The role of water tariffs as a determinant of water saving innovations in the hotel sector

International Journal of Hospitality Management 52 (2016) 78–86

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The role of water tariffs as a determinant of water saving innovations in the hotel sector Maria Razumova ∗ , Javier Rey-Maquieira, Javier Lozano Department of Applied Economics, University of the Balearic Islands, Crta. Valldemossa km. 7.5, 07122 Palma de Mallorca, Spain

a r t i c l e

i n f o

Article history: Received 7 January 2015 Received in revised form 15 September 2015 Accepted 21 September 2015 Keywords: Water tariffs Hotels Environmental innovations Majorca

a b s t r a c t The hotel sector is one of the biggest consumers of fresh water within the tourist economy. However, the implementation of policies to increase water efficiency in this sector is still an ongoing process. Specifically, the research on the market-based motivational tools is limited. This study attempts to provide an insight to the role of water tariffs in the implementation of water saving innovations in Majorcan hotels. Using the framework of the Porter hypothesis, a model predicting the probability to implement this type of innovation is elaborated. The results show that hotels in the areas with the highest water tariffs are more likely to implement water-saving innovations than hotels in other locations. The paper discusses the challenges faced in order to achieve an efficient water tariff design for hotels, emphasizing the need for development of water consumption benchmarks and measuring of price elasticity as main directions for future research. © 2015 Elsevier Ltd. All rights reserved.

1. Introduction Tourism presents serious challenges for the management of water supplies. Though it is not considered an enormous problem on a global level (direct tourism-related water use is considerably less than 1% of global consumption), the situation differs at the regional level (Gössling et al., 2012). The most popular destinations are located in regions with warmer climates and low rainfall especially during the peak tourism seasons (Essex et al., 2004; RicoAmoros et al., 2009). The deterioration of the water systems can have a significant negative effect on local residents’ welfare and also on the destination’s tourism life cycle. Water problems can disturb the progression of the destination and dislocate the trajectories of rejuvenation or sustainable growth into renewed decline by environmental crises (Essex et al., 2004). Within the tourism industry, the hotel sector is recognized as a key water consumer and sewage producer (Chan et al., 2009). It has been established that people in hotels tend to use the pleasure behavior approach (Eurostat, 2009). Water consumption per person staying at hotels can exceed three times the average consumption of people living at home (Ministerio de Medio Ambiente, 2007). Responding to the need to increase water efficiency, a number of studies have been made analyzing most used

∗ Corresponding author. E-mail addresses: [email protected] (M. Razumova), [email protected] (J. Rey-Maquieira), [email protected] (J. Lozano). http://dx.doi.org/10.1016/j.ijhm.2015.09.011 0278-4319/© 2015 Elsevier Ltd. All rights reserved.

water saving measures in the hotels, their efficiencies (Barberían et al., 2013; Chan et al., 2009; Charara et al., 2011; González and León, 2001; Wyngaard and de Lange, 2013), as well as examples of the inefficient practices in water management (Trung and Kumar, 2005). However, the development of policies for tourism in general and for hotels in particular to promote the implementation of such measures is a relatively new and ongoing process. Thus far, many of the existing water policy proposals have focused on voluntary approaches to promote water saving, such as fiscal incentives, awareness campaigns or voluntary certification schemes. Nonetheless, the effectiveness of these approaches has shown to be uncertain (Cashman and Moore, 2012). One of the possible reasons for the low efficiency of the voluntary approaches is that water tariffs are subsidized by many governments (OECD, 2009). Though the guarantee of moderate prices for individuals and the competitiveness of the local businesses (Cashman, 2012), the subsidized tariffs present a considerable disincentive for water saving. Thus, Gössling et al. (2012) state that in order to raise awareness and to engage stakeholders proactively in water saving measures, considerable increases in water prices may be demanded. Kasim et al. (2014) elaborate a voluntary water management framework for hotels but also admit that generally low water tariffs are one of the most important challenges to the implementation of such frameworks in practice. Charara et al. (2011) suggest that in Barbados, a lack of success in reducing hotels’ water consumption is linked to the fact that water bills represent less than 5% of their annual expenses. Recognizing this problem the European Water Framework Directive (European

