Paying for tourism

New Zealand's likely to be getting tourists again this year with the border re-opening. Not a bad time to revisit the idea of running proper access fees at congested venues. 

I'd noted it here last year, after I gave a talk on this stuff at Otago University's Tourism Policy conference in Queenstown. 

I'd had to dig up my old notes from that talk for another purpose and realised I'd never put them up anywhere else. 

So I'll paste them here. 

I never deliver the talk I write down ahead of these things; I always ad lib. But the notes give a decent idea of what I likely covered. I'd sent this version through to the organisers ahead of time. 

Net Benefit Tourism: Covering the Costs

Address by Dr Eric Crampton, Chief Economist, The New Zealand Initiative, to the Otago Tourism Policy School 2021.

[Or, rather, notes for such an address – check against delivery. My talk will be on the themes here developed, but I don’t memorise or read speeches.]

Imagine for a moment that the grocery store here in Queenstown ran on the same principles that underpin New Zealand’s tourism framework.

We would have substantial government-funded advertising regimes encouraging people to get out to the grocery store, noting the fabulous products that could be on offer.

People would have to pay their own way to get to Queenstown, and to get from the airport to the store.

But when they would get to the store, half of the aisles would be an utter disaster. The products in those aisles would all be priced at zero dollars. Customers would be queued for glimpses of the products, and the aisle itself would be rather run-down. Products in other aisles would be priced normally, but the congestion and mess resulting from the freebie aisles would make the whole place just a little tawdry.

It’s pretty easy to imagine how people would react to having to shop at that store. They’d want government to step in to limit the number of people who might shop there. They’d want tough measures to make sure that locals who needed to shop there weren’t crowded out by other visitors coming in for all the free products. And nobody would be happy. We would have conferences on how we might ensure that grocery customers pay their way, and figuring out rationing mechanisms for the products in those messy aisles.

When we put it that way, the problem is pretty obvious.

Until the past couple of decades, getting to New Zealand was expensive enough relative to incomes that congestion really could not be much of an issue. When there aren’t many visitors, figuring out how to charge for access to parks, or how to cover the infrastructure costs of tourism in places like Fox Glacier, didn’t really come up.

There is no point in setting up property rights or pricing mechanisms for things that are in infinite supply relative to demand. Students of economic history and the history of economic institutions will know Harold Demsetz’s 1967 work that described the evolution of property rights regimes among the North American First Nations. Prior to Europeans’ arrival in what is now Quebec, beavers were hardly scarce; their meat was of little value, and locals requirements for furs were small. So no hunter much impeded on other hunters’ ability to get on with things. After the arrival of Europeans with insatiable appetites for beaver furs, property rights in trapping grounds were established and enforced. Establishing and enforcing those rights is hardly free. But it became worth the effort when demand conditions changed.

In 1990, New Zealand accommodated just under a million visitor arrivals. In 2000, 1.8m. 2010: 2.5m. 2019: 3.9m. Central government collected about $1.8 billion in GST from those visitors in 2019. In recognition of the costs that large numbers of visitors can impose on specific communities, the government provides a $25 million annual fund for infrastructure projects in tourist-facing places.

When the number of visitors quadruples, the country starts needing better ways of managing access to things that are scarce. Some things that had been free to access might just need an access fee. And there are ways of doing it that improve outcomes for locals, rather than making things worse.

I hope that New Zealand’s vaccination programme proceeds at a fast pace and that the country can reopen to travel in the near future. Getting some better mechanisms in place to cover the costs, though, would put the industry on more sustainable footing.

Currently international travel is not covered by the emissions trading scheme; there has not yet been international consensus on how to divvy up carbon charges between countries. That has led to arguments that travel should be restricted to reduce international aviation emissions. But another way of thinking about it is that the carbon emissions in a ticket from London to Auckland would cost about $50 if they were covered by New Zealand’s ETS. Does it make more sense to try to centrally plan visitor numbers, or does it make more sense to find ways of adding a $50 carbon charge to a ticket? International agreement is best, but it isn’t hard to imagine putting international aviation fuel into the ETS - Increasing New Zealand’s net emissions cap commensurately, but maintaining the same path to net zero. If someone then decides that travel isn’t worth the cost, where the cost includes the carbon charge, isn’t that a better way of sorting out which travel might really not be worthwhile?

