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

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

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

4. 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, 4th edition, Veal, 2017, CABI Tourism Texts

5. 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)
Costs
Benefits
Measurable A C
Non-measurable B 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, 4th edition, Veal, 2017, CABI Tourism Texts

6. The cost-benefit approach to project evaluation (Table 14.2)
PRIVATE SECTOR
Capital cost
£’000s
(a) Investor
5000
(b) Bank loan
(c) Total capital (a+b)
10,000
Annual expenditure
(d) Bank interest (10% of b)
500
(e) Running costs
3500
(f) Total (d+e)
4000
Annual income
(g) Sales
Annual profit
(h) Profits (g – f)
1000
(i) % return on investor’s
capital (100 x h/a)
20%
PUBLIC SECTOR
Capital cost
£’000s
(a) Public agency funds
5000
(b) Borrowings
( c) Total capital (a+b)
10,000
Annual costs
(d) Capital charges (8% of b)
400
(e) Running costs
3500
(f) Total (d+e)
3900
Annual income
(g) Fees and charges
1500
Annual deficit/subsidy
(h) Net cost/loss (g – f)
– 2400
(i) Net social benefits ?
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

7. 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, 4th edition, Veal, 2017, CABI Tourism Texts

8. 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, 4th edition, Veal, 2017, CABI Tourism Texts

9. 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
3.2–5.8
Total costs
16.3–19.8
Benefit: cost ratio
2.7–3.2
*including multiplier effects
SA = South Australia
(Source: Burns et al., 1986)
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

10. 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: $6.2m
Proportion of the above who were still in favour of hosting the Grand Prix: 90%
Total extra travel costs of the 90%: $5.6m
Psychic value of Grand Prix for this group (20% of population): at least $5.6m
Psychic value of Grand Prix for whole population: (5 x $5.6m) $28m
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

11. Traffic congestion costs (Table 14.4)
Source
a. No. of vehicles experiencing delays
Survey
1,000,000
b. Average increase in journey time
0.25 hrs
c. Aggregate delay time
a x b
250,000 hrs
d. Value of time per hour
Average wage
£8.00
e. Value of time lost
c x d
£2,000,000
f. Average fuel costs/vehicle/hour
Motoring org.
£2.00
g. Aggregate fuel costs of congestion
c x f
£500,000
h. Total costs of congestion
e + g
£2,500,000
(Hypothetical data)
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

12. 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, 4th edition, Veal, 2017, CABI Tourism Texts

13. 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, 4th edition, Veal, 2017, CABI Tourism Texts

14. 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, 4th edition, Veal, 2017, CABI Tourism Texts

15. Travel cost/Clawson method: site/travel zonesB C D

16. Travel cost/Clawson method: data (Table 14.5)
Source of information
Zone
Total A B C D
a. Zone population
Census
20,000
47,000
50,000
60,000
b. Travel costs £/head
Survey £5
£13
£15
£20
c. Total visits to site p.a.
Survey/counts
64,000
65,000
179,000
d. Visit rate/1000 pop’n
Calculated (c/a)
3200
1383
1000
Plot on a graph
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

17. Travel costs x visit rates (Fig. 14.2)
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

18. Travel cost analysis to estimate a demand curve (Table 14.6)
Source of
Information
  Zone A
Zone B
Zone C
Total
Visits
a. Population ‘000s
Table 14.6 20 65 50
b. Travel costs £5
£13
£15
Actual situation entry charge nil
c. Entry charge (£)
d. Total costs (£)
b + c 5 13 15
e. Visit rate
3200
1383
1,000
f. Total visits
64,000
65,000
50,000
179,000
Hypothetical entry charge £3
g. Entry charge (£) 3
h. Total cost (£)
b + h 8 16 18
i. Visit rate
Fig. 14.3
2500
750
350
j. Estimated no. of visits
f x a
35,200
17,500
102,750
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

19. Travel cost analysis to estimate a demand curve (cont’d)
Source of
Information
  Zone A
Zone B
Zone C
Total
Visits
Hypothetical entry charge £6
k. Entry charge (£) 6
l. Total cost
b + k 11 19 21
m. Visit rate*
Fig. 14.3
2200
350
n. Estimated no. of visits
m x a
44,000
16,450
60,450
Hypothetical entry charge £8
o. Entry charge (£) 8
p. Total cost
b + o 13 23
q. Visit rate
1383
r. Estimated no. of visits
l x a
27,660
Hypothetical entry charge £12
s. Entry charge (£) 12
t. Total cost
b + s 17 25 27
u. Visit rate
650
v. Estimated no. of visits
u x a
13,000
Plot on a graph
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

20. Demand curve (Fig. 14.3)
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

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

22. 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, 4th edition, Veal, 2017, CABI Tourism Texts

23. 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, 4th edition, Veal, 2017, CABI Tourism Texts

24. 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)
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

25. Comparing costs and benefits (Table 14.7)
Cash assessment
Costs
£'000 p.a.
Capital charges
400
Opportunity costs -
Running costs
3500
Externalities
Total costs
3900
Benefits
Private/user benefits paid for
1500
Private/user benefits not paid for
Non-user benefits
Total benefits
Surplus/deficit
-2400
Cost-benefit analysis
£'000 p.a.
400
300
3500
450
4650
1500
1000
2500
5000
350
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

26. 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, 4th edition, Veal, 2017, CABI Tourism Texts

27. Two projects compared: Net Present Value (Table 14.8)
Project A
Project B
Year
Costs
(£m)
Benefits (£m)
Net benefits (£m) 1 10 9 -1 11 8 -3 2 -2 3 7 4 5 6 12 14 13
Total 82
100 18 85
103
NPV*
11.3
7.6
* Calculations not shown
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

28. Life of a project: 2 projects compared (Fig. 14.1)
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

29. Switching values
Minimum value of benefits if project is to go ahead (Table 14.9 example)
Annual cost of project
£3 million
Annual income
£2.2 million
Net annual costs
£800,000
No. of annual visits
400,000
Cost per visit/switching value £2
Decision-makers decide whether £2 subsidy is acceptable
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

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

31. 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, 4th edition, Veal, 2017, CABI Tourism Texts

32. 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, 4th edition, Veal, 2017, CABI Tourism Texts

33. 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, 4th edition, Veal, 2017, CABI Tourism Texts

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

35. Multiplier calculations: diagram (Fig. 14.5)
Round
Leaks
Local firms
Individuals
Leaks 1
Initial cost $1000
35%
40%
25% 2
$350
$250
$400
50%
50% 3
$200
$87.50
$ =
$100 4
$50
$91.88
$ =
$105 5
$52.50
$40.47
$ = 81.41
$46.25
etc.
etc.
etc.
etc.
etc.
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

36. Multiplier calculations (cont’d)
Each round produces a smaller impact because of leaks.
Fig shows around 14/15 producing local impacts of <$1.
Aggregate impacts:
business turnover: $
resident incomes: $726.90
Various multipliers:
business turnover multiplier: /1000 = 1.82
orthodox income multiplier: /400 = 1.82
unorthodox income multiplier: /1000 = 0.73
Different firms’ and individuals’ expenditure ratios affect the size of multipliers.
Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

37. 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, 4th edition, Veal, 2017, CABI Tourism Texts