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Commission, 2000) has established 2015 as a deadline for European Union countries to reform water price policies to provide adequate incentives for water saving. It recommends the use of economic instruments and pricing schemes that encourage a more efficient use of the resource. Despite the numerous calls for research, to date, the role of water pricing as a driver of water efficiency in hotels has received a very limited attention from the academics. A recent work of Cashman and Moore (2012) makes a valuable contribution to the issue by analyzing the potential of the tradable permits system for water in the hotel sector of Barbados. The authors conclude that such a scheme would, in theory, motivate hotels to adopt water saving measures. Yet there are a number of important technical, administrative and social considerations that would need to be addressed. The present work aims to further contribute to the under researched topic of water pricing focusing on water tariffs as a possible tool to trigger the implementation of water saving innovations in hotels. Under the terms of water saving innovations we considered the implementation of both technical devices and water efficient processes in the hotels. The empirical model to test the role of the water tariffs steams from the framework of the so-called Porter Hypothesis (Porter and van der Linde, 1995). The PH claims that firms may fail to reveal profitable environmental innovations due to the internal constraints. Efficient and stringent environmental regulation has a potential to overcome such constraints and trigger innovative response. The water tariffs are potentially a regulatory tool that the PH refers to. The OECD report “Managing Water for All” (2009) stresses the vital role of tariffs as a “core instruments of water policies” (OECD, 2009:74). Specifically, it argues that “well-designed tariffs are crucial for sustainable cost recovery and provide incentives to use water efficiently” (OECD, 2009:73). The island of Majorca (Spain) was selected for this study for being a representative Mediterranean mass tourism destination characterized by the typical arid climate, highly seasonal tourism pattern and scarce water resources (Deyà and Tirado, 2011). Water consumption in Majorcan hotels in many cases exceeds the available industry benchmarks for the Mediterranean hotels (Table 1) making it essential to understand the driving forces behind water saving activities to be able to design effective water management policies on the island and in the similar destinations. For the empirical test we have used micro-data from 188 hotels operating in Majorca and the data on the water consumption tariffs and sewage fees applied to them. The tariffs design varies between local Majorcan council jurisdictions, thus making it possible to compare their effect on the water saving innovations and shed some light on the potential of tariffs as a water management policy tool. The paper is structured as follows. It begins with the specification of the model estimating the effect of the water tariffs on the implementation of the water saving practices in hotels. Then, the data used, measurement of variables, in particular the relative stringency of the water tariffs, and the econometric analysis are explained. The paper follows with a discussion of the main results, conclusions and directions for future research.

2. The model To elaborate the empirical model for testing of the water tariffs as a driving force in water saving innovations we use the framework of the Porter Hypothesis (Porter and van der Linde, 1995). The central idea of the PH is that pollution is generally a sign of an inefficient use of resources: “Pollution is a manifestation of economic waste and involves unnecessary or incomplete utilization of resources. . . Reducing pollution is often coincident with improving productivity with which resources are used” (Porter and van

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der Linde, 1995, p. 98, 105). The main assumptions of the PH why firms fail to improve their productivity is that the present business environment is characterized by the dynamic competition and rapid technological advances. The firms’ organizational ineffectiveness and lack of experience addressing environmental issues make them overlook some profitable (cost-saving) environmental innovations. Therefore, Porter argues that “properly designed environmental regulations can trigger innovation” (Porter and van der Linde, 1995, p. 98). Water saving measures seem to be a priori a type of innovation the PH refers to: they are cost-saving innovations. Importantly, there is ample evidence that hotels realize the potential of such practices. The studies of Ayuso (2007), Barberían et al. (2013), Bohdanowicz (2005), Bohdanowicz (2006), and Chan et al. (2009) show that the prospect of reduced operational costs from decreased consumption of water can be a major motive or the number one motive for innovations in the hotels due to their important economic potential. A study of the Hotel Technologic Institute estimates that the installation of the full range of low cost watersaving devices in a hotel would cost about 23D per room and that the investment could be recovered in less than six months (ITH, 2014). Moreover, hotels are aware that water saving measures not only reduce costs but also affect demand. Adopting a strategy of environmental responsibility not only improves hotels’ competitive advantage in terms of differentiation as tourists increasingly value environmental variables when choosing destinations and accommodation but also eventually increases a hotel’s profitability (Molina-Azorín et al., 2015; Tarí et al., 2010). So, if the water saving has so many advantages for the hotels, why is the consumption of this resource in many of them still higher than good practice benchmarks? (Table 1). To shed light on this question, the empirical model to test the effect of firm’s internal characteristics and water consumption tariffs on water saving innovations has been designed. The choice of variables and their measurement are explained in Sections 2.1 and 2.2. 2.1. Firm’s internal variables related to environmental innovations Firm’s internal variables in the model stem from the main constraints to innovations mentioned by the PH: organizational inefficiency and the lack of experience addressing environmental issues. Porter and van der Linde (1995) mention three types of organizational ineffectiveness that impede firms aiming to find all profitable innovations: organizational inertia, the principalagent problem and incomplete information. Organizational inertia is associated with the routines and procedures used in the firms. In the short run, such routines and procedures may improve a firm’s efficiency, but in the long run, they may reduce the firm capacity to adapt to changing circumstances (Gabel and Sinclair-Desgagné, 2001). The principal-agent problem represents the situations when there are discrepancies between the objectives of a principal and an agent hired by the principal. In the case of environmental innovations, such discrepancies may appear if the manager lacks his or her own environmental values and his or her remuneration is not related specifically to the environmental performance of a hotel. Linking a manager’s bonus to the achievement of environmental goals (Bonilla-Priego et al., 2011) and providing a monetary reward for employees for bringing “green” ideas seem to be possible mechanisms to engage staff in environmental innovations (El Dief and Font, 2012; Govindarajulu and Daily, 2004). Finally, the problem of incomplete information for the possibility for environmental improvements is particularly relevant to tourism firms. A recent OECD survey on green business model innovation in the tourism sector (OECD, 2012) reveals that the information gaps were the barriers most often mentioned by firms.

