xie economic valuation of heritage-related investments: a case study from china

8/8/2019 Xie Economic Valuation of Heritage-Related Investments: A Case Study from China

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Requirements for Economic

Analysis in Investment Projects At the World Bank, there is an operational policy OP10.04

(Economic Evaluation of Investment Operations) whichrequires economic analysis for all investment projects in

their appraisal. In China, Economic Valuation Methods and Parameters of

Investment Projects (3rd Edition) prepared and issued bythe Chinese government in mid-2000s is a main handbookto guide economic analysis in the country.

Recently, the Chinese government has drafted theGuidelines for Economic Analysis of Scenic Parks to helpfurther guide, review and appraise investment projects inscenic parks which are under the management of centralor local governments


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Case Study

Economic Analysis of Guizhou

Cultural and Natural HeritageProject


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Unique Landscape


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Long History


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Colorful Culture


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Traditional Lifestyle


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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 totalpopulation)

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 Guizhous ethnic

minorities are indigenous, resulting in their ancient livingtraditions (both physical and intangible heritages) beingwell-preserved


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Government Strategy and Plans

The Guizhou Provincial Government has been promotingits tourism while preserving and protecting its cultural andnatural heritages

The tourism sector development is a priority as laid out inthe 11th Five Year Plan of the Province.

The Master Plan of Tourism Development (supported byWB and WTO) and the Rural Tourism Development Plan

adopted in 2002 and in 2006, respectively, to guide theprotection and development of the cultural and naturalheritage and tourism development in the province


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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 pillarof the Guizhou economy, about 19% of GDP in2007


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Statistics of Tourism Development2000 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


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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 performingarts. Young people cannot earn sufficient income fromtraditional skills and have to find jobs outside their villages


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The World Bank Project A WB loan of $60 million

approved in 2008

Its development objective is toincrease economic benefits tolocal communities (includingminority groups) throughincreased tourism and betterprotection of the cultural andnatural heritage in participatingsites


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Project ComponentsInvestments in four broad categories: Ethnic minority cultural heritage protection

Natural heritage and scenic site protection anddevelopment Provincial and gateway towns Capacity building and project implementation

support

Covering over 25 ethnic minority villages, ancienttowns, or scenic areas


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Project Beneficiaries Local and ethnic minority

people/communities in project areas

Domestic and international tourists

Tour operators in project areasPeople living outside project areas who

have no plan to visit the sites but appreciatethe existence of cultural and natural

heritages in Guizhou


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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 tourismactivities and local skills enhancement

Natural ecosystems conservation

Living standards and environmental health

improvement in remote and ethnic minoritydominant areas


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Type of BenefitsDirect use values enjoyed by both local

people and tourists:

Monetized - mainly those with cash returns to localresidents or other service providers in the formssuch as admission fees, or increased netrevenues from provision of cultural shows, foods,accommodation, and parking, and souvenir andhandcrafts sales, etc

Non- monetized mainly consumers surplus, theextra benefit to both residents and visitors


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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 neverplan to visit it.


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Type of BenefitsType ofbenefits

Description of the benefits Beneficiaries Valuationtechniques

Direct use benefits

Monetized Admission fees and any special tourism taxapplied to goods and services; in addition,the extra profit (or economic rent) from thevalues of cultural and natural heritage-related services provided by localcommunicates to and paid by tourists

Mostly tourists Measure direct payments of visitors and estimate theeconomic rent portionwhere appropriate

Non-monetized The extra values of cultural and naturalheritage-related services provided by local

communicates to and not paid for by touristsor residents (i.e., consumers surplus)

Tourists andresidents

Contingent Valuation Method(CVM)

Indirect benefits For example, benefits of ecological andenvironmental improvement and bequestvalues and existence values of culturalheritage.

People livingoutside the projectareas

Not quantified in the analysisbut could be done usingvarious valuation techniques


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Project CostsCapital investment and O&M costs,including environmental prevention and

management costs and resettlement costsincurred by new construction.


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Valuation Methodology A mix of the cost-effectiveness approach and the cost-

benefit analysis employed The cost-benefit analysis was undertaken for a few

representative components (a scenic park area, 2 ethnicminority villages, and an ancient town)

Willingness-to-pay (WTP) surveys and the travel costmethods (TCM) were employed at representative projectsites in an attempt to monetize other benefits (i.e.,consumers surplus) of cultural and natural heritageprotection investments to both visitors and local residents

For most of investment components, the cost-effectivenessapproach was used to ensure that the least-cost optionsare adopted


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Projection of Tourist Growth As mentioned earlier, Guizhou has been experiencing very

rapid growth in its tourism sector in recent years (about36% per year over the last 4 years). A simple extrapolationof tourist growth will present a high growth scenario whichis unlikely to be realistic and sustainable in a long run giventhe local carrying capacity

The cost-benefit analysis has to make some strong butconservative assumptions. This is because of the lack ofreliable statistical data and good models

In this analysis, the annual growth of tourists is projectedand controlled at a sustainable and conservative level

based on analyses of tourism development plans, servicesupplies and carrying capacity and discussions with localauthorities and research institutes


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Contribution of the InvestmentSome sites have already developed their tourism

attractions and are already receiving visitors priorto this project, another tricky issue is to estimate

net growth due to the project investment andquantify the share of the project investment in totalincremental benefits.This has been determined site by site, by taking

into account the share of the project investment intotal investment of the site, the relative importanceof the investment in terms of attracting visitors, theexpected lifespan of the investment and so on.


