A. Development Banks (Regional and National)
B. Commercial Banks
C. Financial Agencies
D. International Assistance Agencies
The research for this study, though limited in its scope, did not reveal a major shortage of funding for demonstrably viable nature and heritage tourism development projects, nor did we find that obtaining financing is more difficult for such projects. Indeed, failure to obtain financing may be more attributable to poorly formulated projects or generalized economic problems. For example, the Barbados Development Bank has indicated that it has not received any serious funding requests.
For nature and heritage projects to contribute to the overall health of a Caribbean nation’s economy, they must be sustainable. Self-sufficiency is an essential component of sustainability. One specialist in the nature and heritage tourism industry even goes so far as to define the eco prefix in the word ecotourism as belonging to economic rather than ecology. One of the biggest constraints on the development of projects is the preparation of feasibility studies.
If an organization or business is unable to operate profitably, it will not long survive and will have little impact on preserving the world’s natural and cultural resources.- Mission statement of the Adventure Travel Society
In order to operate profitably, a government or NGO or entrepreneur must avoid a highly leveraged financial structure (i.e., indebtedness) for the project. For nature and heritage tourism to be sustainable, it must be accorded adequate financing alternatives. This may require some innovation and alternative remedies, but it is achievable.
The Caribbean island nations should seek alternative funding mechanisms to help defray the costs of needed infrastructure. This could be done via extra or increased airport user fees, an earmarked tax on project development, increased entrance fees for tourists (the excess of which would go into a fund), impact fees, or adequate facilities agreements with some cost-sharing provisions.
The attractions offered to nature and heritage tourists are a nation’s natural and human resources. This usually means that government property is the profit center for nature and heritage tourism projects. An NGO or entrepreneur can provide accommodations, trails, tour guides, water sports, and beach chairs, but these are all just amenities.
Those who profit should therefore pay for the upkeep of these natural treasures by sharing their earnings with the local government. This may create a funding source for countries that in the past could not afford a “luxury” like environmental preservation.
Because some lenders may not have much experience with evaluating nature and heritage projects, it is incumbent upon the borrower to present the most complete project proposal possible. This should include a market assessment with projected occupancy rates, and agreements with tour operators to include the project in package promotions. It should include an environmental impact statement to assure lenders that the attraction - which, after all, is the project’s principal asset - will not be damaged.
This is particularly important because the collateral offered to commercial banks and financial institutions is often limited to the land that will be developed. Although the land may have agricultural potential, its visitation potential as a tourism project should be assessed significantly higher. The lender should not be left with only the applicant’s subjective promise of a project’s potential: the borrower must establish that value.
National and regional development banks have traditionally been very supportive of tourism projects, but have not provided much assistance for nature and heritage tourism. Although they report that they are eager to support such initiatives, they make no distinction between nature and heritage tourism and other tourism development projects. For example, they have not made any special concessions for such projects (such as longer grace or repayment periods). Caribbean countries could amend their policies on development banks to improve access by nature and heritage project developers, and thereby reduce dependence on international assistance agencies for site development. National development banks cater to both public- and private-sector projects. Their funds are usually made available in the form of loans at a percentage point or two below commercial bank rates.
The National Development Bank (NDB) of Jamaica is funding a US$1.3 million and an approximately US$333,000 ecotourism project on the southern coast of Jamaica. It also provides assistance for the preparation of feasibility studies. Authorities at NDB believe that current high interest rates (over 70 percent per year nominal market rates) are discouraging investment decisions, regardless of how well-designed an ecotourism project may be. The initial low returns, in addition to the relatively sizable investment required, make access to commercial lending difficult. Incentives provided by the government sometimes only apply to larger developments, not small-scale ecotourism projects.
The Caribbean Development Bank (CDB) provides both loan and grant funding for tourism-related activities. Most is channeled through governments, but some is provided to the private sector. CDB loans to the private sector carry the following requirements and terms:
· Debt-equity ratio requirement: maximum 50 percentFor projects developed by governments or by private individuals, the bank provides Contingent Recoverable Loans through its Special Development Fund (SDF), which was created to fund studies that might lead to projects that the CDB could finance. If no viable project results from the feasibility study, the loan reverts to a grant. To date, the fund has received two requests and funded one - a US$4 million loan to the Government of Dominica. Preliminary assessments are currently being made to determine the economic and financial viability of other proposals.