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Table 1 Water consumption and benchmarks for Mediterranean hotels, m3 /bed/night. Year

Source

Sample

Average consumption

2007

World Wildlife Fund

Small full service Mediterranean hotels Mid-range full service Mediterranean hotels Luxury full service Mediterranean hotels

2008

Makrinou, Mandaraka Assimakopoulos

Small and medium size Mediterranean hotels

0.45

2011

Malta Business Bureau

Hotel 3 star (Malta) Hotel 4 star (Malta) Hotel 5 star (Malta)

0.199 0.292 0.462

2011

Deyà and Tirado

Majorcan hotel 3 star Majorcan hotel 4 star Majorcan hotel 5 star

0.516 0.548 0.701

Benchmark Good

To assess the relevance of organizational efficiency to the implementation of water saving innovations the following variables are considered: the frequency with which processes and the organizational structure are reviewed in a hotel (review); remuneration of the hotel managers depends on hotel’s environmental performance (manag remun); and variable staff remun which reflects whether the employees are rewarded for innovative ideas. The total number of sources of information on environmental innovations used by a hotel (num sources) aims to reflect the degree of information completeness. We also include two variables that assess a hotel’s general predisposition to implement innovations as a measure of organizational efficiency (Hurley and Hult, 1998): whether all innovations based on research results are readily accepted by the hotel (research) and whether the search for innovative ideas is a priority for hotel management (priority). Experience addressing environmental issues is another factor that may affect the adoption of environmental innovations according to Porter and van der Linde (1995). Thus, Arimura et al. (2007), Ferreira et al. (2010), Horbach (2008) and Horbach et al. (2012) demonstrate that certain types of environmental innovation, such as environmental accounting, environmental training, and environmental management systems (EMS), are associated with the further introduction of environmental process innovations in manufacturing firms. Furthermore, Rennings et al. (2006) and Inoue et al. (2013) show that multiple validations of EMAS and ISO 14001 are related to the incidence of environmental process innovation and environmental R&D, respectively. Frondel et al. (2007, 2008) find that establishing an environmental department or a person whose principal function is addressing environmental matters is necessary for the accumulation of environmental experience within a firm. Indeed, experience is an important part of human capital (Canina et al., 2006) and thus is embodied in the firms’ employees. Regarding the possible role of the experience addressing environmental issues for the implementation of water saving innovations the following variables are considered in the model: adherence to a standard for environmental management systems such as ISO14000, EMAS, Q-verde or other; the number of revalidations of the environmental certificate, if any; annual training on environmental management to the staff; existence of environmental department and/or a person whose principal function is addressing environmental issues, and environmental accounting. Some more variables are derived from the research on the innovation processes specific to tourism. So, Hjalager (2002) analyzes the tourism industry from the point of view of knowledge transfer potential and finds a number of structural and behavioral preconditions that facilitate innovation are simply not present in the industry. First, the innovative behavior of most tourism firms can be characterized by “free riding” on investments and

