CABI TOURISM TEXTS 4 th Edition Leisure Sport

CABI TOURISM TEXTS 4 th Edition Leisure, Sport and Tourism, Politics, Policy and Planning A. J. Veal COMPLEMENTARY TEACHING MATERIALS

Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th Edition CHAPTER 14 Economic Evaluation Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Outline Introduction Cost-benefit analysis Economic impact analysis Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Cost-benefit analysis Measurables and unmeasurables The cost-benefit approach Identifying and measuring costs Identifying and measuring benefits Measuring private benefits – travel cost and other methods • Comparing costs and benefits • The value of time • Value transfer • • • Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Measurables and unmeasurables CBA involves identifying all costs and benefits, and measuring and comparing what can be measured, but not everything may be measurable. (Table 14. 1) Measurable Non-measurable Costs A B Benefits C D Decision makers must ultimately decide whether: A–C (measurable net costs) or C–A (measurable net benefits) outweigh the non-measurables B and D. Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

The cost-benefit approach to project evaluation (Table 14. 2) PRIVATE SECTOR PUBLIC SECTOR Capital cost £’ 000 s (a) Investor 5000 (a) Public agency funds 5000 (b) Bank loan 5000 (b) Borrowings 5000 (c) Total capital (a+b) Annual expenditure 10, 000 Capital cost ( c) Total capital (a+b) £’ 000 s 10, 000 Annual costs (d) Bank interest (10% of b) 500 (d) Capital charges (8% of b) 400 (e) Running costs 3500 (f) Total (d+e) 4000 (f) Total (d+e) 3900 Annual income (g) Sales Annual income 5000 Annual profit (g) Fees and charges 1500 Annual deficit/subsidy (h) Profits (g – f) 1000 (h) Net cost/loss (g – f) (i) % return on investor’s capital (100 x h/a) 20% (i) Net social benefits – 2400 ? Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Identifying and measuring costs • Capital costs – costs of building the facility: upfront and annual • Running costs – annual costs of: staffing, materials, heating, lighting, transport, etc. • Externalities as costs • Opportunity costs – the value of the resource in an alternative use – e. g. parkland as housing/offices Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Externalities (or ‘third party’ or ‘neighbourhood’ effects) (from Chapter 5) • Market under-provides or over-provides, due to specific benefits enjoyed or costs imposed, but not paid for, by specific third parties • Negative: costs imposed on third parties, e. g. : – air pollution, noise pollution, congestion • Positive: benefits to third parties, which they do not pay for, e. g. : – environmental/amenity benefits of a golf course to surrounding properties; public tourism attractions Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Adelaide Grand Prix study (Table 12. 3) Benefits $m Tangible benefits: visitor expenditure* 9. 9 Tangible benefits: event costs funded from outside SA* 13. 7– 14. 9 Social benefit: psychic income (general excitement, etc. ) 28. 0 Total benefits 51. 6– 52. 8 Costs Tangible costs: event + capital costs funded from SA sources 6. 6– 7. 5 Social costs: traffic congestion 6. 2 Social costs: property damage 0. 03 Social costs: accidents Total costs Benefit: cost ratio *including multiplier effects SA = South Australia 3. 2– 5. 8 16. 3– 19. 8 2. 7– 3. 2 (Source: Burns et al. , 1986) Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Adelaide Grand Prix study: Psychic income calculation • 20% of population experienced extra travel costs due to congestion/diversions during the Grand Prix • Total extra travel costs: $6. 2 m • Proportion of the above who were still in favour of hosting the Grand Prix: 90% • Total extra travel costs of the 90%: $5. 6 m • Psychic value of Grand Prix for this group (20% of population): at least $5. 6 m • Psychic value of Grand Prix for whole population: (5 x $5. 6 m) $28 m Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Traffic congestion costs (Table 14. 4) Source a. No. of vehicles experiencing delays b. Average increase in journey time c. Aggregate delay time d. Value of time per hour e. Value of time lost f. Average fuel costs/vehicle/hour g. Aggregate fuel costs of congestion h. Total costs of congestion Survey a x b Average wage c x d Motoring org. c x f e + g 1, 000 0. 25 hrs 250, 000 hrs £ 8. 00 £ 2, 000 £ 2. 00 £ 500, 000 £ 2, 500, 000 (Hypothetical data) Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Identifying and measuring benefits • User benefits: – willingness-to-pay or ‘contingent’ method – travel cost or Clawson method – hedonic pricing Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Willingness-to-pay or ‘contingency’ method • Users of free public facilities are asked in a survey what they would be willing to pay. • Possibility that respondents will: – under-state, just in case there is a plan to introduce charges – over-state to ensure support for the facility Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Travel cost or Clawson method • Based on: – the observation that fewer people use a facility as travel costs increase – deriving a classic demand curve (price v. quantity) – measurement of consumer surplus • Box 14. 2 Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Travel cost/Clawson method: site/travel zones Site A B C D