· Interest rate: 9.5 percent (approximately)
· Grace period on repayment of principal: up to 5 years
· Assessment fee: 1 percent of loan amount, up front
· Commitment fee: 1 percent per annum on the undisbursed balance
· Loan minimum: US$750,000
· Loan maximum: US$5 million
· Debt service coverage ratio: not less than 2:1
To date, there have not been many requests for these loans, and CDB has not aggressively advertised them, as SDF funds are limited. Even when this facility is replenished, nature and heritage tourism projects will have to compete with other projects for funding.
Contingent Recoverable Loans made available from the Special Development Fund (SDF) have the following conditions:
· interest rate: 2-4 percentFor government nature and heritage tourism projects, a mixture of grants, soft funds, and hard funds can be used. Private-sector borrowers are subject to the usual funding requirements.
· grace period: 10 years
· loan term maximum: 40 years
· loan maximum: no limit for government borrowing; depends on CDB’s exposure in the country
The commercial banking system does not make special provisions for tourism projects. All requests for loans are assessed according to their financial viability. The banks, like all commercial financial agencies, also require some collateral and owner equity. The interest charged depends on the prevailing rates, which currently vary from 8 to 16.5 percent a year. Both Barclays Bank PLC and the Royal Bank of Canada have provided loan financing for nature tourism projects in Barbados at prevailing interest rates. In Trinidad and Tobago, officials at Republic Bank, the country’s largest commercial bank, could not identify a single project that it was financing in the area of either nature or heritage tourism.
In Jamaica, the Trafalgar Development Bank, a private banking institution, has expressed much interest in environmental issues. It is currently financing a sixteen-room ecotourism project, the Hotel Mocking Bird Hill, near Port Antonio, for which it has lent US$150,000 of the total cost of US$262,000. However, it is not well informed about the nature and heritage tourism market, and a lack of adequate feasibility studies, serious sponsors, appropriate security, or confirmed leases/concessions from the government, has kept it from further involvement in such ventures.
Financial agencies operate in the same way as commercial banks. Tourism is not treated more favorably than other sectors. One such agency in Barbados, Caribbean Financial Services Corporation (CFSC), has funded one nature tourism development, the Barbados Wildlife Reserve.
The CFSC reports that although an increasing number of eco-based projects have been submitted for funding in the recent past, most were turned down for the following reasons:
· The capital cost of development is usually too high, with most projects exceeding CFSC’s maximum transaction size of US$1 million.In Trinidad and Tobago as well, no distinction is made between nature and heritage tourism and conventional tourism projects. Representatives of Development Finance Ltd. indicated that there have been several inquiries about ecotourism. They have also been involved in discussions about a proposed ecotourism facility in Tobago, but it is still in the conceptual stage.· The equity base sometimes consists only of the piece of land to be developed; this is usually insufficient to give the project a feasible debt/equity structure.
· The cash flows and earning potential are usually too low to provide a reasonable return on equity as well as a comfortable debt service profile.
· CFSC’s sources of funding allow for a maximum loan term of ten years, while many projects require at least fifteen-year financing in order to match the projected cash flows.
The Business Advisory Services/Enterprise Development Limited agency of Trinidad and Tobago has had extensive experience with small projects in the past, involving an important subsidy component. In the recent past, however, a change in its operating orientation - it is now required to be self-sustaining - has precluded it from financing projects of undemonstrated financial viability. Nevertheless, interest in the development of nature and heritage tourism projects still exists. It has been recommended that a fund be established for a given period of time to provide grants to sponsors willing to prepare feasibility studies and proposals for the development of such projects. Seed funds could also be considered as a mechanism to support potential sponsors.
As a rule, the loan criteria applied by the financial agencies are similar to those of commercial banks, but the rates may be just below theirs. However, grace periods (two years in the case of the Barbados Wildlife Reserve) may be granted.
In the absence of national government subsidies, international assistance agencies can provide financial and technical assistance to cover a wide range of needs, from support for research initiatives to feasibility studies and assistance with the provision of infrastructure (such as trails and interpretation centers).
Most of the international agency assistance has been in the form of grants and grant packages from donor agencies. The following agencies have been generous: the British Development Division in the Caribbean (BDDC), CIDA, the European Economic Community (EEC), the Food and Agricultural Organization (FAO) of the United Nations (UN), the OAS, and United States Agency for International Development (USAID).
The development of Pigeon Island in Saint Lucia illustrates how various organizations can cooperate for a shared purpose. Pigeon Island was a strategic naval station of the British colonial empire during the eighteenth century and is now under the control of the Saint Lucia National Trust. It has been renovated with assistance from the OAS, which provided technical assistance for institutional strengthening of the Trust and prepared a feasibility study on restoring and enhancing the island, and from CIDA, which donated US$577,000 for the transformation of a historic building into a museum/interpretation center.