<0.220 <0.450 <0.600

Fair 0.220–0.250 0.450–0.600 0.600–0.750

Bad >0.250 >0.600 >0.750

ideas of other companies. Such behavior creates mutual distrust in the industry and eliminates the incentives for the innovation and knowledge transfer between companies. Moreover, the tourism industry is characterized by the low rates of business survival, which disrupts the establishment of long-term collaborative relations between destination agents such as university research centers, environmental organizations and other firms. Such disruptions are important because evidence suggests that external knowledge plays an important role in both manufacturing firms and hotels (Den Hertog et al., 2011; Horbach et al., 2012; Nieves et al., 2014). A second problem affecting knowledge transfer is the high turnover rate in the tourism industry owing to seasonal fluctuations, poor working conditions, and low salaries, which impede employees’ ability to be “repositories” of tacit knowledge and thus firms’ ability to realize knowledge exchange. Moreover, hotel employees, especially low-ranking ones, are important because they are the actual “performers” of most “greening” activities (Bohdanowicz et al., 2011; Chou, 2014). In this context, job satisfaction becomes a key factor for innovations. The works of Gunlu et al. (2010), Ineson et al. (2013), Silva (2006) and Zopiatis et al. (2014) show that a relationship exists between job satisfaction and staff commitment to organizational goals and values. Furthermore, Shipton et al. (2006) find that job satisfaction is strongly and positively associated with innovation in production technology/processes among a sample of manufacturing firms. To assess the relevance of knowledge transfer on environmental innovations the following variables are used in the model. Firstly, to track down the role of different information sources in knowledge transfer, we measure whether a hotel uses: academic research (academy), direct collaboration with other hotels, public environmental reports published by other hotels, tourism and environmental organizations and information from suppliers. Secondly, the number of ownership changes (own change) that have taken place in the last five years aim to reflect the turbulence of the industry and its potential negative effect on collaborative relationship with destination agents and academia. We use staff turnover (staff turnover) and job satisfaction (staff satisf) of the hotel’s employees to reflect the role of these factors in the innovation process. In addition to the above mentioned variables, we consider the following regressors related to physical characteristics and management factors on hotels’ innovation activities (Carmona-Moreno et al., 2004; Crespí-Cladera and Orfila-Sintes, 2005; González and León, 2001; Jacob et al., 2010): the hotel size (less than 50 rooms, dummy variable small; more than 150 rooms, dummy variable big), the hotel category (star), the chain affiliation (chain), the owner’s management of the hotel (owners mng), and variable (renov) if a hotel was totally renovated during the surveyed period (Barberían et al., 2013).

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2.2. Water tariffs The PH notes that the type of regulatory instrument is an important premise for its capacity to trigger innovative response from the firms. Concretely, efficient environmental regulation should adhere to three principals: (1) it should leave the approach to innovation to industry and not the standard-setting agency; (2) foster continuous improvement, rather than locking into any particular technology; and (3) leave as little room as possible for uncertainty at every stage. In this context, water tariffs, especially increasing block schemes, can be considered an efficient tool. They give the firms two types of incentives to improve their water efficiency: first, cost-saving may be obtained through the reduction of the total amount of water used by the hotel and second, by the decreasing marginal price of a unit of water. Apart from the efficiency condition, the PH also requires that environmental regulation should be stringent. It is expected that stringent regulation would induce the firms not incrementally but fundamentally to alter their products and processes in order to attain set targets. However, in the empirical testing of the PH the measuring of the stringency of regulations has been one of the most important methodological problems during twenty years since it was formulated (Ambec et al., 2013). As a direct measure of stringency is usually impossible due to the non-monetary nature of many regulation tools, this concept has been measured by other variables. The most used proxies have been the environmental compliance costs, process outcomes and respondents’ subjective valuation of the regulation stringency (Wagner, 2003; Iraldo et al., 2011). Yet, the used proxies have a number of important limitations. Thus, high compliance costs may be pointing to an ineffective response to regulation, rather than high environmental standards. The regulatory process outcome proxy uses such variables as the concentrations of different pollutants, waste loads, and energy consumption. The main shortcoming is that the source of many pollutants can hardly be definable, so that the analysis can be done only on the aggregated country level (Wagner, 2003). These limitations often impeded the use of these proxies that some researchers call “objective” (Razumova et al., 2009). That is why many empirical tests of the PH opted for measures based on managers’ “subjective” valuation of the regulation stringency (Arimura et al., 2007; Frondel et al., 2007, 2008; Horbach, 2008; Horbach et al., 2012; Lanoie et al., 2011; Rehfeld et al., 2007). The main advantage of this method is that the data on subjective valuations of regulation can be easily obtained by using surveys. Nonetheless, this measure has an important drawback as the subjective perception may be affected not only by the objective characteristics of regulations, but also by the intrinsic characteristics of managers who respond to the questionnaire (Razumova et al., 2009), and hence become a less reliable proxy (Razumova et al., 2015). Many studies have used this method and have obtained significant results, but it seems that the analysis of the reliability of this method hasn’t received due attention so far. In this work, we propose to measure the stringency of water regulations applied to hotels as the level of water consumption tariffs. The main advantage of this measure comparing to the above mentioned proxies is that it can be considered a direct measure of stringency of regulation. Moreover, the data on the water tariffs can be easily obtained and compared. 3. Methodology 3.1. Sample and variables The data were obtained from two sources. First, the data on the water saving innovations in the hotels and the rest of the variables related to the hotels were obtained from the Environment

