Economic Valuation of Heritage- Related Investments: A Case Study from China By Jian Xie The World Bank jxie@worldbank.org Requirements for Economic Analysis in Investment Projects At the World Bank, there is an operational policy OP10.04 (Economic Evaluation of Investment Operations) which requires economic analysis for all investment projects in their appraisal. In China, Economic Valuation Methods and Parameters of Investment Projects (3 rd Edition) prepared and issued by the Chinese government in mid-2000s is a main handbook to guide economic analysis in the country. Recently, the Chinese government has drafted the Guidelines for Economic Analysis of Scenic Parks to help further guide, review and appraise investment projects in scenic parks which are under the management of central or local governments 1
Case Study Economic Analysis of Guizhou Cultural and Natural Heritage Project Unique Landscape 2
Long History Colorful Culture 3
Traditional Lifestyle Great Hospitality 4
Basic Data Population: 39.5 million The poorest province in China, per capita GDP was less than $1,000 in 2007, Most ethnic minorities in China (49 ethnic groups including Miao, Buyi and Dong comprising about 38% of its total population) Characterized by a unique karst landscape, with over 90% of its total land area covered by mountains and hills Separated by difficult landscape, most of Guizhou s ethnic minorities are indigenous, resulting in their ancient living traditions (both physical and intangible heritages) being well-preserved Government Strategy and Plans The Guizhou Provincial Government has been promoting its tourism while preserving and protecting its cultural and natural heritages The tourism sector development is a priority as laid out in the 11th Five Year Plan of the Province. The Master Plan of Tourism Development (supported by WB and WTO) and the Rural Tourism Development Plan adopted in 2002 and in 2006, respectively, to guide the protection and development of the cultural and natural heritage and tourism development in the province 5
Trend of Tourism Development Growing at a fast pace The number of tourists (measured in person visits) increased by 22% annually from 1984 to 2007 and by 36% from 2004 to 2007 (62 million person visits) Tourism earnings increased by over 30% per year from 2000 to 2006 and have become a key pillar of the Guizhou economy, about 19% of GDP in 2007 Statistics of Tourism Development 2000 2004 2005 2006 2007 Tourist numbers (million person-visits ) 19.98 25.03 31.28 47.48 62.61 Domestic (million person-visits) 19.80 24,80 31.00 47.16 62.19 Overseas (million person-visits) 0.18 0.23 0.28 0.32 0.43 Tourism revenues (billion Yuan) 6.30 16.78 25.11 38.00 51.2 Share of GDP (%) 6.34 11.19 13.20 17.07 18.97 Sources: Guizhou Tourism Yearbooks 6
Problems and Challenges Poor living and environmental conditions Low awareness and appreciation of minority cultural heritages Poor infrastructure and facilities to protect and promote cultural and natural heritages Inadequate management including weak institutions at the grass-roots level The cultural heritage in poor traditional villages is in danger in modern age, historic buildings are demolished, and only elders have artisan skills or knowledge of local l performing arts. Young people cannot earn sufficient income from traditional skills and have to find jobs outside their villages The World Bank Project A WB loan of $60 million approved in 2008 Its development objective is to increase economic benefits to local communities (including minority groups) through increased tourism and better protection of the cultural and natural heritage in participating sites 7
Project Components Investments in four broad categories: Ethnic minority cultural heritage protection Natural heritage and scenic site protection and development Provincial and gateway towns Capacity building and project implementation support Covering over 25 ethnic minority villages, ancient towns, or scenic areas Project Beneficiaries Local and ethnic minority people/communities in project areas Domestic and international tourists Tour operators in project areas People living outside project areas who have no plan to visit the sites but appreciate the existence of cultural and natural heritages in Guizhou 8
Main Economic Benefits Identified Increased value of cultural and natural heritage protected by the project Local economic development values, particularly, the increase in income associated with tourism activities and local skills enhancement Natural ecosystems conservation Living standards and environmental health improvement in remote and ethnic minority dominant areas Type of Benefits Direct use values enjoyed by both local people and tourists: Monetized - mainly those with cash returns to local residents or other service providers in the forms such as admission fees, or increased net revenues from provision of cultural shows, foods, accommodation, and parking, and souvenir and handcrafts sales, etc Non- monetized mainly consumer s surplus, the extra benefit to both residents and visitors 9