Once travelers get here, they face a lot of parks and attractions that carry no charge but that are under substantially increased pressure.

I grew up in Canada. There, if you want to visit the national parks, you have to buy a national parks pass. The annual pass doesn’t cost that much, and is a rather good bargain for locals would use it year-round, but amounts to a very high per-visit fee for foreign tourists. The government could run a similar system here, but with explicitly much higher charges for foreign visitors than for locals, and use the collected revenues to improve the facilities for everyone.

For other facilities, the Department of Conservation could auction concession rights under a restriction that access by locals has to be at very reduced fees. Again, those kinds of systems would help fund far better services in congested places, with better services for locals being funded by visitors. When visitor numbers are small, it wouldn’t be worth it. But it can make a lot of sense in places where visitor numbers are higher.

Local councils face high costs in trying to build and maintain infrastructure necessary for dealing with surges in tourist numbers on small tax bases. That has driven demand for measures like bed taxes in places like Queenstown. But that doesn’t really solve the problem. Plenty of places without beds to tax face similar problems: Fox and Milford, for example. Bed taxes would never cover the costs in those places.

And bed taxes come with their own substantial risks. Imagine that every town set its own bed taxes. Imagine further that a tourist couple, who would entirely be covering their own costs if the GST they paid were considered, get a thousand dollars in value from a driving tour across the country. Is it that hard to imagine successions of bed taxes that wind up charging more than the value the couple gets from the whole trip?

This is actually a known problem in economics, and I’ll turn again to economic history. In the 1250s, ships traveling the length of the Rhine River had to stop at 12 toll stations along the course of the river, but a lot of informal toll-stations were set up by robber barons along the way too. Each site wound up charging far higher fees than would have been optimal, effectively trying to extract the entire value of a trip at each point along the trip. And, of course, this hold-up problem resulted in far too little travel, hurting all the cities along the way, and the League of Rhine Cities wound up laying siege to some of the robber-baron castles. Having one price for the whole trip, rather than having each segment of the trip extracting high and uncoordinated fees, can make more sense.

And surely where tourists are contributing on the order of $1.8 billion a year already in GST, it makes more sense for central government to use that revenue to defray the costs that tourists impose in different parts of the country. The Tourism Infrastructure Fund seems only a drop in the bucket.

I tend not to write conclusions for these in advance but sum up instead based on the vibe of the rest of the conference. So forgive its dropping off abruptly. 

I've vague memories of a bed-tax-proposing Mayor insisting he wasn't a robber baron though. 

Morning roundup

The morning's closing of the browser tabs:

• Customs is now seizing 125,000 cigarettes and 155kg loose tobacco per month. Why? "We have the most expensive cigarettes in the world for legal purchase."
• Wastewater testing says highest meth consumption, per capita, is in Kaitaia, Ōpōtiki, Wairoa, Kawerau, Tokoroa and Huntly. Lowest levels were in Kerikeri, Dunedin - Tahuna, Queenstown, Wellington - Karori, and Greymouth. 
• Robert MacCulloch on the mediocrity-bias in the public service. 
• Robert MacCulloch wonders why NZ didn't just pay more to get vaccines faster. Asking this on Twitter always generates a pile of replies from Labour-stans, but come on. We're continually vying with Australia for worst in the developed world. 
• Oh - and if we wanted to get vaccinated faster, first doses of AZ followed by second doses of Pfizer seem to work a treat. 
• The Industrial Revolution? Look first to the prior agricultural revolution enabling the population growth that allowed for the division of labour and for time spent in discovery. 
• Ayn Rand's worst idea: moral intolerance. Seems popular though.
• The NZ residence application queue is awful. Almost 30,000 people whose applications are "waiting to be allocated for processing". They suspended processing of Expressions of Interest under the Skilled Migrant Category because of Covid. But piles of those people are already here. They wouldn't need to come in through MIQ. Surely Immigration NZ could give them an answer. 
• MBIE and DoC have a new tourism data portal. There's a ton of stuff in there. Some of it hasn't updated since covid, like employment in tourism. 

