George Veltchev: Calls for Reinstating Deputy Minister of Tourism - Bully Tactics, Disservice to Bulgarian Tourism
George Veltchev is a Bulgarian businessman, investment banker and long-standing investor in Bulgarian tourism. A participant in the first cash privatisation in 1998, later disappointed by the large-scale corruption of the Kostov government, he returned to build for foreign investors, together with partners who also came from the London City, the largest luxury branded hotel portfolio in Bulgaria, currently trading under the Melia and Sol brands, and later attracted the first world-class hotel brand to the Bulgarian Black Sea – Hilton Worldwide. He started his banking career at Lehman Brothers in London, moved to Morgan Stanley, and recently, together with his partners, attracted VTB Capital to open the local office of the first major international investment bank in Sofia. He graduated from the Vienna University of Economics with a MSc in Insurance, and a PhD in Economics and Fiscal Law, and holds MBA degrees from INSEAD and Harvard Business School. He taught economics at Harvard University and at Sofia University Kliment Ohridski, and is one of the co-founders and was elected the first President of the Harvard Club of Bulgaria at the time of its inauguration in 2001.
The summer season is about to start – what are the expectations in the middle of a social and economic crisis?
The early bookings from traditional markets are up year-on-year, and the average expected growth for the summer hotels is reported at around 5%, as I understand. I am convinced that this is as much a guesswork, as the popular joke about the average temperature in the hospital – everyone is healthy, because half of the patients are burning with fever and the other half has room temperature. Beyond the sinister joke, I believe that the best hotels will improve only very little their occupancy, as they looked at peak occupancy already last summer, there will be a mid-range with growth rates beyond 10%, and there will be those without much improvement.
Luckily for Bulgarian tourism, the social and economic crisis in our country has a negligible impact on tourism, compared to the economic circumstances in Germany, and increasingly, Russia. My personal predictions for this season are that Germany will be 5-10% up, Russia – 15-20% up, England – 5-10% down, Romania will be up to 20% down, Israel could go either way only because there was an understandable drop mid-way last summer, and most of the remaining markets are less relevant on a case-by-case basis. My other prediction is that Bulgarian demand for the Bulgarian seaside will be up by up to 20%.
Is Bulgarian tourism under threat with the removal of the deputy minister in charge of tourism?
This is probably one of the most ridiculous notions I have heard in the 15 years I have owned hotels and other businesses in Bulgaria. I think that whoever has come up with this idea does a disservice to Bulgarian tourism, demonstrates chronic lack of respect for the institution of the Minister of the Economy, and deploys bully tactics in an environment where the caretaker government has to focus on national priorities, and leave private business to do what it is best at doing – business.
First, the idea that we will be ignored at trade shows if we don't have a minister present is laughable to anyone who has participated in the trade shows of the past years. The job of a deputy minister of tourism is in Bulgaria, not rubbing shoulders at trade shows explaining how important tourism is for Bulgaria – this explaining is best done at home, building much needed infrastructure, sewerage plants, opening airports for low-cost carriers, fighting corruption, stamping out energy monopolies, and reinvesting the proceeds of tourism in gaining competitiveness. Which one of these has been done by the outgoing deputy minister now so dearly missed by special interest groups?
Second, if it is so important for the country that a minister shows up at the trade show, Moscow is 2 hours of flight away from Sofia – the tourism sector is much better advised to invite the new minister for a day to Moscow, and to help him formulate the main message for Russian holidaymakers – that every Russian tourist will be issued a visa on arrival, by the border police, not by expensive and bureaucratic visa offices, that the government will not allow Russian tourists to be stranded in Bulgarian resorts ever again due to poor management of commercial contracts between Bulgarian tour operators and airlines, and that it will not allow monopolist energy suppliers to leave resorts or hotels without power, without imposing heavy penalties on them, and, generally, that Bulgaria welcomes and loves Russian visitors.
And third, it is a long-standing tradition of the plethora of Bulgarian tourist organisations to attack every new official that they have no influence over, within a few days of his appointment. The caretaker Minister is one of the best educated government officials in this ministry in recent years, he has no legacy or links to be ashamed of, and I am convinced that he will resist the arrogant behaviour of those tourist organisations that are playing power games. The Prime Minister is also well advised to show them the door, unless they show respect for the government office of the Minister who has larger tasks in the few months ahead than to cater to special interests.
What are the priorities that a caretaker Мinister of Еconomy and Тourism should focus on, particularly in the tourism sector?
There is very little a caretaker minister is able to achieve – do not forget that the government's mandate is very limited in time and scope, so unless this political turmoil turns into a full-blown political crisis, and Bulgaria moves to an "Italian scenario" of the past few decades, this government has at best 3-4 months of tenure. Incidentally, however, these 3-4 months are the most important for Bulgarian tourism this year. So, while the answers to this questions are addressed in my answer to the previous question, many of these actions cannot be the responsibility of the caretaker government.