Type of Benefits (cont.) Indirect use values, for example, the ecological and environmental benefits provided by improved natural heritage preservation. Non-use values (bequest values and existence values) which do not involve directly using the sites in any way. For example, some people appreciate the existence of ethnic minority cultures and are willing to pay for its existence even if they may never plan to visit it. Type of Benefits Type of benefits Description of the benefits Beneficiaries Valuation techniques Direct use benefits Monetized Admission fees and any special tourism tax applied to goods and services; in addition, the extra profit (or economic rent) from the values of cultural and natural heritagerelated services provided by local communicates to and paid by tourists Mostly tourists Measure direct payments of visitors and estimate the economic rent portion where appropriate Non-monetized The extra values of cultural and natural heritage-related t services provided d by local l communicates to and not paid for by tourists or residents (i.e., consumer s surplus) Tourists and residents Contingent Valuation Method (CVM) Indirect benefits For example, benefits of ecological and environmental improvement and bequest values and existence values of cultural heritage. People living outside the project areas Not quantified in the analysis but could be done using various valuation techniques 10
Project Costs Capital investment and O&M costs, including environmental prevention and management costs and resettlement costs incurred by new construction. Challenges in Economic Valuation Involving not only direct use values of cultural and natural heritages to tourists t and local l residents but also indirect and option and existence values to people who may never visit the site A greater fluctuation and uncertainty in the number of beneficiaries (i.e., the tourists) due to many external factors like economic recessions and outbreaks of epidemic diseases Given the large number of project sites involved and the wide range of the types of investments (such as access roads, water supply and sanitation facilities, waste collection networks, building rehabilitation, fire safety, hiking trails), it is difficult to conduct a full cost-benefit analysis for each and every components of the project 11
Valuation Methodology A mix of the cost-effectiveness approach and the costbenefit analysis employed The cost-benefit analysis was undertaken for a few representative components (a scenic park area, 2 ethnic minority villages, and an ancient town) Willingness-to-pay (WTP) surveys and the travel cost methods (TCM) were employed at representative project sites in an attempt to monetize other benefits (i.e., consumer s surplus) of cultural and natural heritage protection investments to both visitors and local residents For most of investment t components, the cost-effectiveness ti approach was used to ensure that the least-cost options are adopted Projection of Tourist Growth As mentioned earlier, Guizhou has been experiencing very rapid growth in its tourism sector in recent years (about 36% per year over the last 4 years). A simple extrapolation of tourist growth will present a high growth scenario which is unlikely to be realistic and sustainable in a long run given the local carrying capacity The cost-benefit analysis has to make some strong but conservative assumptions. This is because of the lack of reliable statistical data and good models In this analysis, the annual growth of tourists is projected and controlled at a sustainable and conservative level based on analyses of tourism development plans, service supplies and carrying capacity and discussions with local authorities and research institutes 12
Contribution of the Investment Some sites have already developed their tourism attractions and are already receiving visitors prior to this project, another tricky issue is to estimate net growth due to the project investment and quantify the share of the project investment in total incremental benefits. This has been determined site by site, by taking into account the share of the project investment in total investment of the site, the relative importance of the investment in terms of attracting visitors, the expected lifespan of the investment and so on. WTP Survey Tourists Local Residents Number Location Planned Actual Planned Actual Langde 120 164 80 77 Zhaoxing 50 41 50 50 Wanfenglin 80 81 120 100 Libo 100 129 n/a n/a Jiuzhou n/a n/a / 30 Airport and selected hotels in Guiyang City 300 283 n/a n/a Of which international visitors 66 / Total 750 729 250 257 13
