Sunday, November 30, 2008

Raising the resort tenure limit to 50 years

The proposal currently in the Majlis to raise the tenure limit of tourist resorts to 50 years has raised a virtual storm mainly because of two reasons. One, resort islands comprise by far the most valuable economic resource in the Maldives. Two, many people fear the move will ultimately lead to transfer of full ownership of the islands. How real is this fear?

Increasing the lease period on resorts to 50 years could create a situation similar to what's called "lease hold" in Common Law countries like the United Kingdom. Leasehold is a form of property tenure where one party buys the right to occupy land or a building for a given length of time. As lease is a legal estate, leasehold estate can be bought and sold on the open market and differs from a tenancy where a property is let on a periodic basis such as weekly or monthly. Until the end of the lease period (often measured in decades; a 99 year lease is quite common) the leaseholder has the right to remain in occupation as an assured tenant paying an agreed rent to the owner.

In contrast to the above, full ownership of the land as well as buildings is called "free hold," where you own the land indefinitely and can do as you please with it. But this difference is mostly theory, and there is no real difference in practice between lease hold and free hold. In both cases you have full ownership of the land for all practical purposes.

Considering the above, many people believe that increasing the lease period is just one step from granting full ownership. Others however disagree. They believe that a lease situation can be maintained indefinitely; and as long as such a lease situation exists government will have control over the islands.

Now a fundamental question: What difference will it make if resorts are given on free hold basis? Opponents believe it will hamper the government's ability to regulate land use and levy taxes. Supporters believe it will help owners to raise finance to develop the properties.

Thus there are no clear-cut answers to the issue. But one thing is certain. Any decision People's Majlis takes on the matter could have the potential of haunting the Maldivian people for generations.


Anonymous said...

No thoughst need be lost on what this 'majilis' will decide eh. yup no need to say it.

Abdulla Yasir said...

Why do you think there is no clear answer to the issue?

Islands are a national asset and the must stay so well into the future. At given frequencies islands must be returned and retired. The government can then re-lease the islands for good and able entrepreneurs at the time. In 35 years, as it now stands, the owner would have made a handsome return on his investment and it is reasonable for the government to provide the opportunity to someone new. For changing hands 35 years is thus a very good period / frequency.

Important rules to remember in assigning lease of islands are (a) to preclude those with valid lease agreements with more than 5 years remaining in contract and (b) existing contracts must be stripped off instantly from those who purport for new leases through use of alias.

Anonymous said...

35 years is more than enough the campaign against bourgeois and plutocracy begins. hehehe

bestguides said...

I believe that 35 years is more than enough for the investment to cover up. Its not good to be too greedy. Our islands are there for our grand children as well.

Maldives Tourism Update

Anonymous said...

Lets keep an open mind about this. If it is a major investment, maybe 50 years is ok. However their should be responsibilities put upon these owners in terms of economic contribution to the community. A resort owner will be more willing to develop and maintain the environment of the resort if they were able to rent the resort for a longer term. Of course, monitoring by the government must be implemented. There are pros and cons and it depends on what the whole bill says, the limitations and all.

Anonymous said...

Land leases must be of sufficient length to attract investors, even if this means lengthening the maximum lease period stipulated by law. Some larger businesses require a long time before the business repays the huge investment. A major tourist resort complex, for instance, can take years before it begins to turn a profit. Such resorts often operate at a loss until they build up a clientele, and even then it might be years before they recoup the huge outlay for construction that usually runs into the millions. Even if the developer intends to sell out early, the resort will be less attractive and command a smaller price if only a few years are left on the lease term. In general, short-term leases are far less attractive to investors than long-term leases. Investors are understandably afraid that in 35 years they are not able to get return on investment.

Anonymous said...

I think its ok to have 50 year leases. But it should not apply to existing leases. It can apply to new leases. Once existing leases expire they should be go for go through the tender process before going for 50 year leases. Extending existing leases to 50 years is a crime and should be prevented at any cost.

maldivian.national said...

The proposed 50 year lease period for resorts – some issues….

The main issue relating to the proposed 50 year lease-periods lies with extending the leases of the existing resorts. When the initial bids were announced and in the case of the earlier resorts, when the law on the lease of tourist resorts was implemented, current resort owners knew what the term periods were going to be. Now if we do extend this period so that the total period is 50 years, it is in fact very unfair to the other bidders who did not win in the previous cycle and who might have bid higher rates if the period was for 50 years. Extending the leases now is akin to moving the goal posts after the game has started.

So in this sense it maybe argued that for bids on new resorts, we could in fact have a 50 year lease. However, then this also implies that the current lease period is too short. The prosperity of resort owners does not indicate this at all. The current lease period seems reasonable enough to enable the owners to make a tidy profit. So why fix something that is in fact not broken!

When the wealth distribution of the Maldives is considered, we already have a very skewed distribution of wealth. If you consider the number of people (and families) which currently own the leasehold of most of the resorts, if we extended the current leases, we are aggravating the situation and moving to one where 95% of the country’s wealth will be held with 5% of the people. By this move we are also creating a feudal system of sorts where a large majority of citizens, present and future would be ‘working’ for this 5% of ultra rich ‘landlords’. There will be no equity in the economic opportunity for future generations, with only those belonging to these rich families exploiting the few resources of the country. You would be creating a situation where a youth who is 15years old now will not have an equal chance to utilize this important natural resource of the country.

