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 (3rd 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
 Case Study

Economic Analysis of Guizhou

Cultural and Natural Heritage
Project
Unique Landscape
Long History
Colorful Culture
Traditional Lifestyle
Great Hospitality
 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
 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

 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 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
 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
 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
 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 Description of the benefits Beneficiaries Valuation
benefits techniques

Direct use benefits

Monetized Admission fees and any special “tourism Mostly tourists Measure direct payments of
tax” applied to goods and services; in visitors and estimate the
addition, the “extra profit” (or economic rent) “economic rent” portion
from the values of cultural and natural where appropriate
heritage-related services provided by local
communicates to and paid by tourists

Non-monetized The extra values of cultural and natural Tourists and Contingent Valuation
heritage-related services provided by local residents Method (CVM)
communicates to and not paid for by
tourists or residents (i.e., consumer’s
surplus)
Indirect benefits For example, benefits of ecological and People living Not quantified in the
environmental improvement and bequest outside the project analysis but could be done
values and existence values of cultural areas using various valuation
heritage. techniques
 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 and local 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
 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 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 components, the cost-effectiveness
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
 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
300 283 n/a n/a
City
Of which international visitors 66 /
Total 750 729 250 257
 Willingness to pay
values by survey site
Langde Zhaoxing Wanfenglin Jiuzhou
Average Average Average
% % Average %
WTP WTP % with WTP
with with WTP with
value Values WTP Values
WTP WTP (Yuan) WTP
(Yuan) (Yuan) (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 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 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 distance to visit Guizhou and that they obviously
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.
 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
 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 protection and development of local 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 tourism earnings

Earnings from admission fees [Ym] 3.70 5.18 6.88 8.83 17.98 32.72 43.45 45.94
Net earnings from other 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' 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 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%
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
 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, water supply, fire protection, 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.
 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] 6.34 7.93 9.52 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 tourism earnings

Earnings from admission 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-monetized benefits of heritage protection

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.
 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 would pay the fee. In addition, visitors 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
Economic cost
Fixed capital investment [Ym] 6.34 7.93 9.52 7.93
Incremental variable costs [Ym] 1.97 1.99 2.01 2.03 2.14 3.44 3.61 3.61
Total economic cost [Ym] 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 tourism earnings

Earnings from admission fees [Ym] 1.63 2.06 2.55 3.12 5.79 10.09 13.22 13.95
Net earnings from other services provided to visitors [Ym] 0.13 0.29 0.46 0.67 1.62 3.15 4.26 4.52

Total economic benefits [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 economic flows [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%
 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.

 Sensitivityanalysis 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.