Willingness to pay values by survey site % with WTP Langde Zhaoxing Wanfenglin Jiuzhou Average WTP value (Yuan) % with WTP Average WTP (Yuan) % with WTP Average WTP Values (Yuan) % with WTP Tourists 76.8 10.7 13.5 44 30.9 24.2 /* /* Average WTP Values (Yuan) Residents 88.2 17.1 100 18.4 85 11.8 85.0 27.8 The survey on tourists was not conducted at this site because there are few visitors so far. The average WTP estimates varied from 11 to over 44 Yuan, depending on the site. It is assumed that these are one time payments for the tourists who will probably only visit the site once in many years. For local residents, who depend on the same sites for their livelihood, the WTP number is used as an annual value. Travel Costs Information on travel costs and local expenditures were also collected. Tourists were asked about the total t costs for them to make a trip to or in Guizhou, the list of tourist destinations visited, and the number of days spent on a particular site. The average travel costs of project sites are calculated. They indicate that many visitors are willing to come from some dit distance to visit iitgih Guizhou and dthtth that they obviously bi valued the sites visited. It is not possible, however, to estimate the economic rent/ consumer s surplus generated by these visits from the data that were collected. 14
Cost-Benefit Analysis of Selected Project Components Four sites, representing representative types of project components, were selected as samples for the cost-benefit analysis. They are: Wanfenglin Scenic Park Area, Langde Upper Miao Minority Village, Zhaoxing Dong Minority Village, and Anshun Jiuzhou Old Town. Wanfenglin Scenic Area in Xingyi City 15
Wanfenglin Scenic Area in Xingyi City Wanfenglin (Thousand Peaks Forest) is a national Geo-park with magnificent Karst landscape and rich of Buyi ethnic minority culture. Despite its natural beauty, tourism was undeveloped. Insufficient tourist infrastructure is emerging as a bottleneck. This investment component aims to significantly improve tourist infrastructure and protect cultural and natural heritages in order to significantly promote tourism. It will invest $9 millions in the construction of tourist information center and Buyi ethnic culture center, construction and rehabilitation of bridges over Nahui Rive, bike trails, and footpaths, river bank ecological management; and integrated t protection ti and development of local l villages. Results of Cost-Benefit Analysis [NPV] [0] [1] [2] [3] [4] [5] [6] [7] [12] [17] [22] [23] 2008 2009 2010 2011 2012 2013 2014 2015 2020 2025 2030 2031 Economic cost Fixed capital investment [Ym] 16.12 20.14 24.17 20.14 Incremental variable costs [Ym] 5.20 5.39 5.42 5.45 5.66 5.92 6.01 6.01 Total economic cost [Ym] 16.12 20.14 24.17 20.14 5.20 5.39 5.42 5.45 5.66 5.92 6.01 6.01 Direct tourismearnings Earnings fromadmission fees [Ym] 3.70 5.18 6.88 8.83 17.98 32.72 43.45 45.94 Net earnings fromother services provided to visitors [Ym] 0.25 0.53 0.86 1.24 3.01 5.86 7.94 8.42 Total monetized economic benefits [Ym] 3.95 5.71 7.74 10.07 20.99 38.58 51.39 54.35 Non-monetized benefits of heritage protection Visitors' it consumer surplus [Ym] 139 1.39 160 1.60 184 1.84 211 2.11 340 3.40 548 5.48 699 6.99 734 7.34 Local residents' WTP [Ym] 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 Total non-monetized benefits [Ym] 1.42 1.63 1.87 2.15 3.44 5.51 7.03 7.38 Total economic benefits [Ym] 173.6 0.00 0.00 0.00 0.00 5.37 7.34 9.61 12.22 24.43 44.09 58.42 61.73 Net economic flows [Ym] 66.9-16.12-20.14-24.17-20.14 0.17 1.95 4.19 6.77 18.77 38.17 52.41 55.72 EIRR [%] 13.7% 16
Sensitivity Analysis EIRR 13.7% 10% decrease in tourist growth rate 11.5% 10% increase in investment costs 12.5% Combined 10.4% Non-monetized benefits excluded 11.8% Langde Upper Miao Minority Village 17
Langde Upper Miao Village 757 residents. A long history starting over 640 years ago in the Ming Dynasty. Rich in the culture of the Miao Minority. The investment (about $3 million) in the village consists of the construction and rehabilitation of facilities such as road and footpath, th water supply, fire protection, ti sewerage network, toilets, and solid waste collection; rehabilitation and protection of ancient and minority architectures; public buildings/space for cultural shows and information center; and intangible heritage protection. Langde Upper Miao Village The village s tourism activities have begun in 1990s and it has attracted visitors for its Miao cultural heritages since then. It is estimated that the village attracted about 79,600 visitors in 2006. From 2001 to 2006, its growth rate was 15.2% per year due to good marketing efforts. However, as the tourist carrying capacity of the small village is limited, the rapid growth rate would hardly sustain in a long run. To be conservative, it is assumed that the future growth rate of visitation is controlled at 10% per year from 2009 to 2019, and 5% per year for the rest of the period. It is further assumed that the project contributes to only half of the growth of tourism during this period. 18