Now let us consider the rates at which some of the resorts have been leased from the government. Some of the earlier ones have rates at a fraction of the cost of recent bids – resorts like Kurumba, Full Moon, and even Paradise etc. This means that the country has already lost a significant amount of money in the years upto now. So does it seem fair that people who have already had an disproportionate opportunity get the chance to continue doing so? The other alternative, which some ‘newer’ owners have been talking about is to lower their rates to that of these earlier rates (of Paradise, Kurumba, etc) – This again goes back to my previous point of being unfair by virtue of changing conditions after the bids have been won. The basic idea here is that business is a risk and when you put in a bid, you accept the conditions and you cannot assume that they would be changed in your favour at some time in the future.

Current legislation does in fact allow 50 year leases – if shares are sold and if they are fully owned by Maldivians. So why do owners do not want to do this – they obviously do not want to share their profit. And belaboring the point – only a few really share in the riches of the tourism industry, despite the fact that the previous administration has also been apparently ‘trying’ to boost equity of more Maldivians in the tourism wealth. The MTDC debacle is evidence enough.

The suspect proposal of the government calls for tax revenue from these resort owners in lieu of the lease extensions. That may on the face of it seem fair – except when we consider some operational details. Among other things, two factors are important – one relates to the formation of a tax authority who has the independence and legal authority to enforce tax legislation, including the prosecution of people who violate these laws. Penalties in other countries often include jail sentences for tax evasion. Given the history of how we have been performing on fairness etc, is it reasonable to assume that we can implement a tax system effectively. The second one involves the independent assessment of the finances of a resort owning company. In most countries, this more-or-less works reasonably well because an integrated mechanism of taxation. What I mean here is that the idea of a corporate tax without personal income tax is bound to easy abuse. A company could easily say that its directors are each paid a few million dollars each year. So despite the company itself as an entity maybe barely covering its costs each year with a low corresponding tax amount, the owners/directors could be making a lot of money which is tax free. So simply stating that a corporate tax will be collected does not really hold a lot of water.

Perhaps, of even greater significance is the fact that there has not been enough public consultation on this important issue. President Nasheed’s administration is preparing to propose to a parliament which is largely dominated by players with major business interests, something which is very much in their favour but is going to impact the average Maldivian current and future more adversely. Despite promises both during the campaign period and after the election of ‘good governance’ and to ‘listen to people’, they are not acting to safeguard the public interest in this manner.

At the risk of seeming a bit personal, I am compelled to question whether this apparent change of heart is because of obvious conflicts of interests. We have one minister who while apparently meeting legal requirements of not being involved actively in business still has shares in many resorts. The tourism minister is a running mate of the presidential candidate who by all accounts gets the approval of his candidate before deciding on any significant issue. The attorney general is the wife of another resort owner. The economic advisor of the president is yet another resort owner. A coalition supporter of MDP who won the third spot in the first round and who allegedly has financial support from the powerful Universal group has two of his colleagues in the cabinet. Against such a back-drop, can we as ordinary citizens expect that it is our interests which will be the priority in such issues?


Anonymous said...

A nuber of resorts near Male' Airport are now about to end their current lease period. According to the agreements with the Government,by the end of the lease period these resorts with the full functioning infrastructure become Government property. So, after a couple of years when the Governmnt re-bids these resorts they will command very high rents which will include the value of the land as well as the infrastructure. By extending the lease period to 50 years then we the people are losing a LOT of money.If ever, lease periods are extended without re-bidding then,some arithmetic has to be done to get back from the current resort holders this revenue.Say, if only five years remain from a 35 year lease then the Government really now owns six-seventh of the resort. So, before a lease period is increased the resort operator has to buy back from the Government six-seventh of the resort infrastructure by paying full market prices. And, Anni's family should have this option for their resorts which I understand are nearing the end of the current lease time.

Anonymous said...

very interesting observations.

@anonymous November 30, 2008 10:52 PM
Idhikeeli writes in their blog that even an upper market resort's investment is recovered in 7 years. so this argument about investors needing more time to recover their investment seems to be bullshit.

Anonymous said...

Idhikeeli campaign against extending the lease period of tourist resorts to 50 years. Please join.

Anonymous said...

Dr. Waheed ! you have painstakingly written six lengthy paragraphs just to say .... "Now a fundamental question: What difference will it make if resorts are given on free hold basis? Opponents believe it will hamper the government's ability to regulate land use and levy taxes. Supporters believe it will help owners to raise finance to develop the properties". ...... however, I feel that you have very conveniently / cunnigly avoided any mention of how much the rental has increased over the 35 years and how this will enable the maldivian people, the owners of these resort islands, will benefit from the increased rental money that could be obtained by re-tendering the land.

I was hoping that you were wrting your blog to create awareness among our people on these important issues, but i have gathered from this article here that even you, like the rest of the gang have an inner motive, a motive to blind the readers, the common people, from the truth behind the issue, and that you harbour an agends that you have been asked / coerced to promote.

the truth is that at the moment the majilis an interim body hat can function to dissolve any pending matters and hence has no prerogative to discuss and resolve an issue that is as important and effect the future of our country as the issue that is under discussion today.

I beleive that the issue can best be left for public discussion, and open forums by NGO's, before the next parliament is elected, who can re-discuss the issue and resolve in a representative way. the people will be represented in the forthcoming majilis more realistically.