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and Hotel Competitiveness survey, which was administered by the University of the Balearic Islands and collected data on 200 Majorcan hotels. The study population consisting of 733 units includes all of the establishments classified from 1 to 5 stars that operated in Majorca in 2008, where hotels account for 75%, and apartment hotels and hotel residences for 25% of the total (IBESTAT, 2014). A representative sample was selected after stratifying the population according to two characteristics: geography and hotel category. Of 200 questionnaires that were collected from the hotels, 188 had all of the necessary data for the study. This sample size allows us to obtain results with a confidence interval of 95% and a sampling error of 7%; further, the sample is representative of Majorcan hotels. The questionnaires were directly completed by the hotels’ top managers and directors in November 2008 in personal interviews that were conducted by professional interviewers. Second, the data on the water tariffs were collected from the Official Bulletin of the Balearic Islands (BOIB). 3.2. Water saving innovations To define water saving innovations, the Environment and Hotel Competitiveness survey uses the approach of the 3rd edition of the Oslo Manual (OECD and Eurostat, 2005) which defines that innovation in service sectors should be either developed internally or integrated from outside the firm. Moreover, such innovations should be implemented three years prior to the survey date. The hotel managers had to answer “yes” or “no” as to whether the hotel has implemented any water saving measure during that said period. Both technical (toilets with a lower flush capacity, low flow showers, aerators in taps, infra-red taps in rooms and kitchens, modernized watering systems in gardens, water harvesting systems and wastewater treatment plants) and process-based innovations (such as projects to encourage the reuse of bed linen, explanations to employees on how to save water when carrying out their duties, systematic control of the leaks) were considered. In our sample 55% of hotels implemented such innovation during the surveyed period. 3.3. Water tariffs in Majorca We consider two tariffs through which the water supplied to hotels is charged: water provision tariff and sewage fee. In Majorca both tariffs have fixed and variable parts. The fixed part is charged to cover the costs of the maintenance of the water and waste water networks and water meters. In the hotels the fixed part is charged per number of hotel beds. The variable part depends on the volume of water consumed or discharged and corresponds to the variable costs of the services provided. This study only focuses on the variable part of the tariffs, as it is the part that provides an incentive to reduce the consumption of water. The fixed part of the tariffs is not analyzed since it cannot be reduced by water saving innovations. The structure of the variable part of the water provision tariffs and sewage fees is very heterogeneous among local Majorcan council jurisdictions. For example, the water provision tariffs can be flat or progressive (increasing blocks). The blocks may refer to the total consumption of a hotel during a period of time (from 1 to 6 months) or to per night/room consumption. In some jurisdictions the tariff depends on hotel categories. The number of blocks varies from two to five, and their limits and the prices also vary significantly. As a result, some jurisdictions are cheaper in the low consumption blocks and more expensive in the high consumption blocks and vice versa. To compare the heterogeneous tariff systems, the average tariff paid per m3 of water consumed and discharged is calculated based on the expected level of consumption of the hotels. The expected levels of consumption are considered to fall in the interval from 7.2 to 20 m3 per bed per month. It is

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Fig. 1. Average water tariffs for different levels of water consumption, D /m3 .

calculated as 0.4–0.7 m3 /bed/night based on the data on water from the available studies on the Majorcan hotel water consumption (Deyà and Tirado, 2011) and on the fact that the average occupancy in the studied hotels in the low season was 60% and in peak season 95% (Balearic Islands Government, 2008). Fig. 1 represents the average tariffs paid per m3 in the studied local council jurisdictions for the levels of monthly water consumption in the considered interval. 4. Data analysis To predict the probability of the implementation of water saving innovations the binary probit model is used. This is a regression model for binary outcomes that can be used for small sample sizes such as our case which includes 188 observations (see Horbach, 2008; Horbach et al., 2012; Rennings et al., 2006). The dependent variable takes the value of 1 if a hotel implemented water saving innovations during the surveyed period, and it takes a value of 0 if otherwise. We use a hierarchical modeling approach similar to that applied in El Dief and Font (2012) and sort the explanatory variables into three specifications. This modeling approach allows us to identify changes in the significance levels of the variables as new regressors are added and to avoid interpretation problems, as we found that several explanatory variables are correlated.

organizations, suppliers, owner change, staff turnover and staff satisf) are added. Specification 3. Water tariff levels In this specification we introduce the stringency of the water regulations as shown in Fig. 1. Three binary variables are used to represent “very stringent”, “somewhat stringent”, and “lax” water tariffs. To better fit the model, different thresholds for each tariff group were tested. In the final specification, we use the following binary variables: • Binary variable “very stringent” takes the value of 1 for the hotels in Calvià area and 1–2 star hotels in Palma area, and takes the value of 0 if otherwise. • Binary variable “somewhat stringent” takes the value of 1 for the three star hotels in Palma area and for all hotels in Son Servera area, and takes the value of 0, if otherwise. • Binary variable “lax” takes the value of 1, if a hotel pertains to Muro or Manacor areas, and takes the value of 0, if otherwise. • The hotels in the rest of the local council areas are treated as the reference group representing “moderate” water tariffs. 5. Results

