Hotel Electricity Rate Cut: A Misguided Move

The decision to slash electricity rates for hotels won’t do anything to solve the crisis in Jordan’s tourism sector.

By Jawad J. Abbassi

Jordan’s tourism sector plays an important role in the Kingdom’s economy. According to the Ministry of Tourism and Antiquities (MOTA), tourism receipts in 2014 rose 6 percent year-on-year to JD3.1 billion, while the number of overnight visitors to Jordan over the same period rose 1.1 percent to almost 4 million.

Last year, some 60 percent of overnight tourists visiting Jordan chose to stay in hotels. Hotel guests totaled 2.4 million, while around 1.6 million tourists stayed in apartments rather than hotels. Hotel guests stay an average of 2.1 nights only, generating over five million hotel nights.

Amman is the prime tourism destination followed by Aqaba, Dead Sea, and Petra. Last year, Amman’s share of total hotel nights was 59 percent and its share of total guests stood at 54 percent. Aqaba followed with a 22 percent share of both nights and guests. The Dead Sea came in third with 14 percent of guests and 12 percent of hotel nights. Petra was in fourth place, with a share of 7 percent of guests and 6 percent of hotel nights. Between them, the four main destinations of Amman, Aqaba, Dead Sea, and Petra accounted for 98 percent of hotel nights and hotel guests in 2014.

Yes, 2014 was a good year for hotels, which was clearly reflected in the results of those listed on the Amman Stock Exchange. Seven publicly traded companies that own 13 hotels generated revenues of JD142 million, up 5 percent on 2013. Operating profits increased by 6 percent to JD42 million.

Unfortunately, hotels didn’t get off to auspicious start in 2015. According to MOTA, tourism receipts in the first four months of the year dropped by 15 percent to reach JD880 million, down from around JD1 billion over the same period in 2014. Tourist numbers also dropped by 13 percent, while tourists arriving in groups dropped by 41 percent. This drop was also reflected in the results of the publicly traded companies: In the first quarter of 2015, the aggregate revenues of the 13 hotels at ASE dropped by 17 percent to stand at JD25 million, while operating profit dropped by 44 percent to a mere JD4.3 million.

In May, the government announced actions aimed at energizing the tourism sector. The measures included waiving taxes on plane tickets and waiving visa fees for tourists that stay longer than three days and visit the tourism sites. Moreover, the government decided to reduce the electricity charges for hotels across Jordan by 50 percent to become 91 fils, down from 181 fils. The official calculations suggest that the electricity rate reduction will amount to JD28 million annually.

The visa reduction measures, which encourage more tourists to visit Jordan is welcome, but the massive electricity rate cut is ill-advised.

The rate drop disproportionately favors hotels less hit by the current crisis than hotels suffering from very low occupancy rates. After all, hotels with low occupancies will have reduced electricity consumption by default as most of the hotel rooms remain empty.

The new rate sells electricity at below its actual cost. This means that the government is subsidizing hotels only while neglecting the other main components of the tourism service sector (restaurants, clubs, malls, recreation parks, etc). Moreover, it neglects that 40 percent of tourists choose to stay in furnished apartments, not hotels. These now pay four times the electricity rates paid by hotels.

The rate drop is revealed to be even more illogical when considering hospitals and schools will now be expected to pay four times the rate paid by five star hotels.

Short of a comprehensive rebalancing of electricity rates in the country, the more sensible decision would have been for the government to keep the electricity rate for hotels unchanged. It should have then taken the surplus it generates from the tourism sector electricity bills (around 28 percent, which is the difference between 181 fils and the actual cost of around 140 fils per kWh), and poured it into the marketing and promotions budget of Jordan’s tourism sector. The root cause of the problem lies in falling tourism numbers. The solution should be to drive up these numbers, not reducing rates for some players at the expense of others.