User fees and park access

I attended Otago University's tourism policy conference held in Queenstown last week, giving a brief keynote opening to a panel session on covering the costs. 

New Zealand's policy has generally been to charge a price of zero for access to congestible resources, then to get really mad about tourists overwhelming those places. Charging access fees, where possible, makes rather more sense. 

I wrote it up for the Stuff papers; it was in this morning's Dom Post and is online as well. A snippet:

Last week, Otago University’s Tourism Policy School held its annual conference in Queenstown. I attended, ready to make the case for charging for access to places that suffer from overcrowding. But I found I was hardly the only one arguing for it.

The Parliamentary Commissioner for the Environment’s report on tourism, released in February, had also made the case for charging for access. The report highlighted the fees charged for park access abroad, and that those fees often differentiated between international tourists and locals. International tourists then can help fund better infrastructure, environmental remediation, and a better experience for local visitors.

Tourism Minister Stuart Nash also found it absurd that New Zealand just gives away some of the most scenic experiences in the world. He pointed out that charging for access can solve some of the problems.

It is pretty easy to see how the country got itself into this situation, but that makes it no less frustrating. For most of the period since colonisation, visitor numbers really have not been high enough to substantially degrade either the environment or the experience at New Zealand’s most scenic places.

When there is no real scarcity, there is no real need to try to manage scarcity. Kiwis came to see zero-price access to national parks as something of a birthright. But visitor numbers quadrupled from 1990 to 2019. And while tourists came to contribute some $1.8 billion in GST per year while here, central government only recently allocated $25 million per year to improve infrastructure in places tourists visit.

Tourists, overall, may well be more than paying their own way. But they’re doing it in ways that don’t wind up helping to preserve and restore the places that they, and we, care about. The Tourism Infrastructure Fund seems only a drop in the bucket.

The overall setup almost guarantees conflict.

I expected brickbats; I've received a few when previously recommending charging fees for this stuff.

Instead I received a friendly note by email in response to the column, reproduced with permission:

I read with interest your article on paying for access to tourist sites and I'm grateful you felt moved to take the time to put that together.

In November 2020 my wife and I with another couple cycled the Otago rail trail, and it never occurred to us that there wouldn't be a fee for using this tourist attraction. So at the end of the trail and in amongst the normal chit-chat we asked trip organisers how much of the fees was for access to the trail itself - '...nothing it's free....'

We were in disbelief that there was no charge for using this resource, but then of course we thought back to the degraded track, parts of which are dangerous because of lack of or poor maintenance, and we could see that actually there is no money being reinvested, and I guess some local farmers do a little bit of work to keep it rideable. 

It is a complete nonsense that people can use this and not pay any money to be put towards maintenance and development of the attraction. On our last night and Clyde we happened to run into the area manager, for I think Fulton Hogan, and spoke with him in the bar about this issue. He said that civil engineering companies periodically spoke to DOC about a maintenance contract - which would be relatively easy, but there was simply no meaningful response from these people. 

So we are left with the hopeless situation of this government department being unable to even set up a contract to have a contractor drag a couple of angled brooms behind a quad bike along the track once or twice a week. 

Anyway thank you for taking the time to put something into the media, and I hope something comes of it. If we can't organise some fee and ticket system utilising the be digital world we seem to live in, then we may as well pack up and close it down. 

I hope Minister Nash makes progress on this one.

I always learn interesting things at these sorts of industry events. 

I don't think that I've ever been to one that more closely fitted Adam Smith's warning: 

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.