Results of Cost-Benefit Analysis [NPV] [0] [1] [2] [3] [4] [5] [6] [7] [12] [17] [22] [23] 2008 2009 2010 2011 2012 2013 2014 2015 2020 2025 2030 2031 Economic cost Fixedcapital investment [Ym] 634 6.34 793 7.93 952 9.52 793 7.93 Incremental variable costs [Ym] 1.16 1.16 1.16 1.16 1.16 1.16 1.16 1.16 Total economic cost [Ym] 6.34 7.93 9.52 7.93 1.16 1.16 1.16 1.16 1.16 1.16 1.16 1.16 Direct tourismearnings Earnings fromadmission fees [Ym] 3.00 3.76 4.60 5.52 10.97 15.27 20.77 22.03 Net earnings from other services provided to visitors [Ym] 0.06 0.13 0.21 0.29 0.79 1.19 1.69 1.81 Total monetized economic benefits [Ym] 3.06 3.89 4.81 5.81 11.76 16.46 22.46 23.84 Non-monetizedbenefitsof Nonmonetized of heritageprotection Visitors's WTP [Ym] 1.16 1.28 1.41 1.55 2.38 3.03 3.87 4.07 Local residents' WTP [Ym] 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Total non-monetized benefits [Ym] 1.18 1.29 1.42 1.56 2.39 3.05 3.89 4.08 Total economic benefits [Ym] 90.9 0.00 0.00 0.00 0.00 4.24 5.19 6.23 7.37 14.15 19.51 26.34 27.92 Net economic flows [Ym] 56.5-6.34-7.93-9.52-7.93 3.08 4.03 5.07 6.21 12.99 18.35 25.18 26.76 EIRR [%] 19.6% Jiuzhou Ancient Town Jiuzhou is the oldest military fortress in the area, founded in early Ming Dynasty over 600 years ago. The traditional culture (architecture, custom, performance, etc) of old Han people (called Tunpu culture) is well preserved in the town. The project helps preserve the ancient town and develop it into a tourist destination for Tunpu culture. Total fixed capital investment is $4.15 million. 19
Assumptions and Data Admission fee and other net tourism earnings. An admission fee of 50 yuan is expected upon the completion of the project. It is assumed that 50% of visitors it would pay the fee. In addition, visitors it would spend 89 yuan per person for their accommodation, foods and shopping in the town, which generates a net tourism income (an economic rent/ exrta profit) of about 17.8 yuan per visitor for the local community. Consumer s surplus. No WTP survey on visitors was conducted because there are few visitors in the town at present. Although 85% of local residents are willing to pay for the project at an average of 27.8 yuan per person per year, non-monetized values were not included in the analysis. Results of Cost-Benefit Analysis [NPV] [0] [1] [2] [3] [4] [5] [6] [7] [12] [17] [22] [23] 2008 2009 2010 2011 2012 2013 2014 2015 2020 2025 2030 2031 Economiccost Fixedcapital investment [Ym] 6.347.939.527.93 Incremental variablecosts [Ym] 1.971.992.012.032.143.443.613.61 Total economiccost [Ym] 6.347.939.527.931.971.992.012.032.143.443.613.61 Direct tourismearnings Earnings fromadmissionfees [Ym] 1.632.062.553.125.7910.0913.2213.95 Nt Net earnings fromother services providedtovisitors iddt iit [Y] [Ym] 013 0.13 029 0.29 046 0.46 067 0.67 162 1.62 315 3.15 426 4.26 452 4.52 Total economicbenefits [Ym] 52.7 0.00 0.00 0.00 0.00 1.76 2.34 3.02 3.79 7.41 13.24 17.49 18.47 Net economicflows [Ym] 8.3-6.34-7.93-9.52-7.93-0.21 0.36 1.01 1.76 5.27 9.80 13.87 14.86 EIRR [ %] 10.1% 20
Impact on the Poor The project will improve the condition of local infrastructure and bring economic and health benefits to the entire population including the poor in the project areas. Most of the project investment will be shouldered by local governments and cause no tariff or tax increase on local residents although a portion of the project loan will be disbursed through a small loan program to those local residents who borrow for their own home improvement. To ensure that the project revenue will be fairly shared among local residents, a community-based participatory approach will be employed in project implementation. Accordingly, the project anticipates no negative impact on the poor. Conclusions The EIRR of each individual component varies from 10.1% (Jiuzhou Ancient Town) to 19.6% (Langde Miao Ethnic Cultural Village). The variation is due primarily to the different nature and size of investments at the different sites. All of these components have their EIRR above the hurdle level acceptable to the Chinese Government, i.e., the 8% discount rate for investment projects in 2002. It is likely that the result of the economic analysis is at the low end of estimation but can be used to economically justify the project. Sensitivity analysis assuming a 10% reduction in visitor number and a 10% increase in investment costs further shows that the analysis is robust. One can conclude that the project is economically justified. 21