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WTP Survey

Number

Location

Tourists Local Residents

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 / 30Airport and selected hotels in Guiyang

City300 283 n/a n/a

Of which international visitors 66 /

Total 750 729 250 257


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Willingness to pay

values by survey siteLangde Zhaoxing Wanfenglin Jiuzhou

%

withWTP

Average

WTP

value

(Yuan)

%

withWTP

Average

WTP(Yuan)

%

withWTP

Average

WTP

Values

(Yuan)

% with

WTP

Average

WTP

Values

(Yuan)

Tourists 76.8 10.7 13.5 44 30.9 24.2 /* /*

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 thatthese 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 anannual value.


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Travel Costs

Information on travel costs and local expenditures werealso collected. Tourists were asked about the total costsfor them to make a trip to or in Guizhou, the list of tourist

destinations visited, and the number of days spent on aparticular site.

The average travel costs of project sites are calculated.They indicate that many visitors are willing to come fromsome distance to visit Guizhou and that they obviouslyvalued the sites visited.

It is not possible, however, to estimate the economic rent/consumers surplus generated by these visits from thedata that were collected.


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Cost-Benefit Analysis

of Selected Project ComponentsFour sites, representing representative types ofproject 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.


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Wanfenglin

Scenic Area in Xingyi City


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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 promotetourism.

It will invest $9 millions in the construction of tourist information center and Buyiethnic culture center, construction and rehabilitation of bridges over Nahui Rive,bike trails, and footpaths, river bank ecological management; and integratedprotection and development of local villages.


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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

Eco omic 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 to rismear i gs

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

No -mo etize e efits of eritage rotectio

Visitors' consumer surplus [Ym] 1.39 1.60 1.84 2.11 3.40 5.48 6.99 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 eco omic e efits [ m] 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 eco omic flo s [ m] 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


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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 benefitsexcluded 11.8


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Langde Upper Miao Village

757 residents.

A long history starting over 640 years ago in the MingDynasty.

Rich in the culture of the Miao Minority.

The investment (about $3 million) in the village consists of theconstruction and rehabilitation of facilities such as road andfootpath, water supply, fire protection, sewerage network,toilets, and solid waste collection; rehabilitation andprotection of ancient and minority architectures; publicbuildings/space for cultural shows and information center;and intangible heritage protection.


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Langde Upper Miao Village

The villages tourism activities have begun in 1990s and ithas attracted visitors for its Miao cultural heritages sincethen.

It is estimated that the village attracted about 79,600

visitors in 2006. From 2001 to 2006, its growth rate was15.2% per year due to good marketing efforts.

However, as the tourist carrying capacity of the smallvillage is limited, the rapid growth rate would hardlysustain 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 restof the period.

It is further assumed that the project contributes to onlyhalf of the growth of tourism during this period.


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2008 2009 2010 2011 2012 2013 2014 2015 2020 2025 2030 2031

Economic cost

Fixed capital invest ent [ m] 6.34 7.93 9.52 7.93

Incre ental variable costs [ m] 1.16 1.16 1.16 1.16 1.16 1.16 1.16 1.16

otal econo ic cost [ m] 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 tourismearningsEarnings fro admission fees [Ym] 3.00 3.76 4.60 5.52 10.97 15.27 20.77 22.03

Net earnings fromother services providedto 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-monetizedbenefits of heritage protection

Visitors's WP[Ym]

1.16 1.28 1.41 1.55 2.38 3.03 3.87 4.07

ocal residents' WP [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%


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Jiuzhou Ancient Town

Jiuzhou is the oldest military fortress in the area, founded inearly 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 itinto a tourist destination for Tunpu culture.

Total fixed capital investment is $4.15 million.


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2008 2009 2010 2011 2012 2013 2014 2015 2020 2025 2030 2031

Economiccost

Fixedcapital investment [m] 6.34 7.93 9.52 7.93

Incremental variablecosts [m] 1.97 1.99 2.01 2.03 2.14 3.44 3.61 3.61

otal economiccost [m] 6.34 7.93 9.52 7.93 1.97 1.99 2.01 2.03 2.14 3.44 3.61 3.61

Direct tourismearnings

Earningsfromadmissionfees [Ym] 1.63 2.06 2.55 3.12 5.79 10.09 13.22 13.95

Net earningsfromotherservicesprovidedtovisitors [Ym] 0.13 0.29 0.46 0.67 1.62 3.15 4.26 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%


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Impact on the Poor

The project will improve the condition of localinfrastructure and bring economic and health benefits tothe entire population including the poor in the projectareas.

Most of the project investment will be shouldered by localgovernments and cause no tariff or tax increase on localresidents although a portion of the project loan will bedisbursed through a small loan program to those localresidents who borrow for their own home improvement.

To ensure that the project revenue will be fairly sharedamong local residents, a community-based participatoryapproach will be employed in project implementation.Accordingly, the project anticipates no negative impact onthe poor.


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Conclusions

The EIRR of each individual component varies from 10.1%(Jiuzhou Ancient Town) to 19.6% (Langde Miao EthnicCultural Village). The variation is due primarily to thedifferent 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 thatthe result of the economic analysis is at the low end ofestimation but can be used to economically justify theproject.

Sensitivity analysis assuming a 10% reduction in visitornumber and a 10% increase in investment costs furthershows that the analysis is robust. One can conclude thatthe project is economically justified.

xie economic valuation of heritage-related investments: a case study from china

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