Specification 1. Physical characteristics and management This basic specification includes the variables related to hotels’ physical characteristics and type of management: small, big, star, renov, chain and owners mng. Specification 2. Organizational efficiency, experience and knowledge transfer In this specification, the variables associated with organizational efficiency (review, manag remun, staff remun, num sources, research, tot source), experience addressing environmental issues (standard, revalidations, training, department, person, accounting) and knowledge transfer (academy, collaboration, reports,

The data analysis is performed using STATA software version 10.0, a powerful statistical tool allowing for estimating binary probit regressions (Baum et al., 2011) The results of the estimation are shown in Table 2. The estimation method used is based on the maximum likelihood technique. The standard errors are computed via the variance estimator of Huber/White/Sandwich to ensure the robustness of the results and to avoid a possible heteroskedasticity problem. Table 2 represents the transformed coefficients to allow for better interpretation of the results. Thus, for the continuous variables, the df/dx coefficient means how much the probability of the implementation of the water innovation will change if the explanatory variable changes in one unit, taking the mean of the explanatory variable as the initial value. For the dummy variables,

M. Razumova et al. / International Journal of Hospitality Management 52 (2016) 78–86 Table 2 Probit model results. Specifications and variables

Table 3 Manager’s subjective valuation and actual level of water tariffs. Specification 2 df/dx

RENOV PRIORITY STAFF SATISF OWNER CHANGE COLLABORATION VERY STRINGENT (Calvià and 1-2* Palma) Pseudo-r2 LR Chi2 Log likelihood * ** ***

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0.1343 0.1396 0.1597 −0.2106 0.2960

0.0968 26.32 −122.81

Specification 3 Sign. ** * ** ** ***

***

df/dx 0.1419 0.1433 0.1596 −0.2238 0.2671 0.1635 0.1097 29.85 −121.05

Local council area

Mean of manager’s perception of the level of water tariffs

Stringency of water tariffs based in Fig. 1

Ses Salines Manacor Llucmajor Calvià Capdepera Alcúdia Palma Sóller Pollenc¸a Felanitx Muro Santanyí Son Servera

7.00 6.86 6.70 6.67 6.64 6.63 6.56 6.56 6.36 6.00 5.88 5.64 5.08

M L M VS M M M,SS,VS M M M L M SS

Sign. * * ** ** *** **

***

Significance at the 10 percent level of significance. Significance at the 5 percent level of significance. Significance at the 1 percent level of significance.

the df/dx coefficient means how much the probability of the implementation of the water innovation will change if the condition defined by the dummy variable is satisfied, given all of the other variables in the model are held constant. We also show the value of the McFadden pseudo-R2 for each specification which compares the log-likelihood of the model with the log-likelihood that would have been obtained with only the intercept in the regression. Thus, this ratio suggests the level of improvement offered by the full mode over the intercept model. While it has a minimum value of 0, its maximum value must be less than 1, and unlike the R2 in the OLS regression models, pseudo-R2 does not have a natural interpretation. However, its increase in the specifications from basic to more complex indicates the increase of the goodness of fit of the model. Specification 1 fails to predict the implementation of water saving innovations in the studied period. In Specification 2 and 3 only variable renov from the Specification 1 is found significant. The hotels which carried out total renovation during the studied period were more likely to have implemented water saving innovations. Specification 2 is found significant. Four variables related to the constraints to innovations have significant effect on their implementation, matching conclusions reached in previous literature outlined in Section 2.1. The direct collaboration with other hotels in environmental innovations, staff satisfaction and considering innovation as a priority increase the probability to implement water saving measures, while often changes of the owners decrease it. Only one variable related to organizational effectiveness is found significant. The hotels which consider innovation as a priority had a bigger probability to implement the water saving innovations. No variable related to the experience addressing environmental issues is found significant. With regard to Specification 3, the variables found significant in Specification 2 continue to be significant and with the same sign, demonstrating the robustness of the estimations. Moreover, one variable reflecting the levels of water tariffs is significant. Specifically, the hotels in a “very stringent” group (hotels in Calvià and 1–2 star hotels in Palma) were more likely to implement water saving innovations during the studied period, than the hotels in the reference group of “moderate” tariffs. However, the probability to innovate for hotels in a “somewhat stringent” and “lax” group was not significantly different from that of the hotels in the “moderate” group. 6. Discussion The positive and significant effect of “very stringent” water tariffs on the probability to implement waters-saving measures confirms the Porter Hypothesis that efficient and stringent environmental regulations can stimulate the firms to reveal and