I heard calls for reductions in the number of cruise operators in Milford, not to address environmental consequences but to reduce capacity and increase prices from $100 per ticket to $200. I heard calls for DoC concession licences to include piles of provisions around living wages and net carbon zero measures [even in sectors fully covered by the Emissions Trading Scheme!] that seemed well designed to raise rivals' costs. 

Only one of the sessions was like that, but it was a bit jaw-dropping. 

Tourism and the ETS

Eloise Gibson covers the carbon costs of tourism over at Newsroom:

But in reality: “value-led tourism growth may actually worsen those pressures that are linked with consumption. Higher-value visitors, by definition, consume more goods and services, all of which have an associated greenhouse gas and solid waste footprint. To the extent that these goods and services are relatively energy intensive (e.g. car rather than bus travel, hotel rather than campground accommodation, helicopter rides rather than hiking), high-value visitors will again have a relatively large greenhouse gas footprint.”

While the report concludes it is possible for smaller number of wealthier tourists to put less pressure on wastewater and waste disposal services, that only works if the total number of visitors falls.  “Any such improvement relies crucially on any growth in higher-spending tourists being accompanied by
 a reduction in their lower-spending peers. It is far from clear that this is the intention. The New Zealand-Aotearoa Government Tourism Strategy states that “we want the value of tourism to continue to grow faster than volume”, but provides no mention of limiting volume itself.”

Time to limit cruise ship visits?

Responding to Upton's office's report, Michael Lueck, a professor of tourism at AUT's School of Hospitality & Tourism, said the government should consider outright caps. "It appears that the main problem is the sheer number of tourists, and we need to look at slowing this growth. The often cited 'high-value tourism', or 'quality over quantity' does not always work, but it would be fairly easy to, for example, limit the number of cruise ships coming into the country. These put a disproportional burden on New Zealand’s infrastructure, environment, and culture, while the economic benefits are comparatively small," he said.

When we think about domestic issues [emissions from international travel are their own mess needing international agreement], and remember that we have an ETS that's moving to a binding cap, the implications change.

It isn't that tourists would then increase NZ's net emissions; it's rather that they bid up the price of carbon and you could then imagine potential equity concerns in the same way that there could be equity concerns if international tourists had disproportionate effect on other rivalrous goods that are in absolutely fixed or declining supply.

But the solution to none of that is capping tourist numbers. You don't solve equity issues by mucking about on that side; you do it instead by finding ways of providing transfers to those on the short end of that equity stick, which they can then use however they like. If richer foreign tourists can outbid kiwis for things kiwis enjoy and are in fixed supply (like carbon credits), then you need to find ways of providing side-payments - transfers from the winners to the losers.

If tourists bid up the price of carbon, and emitting industries like agriculture were provided initial allocation units, then the increased price can increase the cost of farming but that's offset by an increase in the value of the allocated units - so that has the compensation built right in.

Crown sales of NZU into the system ultimately for purchase by foreign tourists at the fuel pumps could provide cash that could be used to provide other side-payments.

There's a strong case for getting more tourist-facing facilities onto a proper user-pays basis, with potential for price differentiation between foreign and domestic visitors - like charges for access to national parks that apply to foreign visitors. Some of the things that seem to be in fixed supply around national parks seem more like a policy decision neither to properly charge for access nor to fund the facilities to meet demand at the going price. Letting prices work would allow effective supply to increase and would provide basis for some of those side-payments.

Vogons vs Backpackers

Looks like the Vogons are going after backpackers that provide tourists with lodgings in exchange for some work around the place.

Backpacker hostels face big fines if they continue the long held tradition of casually offering travellers free beds in exchange for unpaid labour.

Some industry stalwarts say travellers can't be bothered with the paperwork now required to legally work for accommodation, and they worry it will destroy hostel culture.

But the Labour Inspectorate is preparing to get heavy with those who do flout the law and is monitoring job advertisements on backpacker and work exchange websites.

