Board (TIB): • A prospective investor in tourism in Israel faces a confusing array of organizations and procedures to gain government approvals and/or grants. • There are presently five separate organizations with responsibility for tourism investment. • Not only does this create confusion and inefficiencies, it does not allow for an overarching development strategy to be implemented. • Turnover within key organizations undermines continuity of any strategy that may exist.

39. Investment Catalyst #1: TIB • A separate entity, under the umbrella of the Tourism Ministry. Separate full-time staff. • Final decisions on projects will be taken by the TIB board, which will include IMOT, HAMAT, Finance Ministry, and the Land Administration. • Guided by an established set of investment goals and strategies including: Tourism Investment Board (TIB) will be responsible for tourism investment, grants, incentives and partnerships with the private sector. This will integrate attractions and lodging strategy under a common long term vision. • Lodging • Attraction-related Infrastructure • Product improvement • Attractions development

40. Investment Catalyst #1: TIB • Develop and promote product concepts to investors • TIB will act as a concierge to court prospective investors. Fast-track approvals • TIB will develop in-house evaluation metrics for projects • Initially funded by the government. Joint ventures should be sought to fund the TIB in the longer term. (TIB should not be considered a developer – only a promoter and/or participant.)

41. Investment Catalyst #1: TIB • Current Decision-Making Structure

42. Investment Catalyst #1: TIB • New Decision-Making Structure IMOT Tourism Investment Board ILA HAMAT Finance • Legislation may be required to establish the TIA. However, the legal environment was not assessed in relation to the new entity.

43. Investment Catalyst #2: Incentives Realities • Current grant and incentive system is too limited to make an impact. • Israel’s investment incentives must address the real issue of a deteriorating product in the midst of new regional development of a much higher quality. • Further, incentives need to address the particular risks to tourism investment in Israel. • And these incentives must be at least as compelling as those of destinations competing for the same capital and developers.

44. Investment Catalyst #2: Incentives Recommendations • Award grants and incentives for renovations, not just for expansions and new projects. • Require a budget for annual maintenance as a grant criterion. • Offer low interest financing for projects of special significance and/or when private financing is difficult to obtain. For mega projects, the government can back bonds. • Offer a safety net policy to investors to counterbalance security risks. • Seek private sector equity and operational expertise in public projects.

45. 5 Summary

46. Summary • Renovate existing lodging supply • Develop new lodging • Attract well-known international hotel brands • Further develop existing attractions • Develop amenities in underdeveloped areas • Address issues relating to transportation to and in Israel • Reform the Tourism Ministry • Consolidate regional organizations • Establish a tourism investment Board • Provide better incentives for tourism development