Notes: VS, very stringent; SS, somewhat stringent; M, moderate; L, lax.

implement profitable (cost-saving) innovations. The fact that only “very stringent” regulation has a significant effect on the probability emphasizes the importance given by the PH to the condition of the stringency of regulation. The effects of “somewhat stringent” and for “lax” regulations were not found significantly different from the effect of the reference “moderate” group. This may be explained by the generally low level of water prices, so that the relative difference in the tariff levels has to be sufficiently large to produce a significant stimulus for hotels to implement water saving. Water tariffs in Majorca are still designed based on the criteria of cost recovery (Font, 2014) and do not explicitly consider neither a negative externality of water pollution nor a markup to stimulate water saving (Shaw, 2005). The draft of the Balearic Hydrological Plan (Balearic Islands Government, 2011) contemplates the implementation of progressive tariff schemes to incentivize for water saving, and our findings should encourage the public authorities to make the best of their potential to encourage efficient water usage in hotels. In our sample the average tariff levels starting from about 2D /m3 were associated with a higher probability of implementation of water saving measures in Majorcan hotels, while the hotels in the local council jurisdictions with the lowest water tariffs paid about 0.25–0.5D /m3 . At this point it is relevant to compare the actual level of water tariffs to their subjective valuation by the hotel managers, available from our database (Table 3). The manager’s perception of the level of water tariffs is measured on a scale from “very low” (1) to “very high” (7). It can be seen that the managers’ perception is far from reflecting the differences in the prices paid for water in different local council areas. For example, the hotels of Ses Salines and Manacor give a higher assessment of tariffs stringency than the hotels of Calvià. Meanwhile, Fig. 1 clearly shows that the level of tariffs in Calvià is much higher than in Ses Salines or in Manacor for all levels of consumption. Though in this work the water tariffs were expressed not as a continuous variable, but as a set of binary variables, and hence have some limitations (i.e. they may include other characteristics of the local council areas), we still consider they are a reliable approximation. We believe this exercise will encourage researchers to avoid proxies when possible, or at least to provide proof of their reliability. How should the water tariffs be designed for the specific segment of tourism accommodations to provide an efficient response from the hotels? Provided that the increasing block schemes is the tool that provides the biggest incentive for efficient consumption (OECD, 2009), the number of blocks, their size and the pricing are the main issues to be considered (De Vicente García, 2008). As for the number of the blocks and their sizes an important challenge would be to define the benchmarks. The researchers show that there is a great deal of variation of water consumption, not

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only between countries but also between hotels in the same country and the same climate zone due to high heterogeneity of hotel characteristics (Barberían et al., 2013; Deyà and Tirado, 2011; Eurostat, 2009). It has been suggested that for the development of reliable consumption models and benchmarks, special benchmarks should be developed not only for specialized groups of hotels and disaggregated hotel facilities, but also for specific category of upscale hotels (Bohdanowicz and Martinac, 2007) and also for those applying water saving measures (Eurostat, 2009). Presently, most of the benchmarks only distinguish between the category of the hotel establishment and the climate (Fig. 1). Finally, an important technical obstacle to applying specific benchmarks should also be considered: the water suppliers have data on the total of the water consumed by a hotel unit; the activity based tariffs will require the installation of water meters for every benchmarked activity. How stringent should the water tariffs be? To define the tariff levels, price elasticity is the key issue to be investigated. The results of Angulo et al. (2014) in the case of the hotels in Zaragoza (Spain) demonstrate that price increases should be treated with caution for this group of entities as the shadow prices are just slightly higher than the real prices paid for the water. Moreover, it is shown that in the short term the water is almost out of the control of the hotels. In the long term water demand is normal and elastic (−0.38) and, hence, there is potential for encouraging the resource’s conservation through pricing policy. When studying elasticity, the evidence from the research on residential use may be insightful to focus the research, as the hotel sector as other service sectors have similar characteristics to the households in terms of water quality requirements and uses of the resource (Angulo et al., 2014). So, firstly, elasticity for indoor and outdoor uses may be differentiated. While the indoor consumption in the household shows to be almost inelastic, outdoor consumption (mainly watering lawns and gardens) shows to be more sensitive to variation in price (Shaw, 2005). This is important in the light of the increasing water consumption for outdoor uses due to the move to so-called “quality tourism” model contemplated by many tourism destinations including Majorca (Deyà and Tirado, 2011). Secondly, the research on price elasticity may also differentiate between the hotel categories. The biggest water consumers are the high category (luxury) hotels. Intuition suggests that it can be much easier for them to incorporate higher water prices in the hotel room rate than for the low category hotels. For the low category hotels, it is especially important that high tariffs in the high consuming blocks should be accompanied by the availability of feasible water saving technologies and facility to implement water saving innovations. In such a scenario the hotel would be able to obtain water cost reductions, offset the investment costs, and thus maintain its profitability and price competitiveness. The price competitiveness is especially important in mass-tourism, where the markets are saturated and customers choose products or services from around the world (Pikkemaat and Peters, 2005). It should not be forgotten, that even the tourists environmentally conscious at home, on holidays may show opposite behavior and not be willing to pay a higher price for the environmental quality (Solstrand and Gressnes, 2014). The results of the paper have also some useful implications for the hotel managers; there are some internal factors associated with the implementation of water saving which the hotels could develop to be able to reveal and/or successfully implement such practices. Thus, treating innovation as a hotel’s priority is having a positive impact on water saving innovations supporting Fraj et al. (2015) that only hotels that are more open to innovating will be more successful in finding opportunities to reduce their environmental impacts. Furthermore, collaboration with peer hotels in the search of water saving opportunities shows to be a powerful source of knowledge. This implies that the development of structures enabling hotel managers to access relevant