There is a real tax and distortion issue here, but there might be a simpler solution. Backpackers will have an incentive to barter for cleaning services with backpacking patrons because PAYE and GST won't be imposed. But that could potentially be solved by having the hostels report the value of accommodation-nights provided under that kind of arrangement and charge FBT on it. That would get rid of the tax distortion while allowing mutually advantageous trades between backpacking tourists and hostels.

Fiji tourist calculus

Suppose that, when Air NZ stopped flying to Vanuatu, you exchanged your tickets for tickets to Fiji - with flights scheduled in a couple of months for a family vacation.

Here are some post-hurricane considerations:

• If the Fijian government is optimising correctly, it will be allocating resources across the tourism and civilian relief sectors to weight both short term pain and long term recovery. Getting tourism working faster, when about a quarter of Fiji's GDP is tourism, means the longer term recovery can also be more effective. Farmers with ruined fields shifting into construction, both privately in the resorts and on the government's budget fixing roads and clearing mess, is better funded where tourists get back quickly. 
• At the margin, you'd then want a bit more emphasis on getting the tourist side going well so that you can draw in the resources for the longer term recovery. But they'll have to take into account that tourists don't like seeing suffering, and that sipping cocktails at the beach doesn't feel nice if there's dysentery from contaminated water not too far away. And even if the tourists didn't care about that, dysentery is communicable. 
• If the Fijian government is extractive, rather than social welfare maximising, it will divert loads of resources from hard-to-see places to the tourist sector to get government revenues up more quickly. 
• In the former case, tourists coming back quickly definitely helps. In the latter, it might hurt things. I have no strong priors on which case applies. The Fijian government certainly seems more competent than that in place in Vanuatu, but competence can be overrated if benevolence is in question.
• On balance, I expect that going does more good than harm, and that the case for it is clearer the farther out in time you are from the hurricane. 

On the purely self-interested side:

• Hurricanes make a mess of mosquito eradication efforts. This matters when mosquito-borne disease is at play.
• We'd planned on doing maybe 3 days in the resorts (pricey) then 4 days on the main island at hotels and touring around. The latter is now far more likely to be unpleasant, and more days in the resorts are too expensive.

Those with information that would assist are welcome to provide it in comments. I've found @alexperro's reporting for RNZ most useful thus far.

If you believe the study...

If Christchurch Council believes the report it commissioned into the wider economic benefits of long-haul flights into Christchurch, it could pay its airport to adjust its slotting fees to ensure that long-haul routes are maintained.

Here's The Press:

Air New Zealand is pulling its last remaining long haul flights from Christchurch, cancelling direct seasonal flights to Tokyo.

After questions from Fairfax Media on Monday night, the airline began contacting the industry warning it of plans to end the flights, which currently operate over the summer months from Christchurch to Narita International Airport.

It later confirmed that the flights would not be operated next summer, saying it was putting on more flights from Tokyo to Auckland in response to research which said consumers had "no clear preference to fly into Christchurch".

"While we accept this decision is disappointing for Christchurch tourism stakeholders, the impact on the total number of seats the airline will operate into Christchurch is minimal," Air NZ said in a statement.

...Peter Townsend, chief executive of the Canterbury Employers' Chamber of Commerce, said Christchurch needed airport links to Asia both to cater to freight demands and bring in tourists to travel throughout the region.

"Air New Zealand need to consider the overall economic impact of their decisions. This isn't just about plane landings or passenger numbers into a particular airport, it's about the economic benefit that accrues from having direct international linkages into the South Island and into the regions of the South Island consequently," he said.

In 2010 a report commissioned for Christchurch Airport by Berl Economics estimated that direct flights from Singapore to the city created more than 2100 full time jobs and added $243.7 million in output to the region.

If Townsend believes those kinds of numbers, he should be asking Council to provide a special levy on businesses that benefit from those flights to subsidise continued routings - not asking Air NZ to turn into a regional development agency.

The continued decline in long-haul traffic into Christchurch must surely be giving Wellington Council second thoughts about expensive runway extensions, mustn't it?

