Pricing solutions to Bhutan's sustainable tourism policy
'High Value, Low Volume’ tourism has been Bhutan’s motto. Nader Tavassoli looks at how their tourist tax affects this
- Designing market-based approaches to sustainability is a complex and uncertain undertaking.
- Evaluating the impact of pricing solutions requires holistic long-term metrics.
- A nation’s brand has many stakeholders.
On the eastern edge of the Himalayas, sandwiched between China and India, lies the small, land-locked Buddhist kingdom of Bhutan. Famous for its fortresses (dzongs) and fascinating cultural traditions, it offers some of the world’s best hiking, lush valleys, snow-capped mountains, and pristine lakes and rivers teeming with marine life. Paro Taktsang (Tiger’s Nest), which clings dramatically to cliffs above the Paro Valley, is one of many sacred monasteries. A mystical destination, Bhutan is also known as “the last Shangri La” – a path to self-discovery and enlightenment.
Photo: Paro Taktsang monastery, is a sacred Vajrayana Himalayan Buddhist site located in the cliffside of the upper Paro valley in Bhutan.
In terms of sustainability, Bhutan’s environment ranks high. Seventy-one percent of its territory is under forest cover – with a minimum of 60% being constitutionally mandated – and some 95% of its electricity is produced using hydropower, contributing to Bhutan being designated the world’s first carbon-negative country in 2017.
But how can a country ensure it remains this way? Bhutan’s recent re-pricing of its tourist tax and re-branding of its nation is an interesting case in hand, one that highlights the use of market-based interventions to address so-called “market failures” in the provision of public goods, such as the quality of the environment.
Photo: Nader Tavassoli is Professor of Marketing at London Business School
Gross National Happiness
For Bhutan, the greatest public good is happiness. In 1629, Bhutan’s ancient legal code had declared: “If the government cannot create happiness for its people, there is no purpose for the government to exist.” In 1972, the fourth king of Bhutan proclaimed: “Gross National Happiness (GNH) is more important than Gross Domestic Product (GDP).” Today, all government policies – including their tourism policy – are evaluated on their impact on a GNH index that includes measures of good governance, sustainable socio-economic development, cultural preservation, and environmental conservation.
“High Value, Low Volume” tourism
Bhutan first welcomed tourists in 1974, and for years brand Bhutan’s slogan was “Happiness is a Place”. By 2019, tourism was contributing to 6% of its GDP, and had evolved into one of the most important economic sectors, second only to hydropower. It is estimated that 16% of the working population is dependent on tourism.
Guided by a “High Value, Low Volume,” Bhutan has won several international awards for sustainable tourism. “High Value” relates to the targeting of mindful and responsible visitors, ensuring high revenue per visitor, and supporting a quality tourism infrastructure. “Low Volume” aims to ensure that the number of tourists is compatible with the carrying capacity of the natural environment and infrastructure. In short, Bhutan aims to avoid hyper-tourism and its damaging effect on the environment.
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“We are targeting mindful travellers who are sensitive to our culture, environment and aspirations. Although our policy is ‘High Value, Low Volume’, that was getting derailed.”
Market-based solutions to sustainability
While tourism can provide significant economic benefits, over-tourism is ruining some of the world’s most perfect places. To combat this, many governments rely on tourist taxes that go towards maintaining tourism facilities and protecting natural resources. For example, the Italian city of Venice has an “overnight tax”, paid directly to the hotel on the first five nights of a stay (€3 a night for a three-star hotel, €5 a night for a five-star one), and is poised to introduce a €5 entrance fee for day trippers in 2024. In Thailand, international arrivals by air are charged US$8, while those arriving by land and sea pay $4. Most Caribbean countries charge a departure tax, such as the $18 by cruise ship, $20 by sea, and $29 by air in The Bahamas.
In Bhutan, tourist taxes have existed ever since it opened its doors to tourism in 1974. Back then, the tax was part of an all-inclusive fee of $130 per person per night. This fee also covered hotel costs, guides, local transport, food and non-alcoholic drinks.
In 1991, tourism was fully privatised along with a higher $250 daily fee for non-regional visitors – with a $50 discount from December to February and June to August when it was too cold or too cloudy to really profit from the Himalayan setting. This amount represented a bundle of fees. One was the daily $65 Sustainable Development Fee (SDF), or tourist tax, that went directly to the Bhutanese exchequer to fund cultural, environmental, and social projects. The remainder covered a three-star hotel – tourists had to pay more for higher-quality ones – food and non-alcoholic drinks, local transport, group guides, and entry fees to tourist attractions; thereby including most daily expenses for those on a tighter budget.
Only a few regional citizens had been exempt from this fee, such as those from neighbouring India who made up around 73% of visitors to Bhutan in 2019. This changed in 2020 when a $16 daily fee was imposed on regional visitors, most of whom represented budget travellers.
“The new Bhutan brand is exciting – and so different from anything else”
A new nation brand
During the two years of the Covid pandemic, when it closed its borders, Bhutan took the opportunity to create a new brand and logo to re-define tourism and boost its nation’s image. When it reopened in September of 2022, it launched its new slogan “Bhutan Believe” – a rallying cry that encapsulated the nation’s values, global contribution, responsibilities and future. A visual identity drew on the vibrant yellow and orange of the Bhutanese flag, the emerald green of the forests, the blue of the national flower (the Himalayan blue poppy), and a soft black that referenced the natural soot in the country’s hearths.