The CIDA grant is part of a US$11.5 million fund being made available to the countries of the Organization of Eastern Caribbean States (OECS)3 over a five-year period. These funds were channeled through the Small Project Improvement Fund (SPIF), which identifies, designs, and delivers small-scale, high-priority projects. Its major objective is to promote sustainable economic and social development by increasing economic output and generating employment and income opportunities.
³Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts, Saint Lucia, and St. Vincent and the Grenadines.Up to a maximum of US$577,000 in grant funding can be requested from SPIF for nature and heritage tourism projects. The main criteria are that the projects be sustainable and that they contribute to job creation and foreign exchange earning. Governments are the main beneficiaries of this fund, and SPIF usually requires that projects designated for funding show a positive rate of return. It also usually requires that a statutory body be established to manage the project and that user fees be introduced to recover the investment cost. Among the projects funded to date are, in Grenada, a craft center, nature trails in Grande Etang (a volcanic crater lake), several restoration projects, and Fort Frederick; in Dominica, buildings in the Cabrits (a historic area containing Fort Shirley); in Saint Lucia, a museum and interpretation center and expansion of the central market; and in Saint Vincent, a waterfront market.
Current OAS technical assistance to member state governments for nature and heritage tourism is directed at institutional strengthening of the organization that has responsibilities in the area and at the preparation and evaluation of regional development plans and investment projects studies. Public education and awareness programs are also considered necessary.
The IDB is considering (August 1994) financing a US$16 million nature and heritage tourism project in Barbados. In Trinidad and Tobago, it is providing technical cooperation and US$30 million for consultants to prepare a tourism master plan. The plan calls for basic infrastructure to facilitate investment in tourism facilities.
Illustrative of USAID financing of nature and heritage tourism is its support of the Blue Mountain and John Crow Mountain National Parks in Jamaica. This assistance was given through various channels, including support of the PARC project of the Planning Institute, facilitation of a debt-for-nature swap, the financing of technical cooperation through the Nature Conservancy, and direct support of projects in the parks. USAID also financed an inventory of historic sites and monuments through the Jamaican National Heritage Trust. The agency is reviewing a US$5 million project to restore the military barracks in Spanish Town.
The OECS countries have been successful at obtaining technical assistance to undertake feasibility studies for nature and heritage tourism projects, but many of these proposals have not been carried to fruition. For example, in 1989, the OAS completed feasibility studies for the Pitons National Park in Saint Lucia, which estimated that the total investment required for the establishment of the park was US$1.6 million. Annual operating costs of US$250,000 would be offset by an estimated income of US$395,000 in the first year from concession operations, entrance fees, and the sale of crafts and souvenirs. To date, no effort has been made to seek funding (either grant or loan) to finance the purchase of land and other capital works to develop the project4. There are many reasons why there have been so few follow-up requests. In the cases of Saint Lucia and Grenada, most of the properties in question were privately owned, which hindered the governments’ ability to acquire them. Also, some of the areas were targeted for other uses - in St. Lucia, for example, for hotel construction. In other instances, countries faced financial constraints.
4The OAS conducted similar feasibility studies for the Tobago Cays in St. Vincent and the Grenadines and for Grande Etang National Park in Grenada, and another was done for Levera National Park in Grenada with funding from the EEC.Most of the grant funding for nature and heritage tourism projects has been from bilateral funds and in support of government-owned projects; the OECS countries have been the largest beneficiaries. Most government-managed projects charge nominal or small user fees that are usually inadequate to cover their operating costs, which impedes their access to SPIF.
The traditional donors appear to be curtailing the amount of funds earmarked for the region. USAID, one of the largest contributors of grant funding, has begun scaling back. The Canadian Government has also indicated that its foreign aid to the region will be cut. The SPIF project will come to an end in 1996 after a nine-year period in which US$17 million will have been injected into the region. However, development banking institutions like the CDB are making soft funding windows available as they realize the contribution nature and heritage tourism can make to economic and overall development. The only major constraint is the degree to which projects can satisfy institutional criteria. For example, several Caribbean nations (Barbados, Trinidad and Tobago) have “graduated” from the World Bank Group’s category of relatively poorer countries and no longer enjoy access to its soft funds. The present study also indicates that soft-window financing will become more scarce over the next several years.
Major international NGOs have also assisted with financial resources and technical assistance to support nature and tourism initiatives in the Caribbean. They include the World Wildlife Fund (WWF), the World Conservation Union, the IUCN, and the Nature Conservancy.