Travel cost/Clawson method: data (Table 14. 5) Source of information a. Zone population Census b. Travel costs £/head Survey Zone A B Total C D 20, 000 47, 000 50, 000 60, 000 £ 5 c. Total visits to site p. a. Survey/counts d. Visit rate/1000 pop’n Calculated (c/a) £ 13 £ 15 64, 000 65, 000 50, 000 3200 1383 1000 0 £ 20 0 179, 000 0 Plot on a graph Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Travel costs x visit rates (Fig. 14. 2) 22 Travel costs per visitor 20 18 16 14 12 10 8 6 4 2 0 0 1000 2000 3000 Visit rates (visits per 1000 of pop’n per year) 4000 Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Travel cost analysis to estimate a demand curve (Table 14. 6) Source of Information a. Population ‘ 000 s Table 14. 6 b. Travel costs Table 14. 6 Actual situation entry charge nil c. Entry charge (£) d. Total costs (£) b + c e. Visit rate Table 14. 6 f. Total visits Table 14. 6 Hypothetical entry charge £ 3 g. Entry charge (£) h. Total cost (£) b + h i. Visit rate Fig. 14. 3 j. Estimated no. of visits f x a Zone A Zone B Zone C 20 £ 5 0 5 3200 64, 000 3 8 2500 50, 000 65 £ 13 0 13 1383 65, 000 3 16 750 35, 200 50 £ 15 0 15 1, 000 50, 000 3 18 350 17, 500 Total Visits 179, 000 102, 750 Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Travel cost analysis to estimate a demand curve (cont’d) Hypothetical entry charge £ 6 k. Entry charge (£) l. Total cost m. Visit rate* n. Estimated no. of visits Hypothetical entry charge £ 8 o. Entry charge (£) p. Total cost q. Visit rate r. Estimated no. of visits Hypothetical entry charge £ 12 s. Entry charge (£) t. Total cost u. Visit rate v. Estimated no. of visits Source of Zone A Information 6 b + k 11 Fig. 14. 3 2200 m x a 44, 000 8 b + o 13 Fig. 14. 3 1383 l x a 27, 660 12 b + s 17 Fig. 14. 3 650 u x a 13, 000 Zone B Zone C 6 19 350 16, 450 8 21 0 0 12 25 0 0 6 21 0 0 8 23 0 0 12 27 0 0 Total Visits Plot on a graph Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts 60, 450 27, 660 13, 000

Demand curve (Fig. 14. 3) Entry charge, £ person 14 12 10 8 6 4 2 0 20, 000 40, 000 60, 000 80, 000 100, 000120, 000140, 000160, 000180, 000200, 000 Estimated visits per year Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Consumer surplus • Gives estimate of value to users • For explanation of consumer surplus, see Chapter 5. Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Hedonic pricing • Alternative way of estimating user value • Willingness to pay for enjoyment of aspects of the site – e. g. value of a park reflected in price of houses with views/access Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Other issues: value of time • Some benefits of projects are time savings • This can apply to leisure projects (e. g. new tourist route), so savings are of leisure time. • How is leisure time valued? • Research indicates people’s willingness to pay money to save their own leisure time and the value they place on it. • Equity issue: Should the leisure time of poorer people be valued at less than that of wealthy people? Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Other issues: value transfer • CBA expensive to conduct • Use results of generic studies to evaluate projects (as in road projects) • See US Forest Service project: – Rosenberger and Loomis (2001) – www. fs. fed. us/rm/pubs/rmrs_gtr 72. pdf Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Comparing costs and benefits (Table 14. 7) Cash assessment Cost-benefit analysis Costs Capital charges Opportunity costs Running costs Externalities £'000 p. a. 400 3500 - £'000 p. a. 400 3500 450 Total costs 3900 4650 Benefits Private/user benefits paid for Private/user benefits not paid for Non-user benefits 1500 - 1500 1000 2500 Total benefits 1500 5000 Surplus/deficit -2400 350 Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