“The new Bhutan brand is exciting – and so different from anything else,” said Carissa Nimah, chief marketing officer of Bhutan’s Department of Tourism at the time, “It is a huge honour and a pleasure to be part of this transformation, and to help facilitate tourism as a strategic driver of positive change and growth across the country.” 1
Photo: Bhutan’s new brand and logo to re-define tourism and boost its image.
Photo: Design from MMBP & Associates, the agency that did the rebrand.
Re-pricing happiness
Most significantly, the rebrand came with a new tourist tax structure. Non-regional visitors would now pay a daily $200 SDF directly to the government (children aged five or younger were exempt and those aged 6-12 received a 50% discount). This tax was initially applied regardless of season or length of stay.
The rationale behind the SDF increase was that the old fee did not sufficiently detract budget travellers; and that local operators were observed to have skimped on quality to sustain on their allocation of the previous all-inclusive fee of which the former $65 SDF had been part of. Dorji Dhradhul, Director General of Bhutan's Department of Tourism, commented: “We are targeting mindful travellers who are sensitive to our culture, environment and aspirations. Although our policy is ‘High Value, Low Volume’, that was getting derailed. The pandemic gave us the opportunity to bring our tourism back on track.”
With the stand-alone $200 daily SDF, tourists now had to pay for everything else out of pocket – essentially, unbundling local costs and providing greater flexibility in choice. Non-regional visitors were required to stay in a tourist-standard hotel certified by the Department of Tourism, with prices for a qualifying double room in the capital Thimphu during peak season ranging from $50-$90 a night to more than $2,000 for a luxury establishment.
Self-catering visitors stood to pay $10-$15 for basic meals at one of Bhutan’s 4,200 restaurants and cafes, and $10-$25 in entrance fees to museums and local attractions that were once included in the daily fee. Optional extras might include spa treatments, kayaking or mountain biking ($35 a day) and white-water rafting ($250 for up to six per trip). Visitors arranging their own travel also had to hire mandatory private guides (around $20 a day plus tip) and drivers when travelling outside of the city ($15 a day plus tip). Bhutan had cemented its place as one the most expensive tourist destinations on Earth!
A blow to (some in) the tourist industry
Most agreed that the tourist tax had been due for a review when taking inflation and GDP growth in visitor countries since 1991 into account. However, the steep increase in the SDF for non-regional tourists and the $16 fee for regional ones came as an untimely blow to some in the Covid-battered industry. Many blamed the new tax on the fact that only 89,326 tourists had visited Bhutan from the country’s re-opening on September 23, 2022, to October 1, 2023, far fewer than the 315,599 in 2019.
Government officials counter-argued that the fee was part of a wider upgrade to the tourist experience. An improvement drive had been put into full swing during the pandemic. Upgrades included new restrooms, such as along the 250-mile Trans Bhutan Trail, face-lifts to tourist sites, and improvements to the online visa system and digital payments.
The Department of Tourism now also assessed hotels, guides and tour operators using more stringent criteria. This included a new “Competency Based Framework for Tourism Officer” backed by foreign-language, culture and history courses. These efforts aimed to promote Bhutan’s image as an exclusive high-end tourism destination, one that was aligned with the higher tax. However, the policy had its drawbacks. For example, licensed guide numbers dropped from 5,600 to 3,000; 30% of them did not pass the new assessment requirements, while others chose not to renew their licence. Further bearing the brunt of the changes were 650 one to two-star budget hotels that were initially no longer allowed to cater to even regional visitors from Bangladesh and India unless they could upgrade to higher standards. Only about 300 hotels had achieved this standard, with the “elitist” regulations viewed as favouring high-end hotels and resorts.
What followed was a sense of frustration about what exactly the re-pricing of the tourist tax and new regulations would achieve. The SDF fee was added to Bhutan’s general fund to invest in programs that would sustain culture, protect the environment, and upgrade the infrastructure. Yet it remained unclear whether the changes would benefit Brand Bhutan and support the government’s objectives and the nation’s happiness, or undermine these in the long term. Some suggested that Bhutan should pursue a different pricing strategy for sustainable development, although there was little consensus on what this might look like.
Duty-free gold and other initiatives
Indeed, regulators had quickly started tinkering with their market-based sustainability efforts. Most significantly, in September 2023, they reduced the SDF by 50% to $100 a day until at least 2027. They also introduced a tiered pricing system, whereby travellers could stay for up to eight nights when paying for four; 14 nights when paying for seven; and an entire month when paying for 12 nights. The government was also working with Drukair Corporation and Bhutan Airlines to reduce airfares, long perceived as too high by non-regional visitors. In one of the more creative approaches, Bhutan even started offering duty-free gold to visitors, as long as they spent at least one night in a certified hotel and paid for the gold in US dollars.
Tinkering with the tax structure to get it right came with its own problems, however, as tourists and tourism operators viewed the country’s policies as unpredictable. Designing market-based approaches to sustainability certainly looked to be a complex and uncertain undertaking.
References
Nader Tavassoli is Professor of Marketing at London Business School.