information and propose and implement new ideas would facilitate the search for water saving opportunities. Moreover, staff job satisfaction shows to be important for water saving. Indeed many environmental practices in hotels are not technologically complex compared to the manufacturing sector (Kumar et al., 2008) but require certain environmental commitment from the staff (Chan et al., 2009), e.g. reduction of water used for cleaning or dish washing. This finding suggests that the hoteliers should not only search for new water saving technologies but also stimulate the environmental commitment of the staff through the human resources management (Bohdanowicz et al., 2011) by providing fair treatment and remuneration, offering promotion opportunities, encouraging the atmosphere of partnership, and implementing other practices improving staff wellbeing in the work place.

7. Conclusions The framework of the PH was used to throw light on the underresearched issue of the potential of the water tariffs to stimulate the implementation of water saving measures in hotels. Twelve local Majorcan council jurisdictions were classified into four groups representing different levels of tariffs and fees related to water consumption. Our findings confirmed the assumptions of the PH: the hotels in the local council jurisdictions with the highest tariffs were more likely to implement water saving innovations than the hotels in the jurisdictions with lower tariffs. It was also shown that the water tariffs have to be sufficiently high to produce a significant effect on the probability to implement water saving innovations, thus emphasizing the importance of the stringency in the regulation design. Moreover, several variables related to the constraints to innovations were found significant, thus, proving the relevance of the PH framework for the case of water saving innovations. Specifically, treating innovation as a management priority, high levels of employees’ job satisfaction, direct collaboration with other hotels in environmental innovations are associated with the higher probability to implement water saving innovations while often owners’ changes decrease this probability. The paper also contributes to a wider issue of the methodological difficulties in empirical testing of the PH. An important disadvantage of many tests of the PH has been the use of the proxies of the stringency of environmental regulation. Instead, the monetary nature of the water tariffs allows comparing them directly. Moreover, the comparison of the actual level of water tariffs to the perceived managers’ valuations reveals that in our case the later would not be a reliable proxy of regulation stringency. Our study can be considered as a first insight into the relationship between water tariffs and water saving innovations and the following directions for future research may be outlined. First, it would be useful to enhance the proposed model by including some potentially important variables such as: water saving innovations held before the studied period, availability of financial aid for water saving innovations, environmental values of managers and employees, etc. It would be also insightful to estimate a dynamic model to analyze possible long term effects of water tariffs (Shaw, 2005). Moreover, there are reasons to differentiate between process-based and technology-based water saving innovations as dependent variable (Kemp and Pontoglio, 2011). The present analysis is a case study, and hence its results should be generalized with caution. Nevertheless, as argued by Kemp and Pontoglio (2011) in their recent analysis of innovation effects of environmental policy instruments, the case studies “help to provide a more comprehensive and realistic picture of the effects of environmental regulations on the eco-innovation process”. Thus, we suggest more cases studies should be done to understand the role of water pricing as a driving force of water saving innovations in hotels, especially in

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the places where water provision is still subsidized. The general availability of the information on water tariffs makes it easy to replicate this study in what the measurement of regulation stringency is concerned.

Acknowledgments The authors gratefully acknowledge the financial support provided by the Ministry of Economy, Finance and Innovation of the Balearic Islands [pre-doctoral scholarship and project PRIB-200410142], which allowed us to obtain the necessary data for this research.

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