The life of a project • Costs and benefits spread over the life of a project – e. g. for a building: 50+ years? • Costs/benefits variable over time and between projects • All costs/benefits valued in current terms by means of discount rate (opposite of interest rate) • Examples: Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Two projects compared: Net Present Value (Table 14. 8) Year Costs (£m) 1 2 3 4 5 6 7 8 9 10 Total NPV* 10 8 7 7 6 8 9 10 9 8 82 Project A Benefits Net benefits (£m) 9 -1 9 1 10 3 11 5 12 4 11 2 10 0 9 1 100 18 11. 3 * Calculations not shown Costs (£m) 11 10 9 9 9 8 7 7 7 8 85 Project B Benefits Net benefits (£m) 8 -3 8 -2 7 -2 8 -1 9 0 12 3 12 6 14 7 13 6 12 4 103 18 7. 6 Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Life of a project: 2 projects compared (Fig. 14. 1) 8 Net benefits, £ million 6 4 2 0 -2 -4 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Project A Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Project B Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Switching values • Minimum value of benefits if project is to go ahead (Table 14. 9 example) Annual cost of project Annual income Net annual costs No. of annual visits Cost per visit/switching value £ 3 million £ 2. 2 million £ 800, 000 400, 000 £ 2 • Decision-makers decide whether £ 2 subsidy is acceptable Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Economic impact analysis • • Introduction Counting the cost The multiplier Economic significance studies Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Introduction to economic impact studies • Concentrates on income and jobs • May be undertaken: – – before initiating a project, as aid to decision-making after completion of project, as part of evaluation after a single event, to persuade funders to support future events In relation to industry sectors – economic significance studies Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Counting the cost • Importance of defining the study area – e. g. country, region/state, county/sub-region, local government area/city • Impact is created by money spent in the study area by: – visitors (‘tourism multiplier’) – external investors – higher levels of government Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

The multiplier • Money spent in an area by visitors, investors or higher levels of government circulates, creating further impacts. • Therefore, if £ 1 initial expenditure eventually creates £ 2 of income, the multiplier is 2. • This can be calculated. Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Estimating the multiplier: data requirements • Firms’ expenditure: a) goes to other local firms b) goes to local residents as wages/salaries c) leaves the area (e. g. taxes, imports, profits) = ‘leakage’ • Discovered by industry survey, e. g. a) 25% to local firms b) 40% to local residents c) 35% leaks • Residents’ expenditure spent (a) locally, (b) outside the area (leakage) • Discovered by resident survey, e. g. a) 50% to local firms b) 50% leaks Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Multiplier calculations: diagram (Fig. 14. 5) Round Local firms Leaks 1 Leaks Individuals Initial cost $1000 35% 2 3 4 5 etc. $350 $87. 50 $91. 88 $40. 47 etc. 25% $250 $200 + 62. 50 = 262. 50 $50 + 65. 63 = 115. 63 $28. 91 + 52. 50 = 81. 41 etc. 40% $400 50% $100 $105 $46. 25 etc. 50% $200 $52. 50 etc. Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Multiplier calculations (cont’d) • Each round produces a smaller impact because of leaks. • Fig. 14. 5 shows around 14/15 producing local impacts of <$1. • Aggregate impacts: – business turnover: $1817. 63 – resident incomes: $726. 90 • Various multipliers: – business turnover multiplier: 1817. 64/1000 = 1. 82 – orthodox income multiplier: 726. 90/400 = 1. 82 – unorthodox income multiplier: 726. 90/1000 = 0. 73 • Different firms’ and individuals’ expenditure ratios affect the size of multipliers. Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts

Economic significance studies Studies that demonstrate the economic significance of industry sectors, e. g. leisure industry, sport industry, cultural industries, tourism industry Leisure, Sport and Tourism, Politics, Policy and Planning, 4 th edition, Veal, 2017, CABI Tourism Texts