There are, however, a few things that he and the new minister of finance can do for Bulgarian tourism already this year. First, the Minister of Finance can "level" the playing field by aggressively going after tax-evaders, most notably, those employing staff at below the market rates. Second, the Minister of the Economy can put energy and other monopolies on notice – that any incident where water or electricity supply is cut, whether objectively or subjectively, and as a result foreign tourists are adversely affected, will be prosecuted, and prohibitive fines will be levied. Third, both Ministers, as a team, can run an international tender and channel all marketing and advertising spending to well-qualified and transparent international advertising agencies that are not connected in any way with special interests, but have a clear track record of repositioning and dramatically improving other countries' image. In doing the latter, they should look primarily at the experience of such countries as Croatia and Turkey, but also South Africa, Barbados, and others.
Are the ongoing demonstrations going to be a factor in the demand for the Bulgarian seaside – there were reports of some western European ministers publicly warning that Bulgaria is not safe?
The grim predictions are not going to materialise. This is another well-established Bulgarian tradition – to badmouth local tourism and draw apocalyptic scenarios of how "now, this year is for sure the last year for Bulgarian tourism". There were reports of German officials advising their countrymen that there is chaos in Bulgaria, the government has resigned and that the security situation is questionable. Guess what – Germans, and generally, Western Europeans, are smarter than urban legends attribute to them. Check the websites of the British Foreign and Commonwealth Office and of the German Ministry of Foreign Affairs – Bulgaria is described as a country at par with most of the European Union in terms of safety in every respect. Where it is not at par, it is typically with countries with higher risk, such as Greece, Romania, etc.
Some hotels in Sofia have exchanged hands and still some others are up for sale – is it a sign of crisis?
No, on the contrary – a sign of crisis is when there is no new development, and no hotels change hands. The recent sale of arguably the best located hotel in Sofia, and Bulgaria, Radisson Blu, is a testimony to the fact that hotels are back in vogue, that Bulgarian entrepreneurs are keen to put their money to work in Bulgaria, and that there is hope for the hospitality industry. The new Novotel just opened doors, there are signs that at least two new top-tier brands will be entering the market over the next 2-3 years, and I am not talking about mid-range Spanish or French brands, my respect for those currently present in Bulgaria – I am referring to real world-class brands, such as Marriott, Hyatt, as well as new, even above the so-called "Upper-Upscale" brands of the already present operators, such as Waldorf Astoria, Ritz Carlton, and W, normally categorised as "Luxury", to mention just a few. There are no "Luxury" brands in Bulgaria at present. And then, there is the much publicised in the local press sale of the Sofia Hilton. So, you tell me if this is the definition of crisis.
The ongoing sale of Hilton Sofia is an interesting story – who are the likely buyers, what is their motivation and what is a reasonable price for a 5-star hotel in Sofia?
My view is that there will be no international buyers for the Hilton Sofia, and perhaps between 6-8 local buyers will have shown interest. The lack of international buyers has nothing to do with the attractiveness of the package, but merely because there is no local capable interest to focus international buyers on Bulgaria, let alone on Sofia. The local buyers will typically be cash-rich buyers, who need the hotel for one or both of two purposes – to "park" a substantial amount of cash at profit rates most recently associated with bank deposits, but which are no longer available, and/or out of pure vanity – to display a mini-oligarchic status that they are badly lacking. To the chagrin of the sellers, the second category is quickly dissolving because the Bulgarian people, much like their Greek neighbours, are showing that they are not so friendly to "public display of wealth". I do not know of more than 1 or 2 truly strategic investors that would participate in the process, let alone the fact that the mere definition of local investors as strategic is an oxymoron.
With regard to the price, there is an iron-clad rule in international hospitality valuation – for a developed and well-running internationally branded hotel in a developed-world capital, the price per key is 1,000 times the average daily rate, or ADR. For Sofia, this rule is adjusted by the "yield comparables", i.e. if the required yield in Sofia is 1% higher than in Western Europe, and I believe it is even higher, then, at a 7% yield, the price per key in Sofia should be between 12-14% lower, i.e. 870 times the ADR. With internationally-branded 5-star Sofia hotels ADRs currently running between EUR 75-95, and the roughly 245 keys, the fair price for Hilton Sofia is EUR 16 M if the ADR is EUR 75, EUR 17 M if the ADR is EUR 80, EUR 18 M if the ADR is EUR 85, and so forth. If anyone pays more than these prices, then they either badly need the Sofia Hilton, for whatever reason, or they feel so insecure investing outside Bulgaria that someone should take advantage of them while their insecurity lasts. In any case, whoever pays above these prices must be a real strategic investor with some unique vision for the acquisition. The more they pay above the fair price, the more unique their vision must be, to round up this interview with a healthy dose of humour.
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