Consumer Surplus and Macro Valuation of Tourism Projects

Abstract:There cannot be a tourism industry without projects. These projects can take different forms, such as development of attractions, accommodation, entertainment, transport, new resorts, congress centre, events, ski infrastructure, etc.. They all involve considerable investment. This paper focuses on five topics. First, it focuses on the nature of investment appraisal and explores the difference between micro and macro approaches. Secondly, attention is paid to externalities in tourism. Indeed many projects belong to the general tourism infrastructure, and the benefits do not only accrue to the paymaster, who may not consider the negative effects. In other words, externalities must be taken into account. A third section deals with the identification of cost and benefit items or the cost-benefit scheme. Environmental costs are an important part of the scheme. In the same section we proceed with the quantification and valuation of cost and benefit items and the calculation of the NPV (net present value) and IRR (internal rate of return). In a fourth part we pay special attention to the valuation of the consumer surplus of non-priced tourism resources and more particularly to two methods often applied to measure the consumer surplus: 'The Travel Cost Method' and 'The Contingent Method' A fifth part of the paper is focused on CBA versus economic impact analysis.Keywords: computable general equilibrium, contingent valuation method, cost-benefit analysis, economic impact analysis, externalities, I-O appraisal, Internal Rate of Return (IRR), investment appraisal, Net Present Value (NPV), travel cost method, willingness to pay, zonal travel cost method.JEL codes: H00.IntroductionLong experience in the tourism sector has taught us that many investment decisions are very emotional; wrong investment appraisal methods are applied and/or the right method is used incorrectly. Therefore, special attention to investment appraisal is very important.Most projects in the tourism sector are the initiative of individuals or companies-tourism or financial - and here the classic investment appraisal methods apply [Vanhove 2011]. However, in tourism, more than in any other sector, the investor (or what we call the paymaster') is not a company or a tourism entrepreneur but the public sector. Indeed many projects belong to the general tourism infrastructure and the benefits do not only accrue to the paymaster, who may not consider the negative effects (This can also be the case for a project in the private sector). In other words, externalities must be taken into account. In such a case, the classic methods of investment appraisal are insufficient. Tourism is clearly an economic sector in which social cost-benefit analysis (CBA) is applicable [Burgan & Mules 2001].A project can be appraised from the micro or the macro point of view. In the first case only benefits (receipts) and costs for the investor (private or public) come into the picture. In the second case the benefit and cost items are large in number and of different natures. The total impact of the project for the destination should be taken into account. Application of CBA is the correct method [see also Vanhove 2013].For many tourism projects the discounted cash flow approach is insufficient. Social cost-benefit analysis is more useful. Referring to Prest and Turvey [1967], CBA can be defined as: a practical way of assessing the desirability of projects, where it is important to take a long view (in the sense of looking at repercussions in the more distant as well as in the near future) and a wide view (in the sense of allowing for side effects of many kinds on many persons, industries, regions etc.) i.e. it implies the enumeration and evaluation of all the relevant costs and benefits'.In addition to the cash flows the calculations take account of all the changes in social benefits and social costs that result from the project reducing them to monetary terms and discounting them to a present value from which the capital cost may be subtracted in order to obtain the net present value. …