Hobbit budgets

I do not know how much NZ central and local governments spent on Lord of the Rings and on The Hobbit. There are conflicting reports, and nobody seems particularly clear on how much was subsidy in the sense of "they paid less in tax than they would have if they were some other business, but they might not have come here without it, so we don't know if the net effect on total taxes paid was positive or negative, but we're going to assume a counterfactual of that it would have been done here and assess on that basis" and how much was a straight-up grant. Gordon Campbell reports that, for LOTR, it was done as tax rebate and that it's now a grant. I've seen other sources counting a GST concession as a Hobbit tax break, but all products and services produced for export are GST exempt so inputs for that export product would always get a GST rebate. I'd love to see an authoritative figure.

But it can be useful to put the figure purported for The Hobbit into a bit of context. The most commonly cited figure for government support for The Hobbit is $67 million. I do not know whether this was a cash grant based on a proportion of their domestic expenditures, a tax concession, or something else. But I do know that for the 2012/2013 budget year, Vote.Tourism allocated $83.9 million for marketing New Zealand as an international tourist destination. 

Imagine that the only benefit we get from the whole LOTR/Hobbit franchise is as tourism marketing campaign.

For 2012/2013, which did more to market NZ as an international tourist destination: The Hobbit, or everything else the government might have done in tourism promotion? Which seems more likely to inspire travel to New Zealand: 100% Pure, or Middle Earth? 

Now I'm not sure that the government should be involved in tourism promotion in the first place.* But if they're going to do it, and if more tourism is a good thing,** is it crazy to think that LOTR/Hobbit could have delivered at least as much per dollar spent as the rest of the Vote.Tourism funding for overseas promotion? 

I don't like differential tax treatment for different industries. And races to provide tax breaks for films mainly benefit Hollywood (see here and here and here and here). But imagine that Peter Jackson had submitted a GETS tender to deliver international promotion of New Zealand. He provided The Hobbit - a 3 hour infomercial for New Zealand - and delivered it to maybe 90 million sets of eyeballs*** for $67 million. Could Tourism New Zealand have done better if they'd won that contract instead of its being outsourced? I'd try to evaluate the government's investment on that basis rather than on economic impact measures. 

Marginalia follows below.

* The main plausible market failure case would be that any firm attracting more tourists to New Zealand only recoups a small portion of the returns and that there are too many of them out there plausibly to coordinate. But there are ways around that kind of problem: The country's two main international airports could have coordinated things along with Air New Zealand, with LOTR sponsors getting access to LOTR tourist packs for incoming visitors. Affiliating sponsors could be listed on Hobbit Trails and the like on the tourist maps. 

** I wonder about it whenever cruise ships come into town. Princess Cruise Line's Diamond Princess visits regularly, carrying 2,600 elderly Americans, most of whom seem to get bused downtown at the same time. Christchurch's total population is about 360,000; Dunedin has about 120,000. This is just me being grouchy though. 

A free idea for somebody planning on entering the 48 Hour Film Festival: a man suffering severe caffeine withdrawal realizes that the passengers being bused into town from the cruise ship are actually zombies. The ship was infected en route. Nobody else in town notices that they're zombies because, well, their behaviours aren't that different from cruise ship passengers: slow shuffling from tourist photo spot to tourist photo spot, moving in herds attracted by noise and light, biting people. Film two versions: one where he does what's necessary about the zombie invasion, with the I Am Legend twist at the end [we'll all be elderly cruise ship passengers, some day, and they're just like that], the other where he tries and fails in raising the alarm because everyone worries about effects on local restaurants, etc. Idea perhaps inspired by that the quest for my first coffee Sunday morning was very slightly delayed by herds from the cruise ship.

*** US domestic gross $287m; international gross $608m (and counting). A U.S. movie ticket averages under $9. If we assume $9 per ticket, then that's almost 100 million people who sat and watched a 3 hour infomercial for New Zealand. That's likely an underestimate as foreign ticket prices should be less than those in the US, and lots of people will have seen the movie via torrented illegal copies.