Investment Appraisal and Economic Planning of Cultural Heritage Projects

1. Cultural Heritage and Sustainable Development An Educator’s Handbook MODULE 4 Investment appraisal and economic planning of cultural heritage projects SESSION 1 Economic planning and appraisal of cultural heritage projects This presentation is part of the InHeriT project: This project has been funded with support from the European Commission. This publication reflects the views only of the authors, and the Commission cannot be held responsible for any use, which may be made of the information contained therein. ERASMUS+ KA2 STRATEGIC PARTNERSHIP ADULT EDUCATION PROJECT NO. 2015-1-EL01-KA204-014085 Prepared by: Georgios Mergos, Professor Emeritus, Division of Development and International Economics, Department of Economics, National and Kapodistrian University of Athens

2. Planning a Heritage Activity T.1 PLANNING A HERITAGE ACTIVITY AS AN INVESTMENT PROJECT

3. Planning a Heritage Activity T.1 Need to formulate, plan and appraise the intervention as an investment project

4. Planning a Heritage Activity T.1 Start with the UNESCO Guidelines for Management of Heritage Sites Source: http://www.expoaus.org/upload/novosti/publication_expoaus_eng_web_105355.pdf

5. Planning a Heritage Activity T.1 Examples of projects in Cultural Heritage appraised and financed by the European Investment BankSource: Aymerich (2017)

6. Planning a Heritage Activity T.1

7. Planning a Heritage Activity T.1 EU Structural Funds offer funding opportunities but require proper project planning and appraisal

8. Planning a Heritage Activity T.1 Use of Cost Benefit Analysis for a Decision on accepting or rejecting a project • Economic and Social Feasibility. Calculate the economic value of the investment or intervention and decide whether it is worth undertaking it from the society’s point of view, i.e. whether scarce resources should be invested. • Decision rule NPV>0. • Financial Sustainability. Examine whether the project generates enough revenues for covering Operation and Maintenance expenditure. It is desired but not necessary that the project recovers some of the capital that is invested. • Decision rule: Revenue > O&M expenses.

9. Planning a Heritage Activity T.1 Need for proper and coherent planning of a site or project before taking any action • Before taking on any maintenance projects or making alterations to a heritage site, it is important to consider how changes may affect the site’s heritage character and significance as well as its performance. • Too many historic sites have suffered from poor planning and hasty renovations. • Good planning can ensure achieving the goals of the restoration while retaining the cultural value of the site. • An interdisciplinary team of qualified and experienced individuals to identify the plan of activities. • This plan should include a detailed examination of the institutional and economic environment, the mode on intervention, and the expected results and output.

10. Planning a Heritage Activity T.1 Designing a Cultural Heritage Project • The existing institutional, socio-economic and political context The economic, social and environmental conditions. The present situation and the existing policy framework. The constraints from the legal and the institutional or social point of view. • The design of the project or the intervention The raison d'être of the investment project. The rational for the investment project and the objective of the intervention. Detailed description of project activities, time scale, quantities and prices of goods and services of costs and benefits, detailed description of the operation of the intervention. 3. The project results, outputs and impact The economic and social outputs, discounting future benefits, addressing risk and uncertainty, social effects, project viability.

11. Planning a Heritage Activity T.1 Tips for successful project planning • Start with a careful examination of the constraints from institutional and legal environment, and learn about the policies that apply to the heritage site. Determine whether the site is designated as protected by the existing institutional framework and what activities are permitted. Obtain all necessary licenses and permissions. • Learn about the site’s history & historic architectural character and document the current condition of the heritage site. Establish an interdisciplinary team of experienced experts (architect, engineer, economist, sociologist, archaeologist, etc.) to design the proposed intervention activities and plan the expected outputs and results. Consider how proposed interventions will affect the site’s heritage features & performance and ensure that they respect the all legal and institutional constraints • Develop a project execution plan, a sequence of activities and a time frame. Develop a financial strategy & find funding for the capital expenditure and for O&M of the heritage project.

12. Planning a Heritage Activity T.1 The project cycle of the European Investment Bank

13. Planning a Heritage Activity T.1 The six steps for a good project planning and appraisal • A presentation and discussion of the existing situation and the socio-economic context and the objectives • The clear identification and the rational of the project • The study of the feasibility of the project and of alternative options • Financial Analysis to determine the project’s financial viability • Economic Analysis to determine the project’s economic feasibility and contribution to economic and social welfare • Risk Assessment to determine the project’s risks and activities for risk mitigation

14. Planning a Heritage Activity T.1 Content of the ex ante project appraisal Problem analysis and needs assessment Objective setting Alternative delivery mechanisms and risk assessment Added value of Community involvement Lessons from the past Planning future monitoring and evaluation Helping to achieve cost-effectiveness

15. Economic and Social Cost Benefit Analysis T.2 ECONOMIC AND SOCIAL COST BENEFIT ANALYSIS OF A CULTURAL HERITAGE PROJECT

16. Economic and Social Cost Benefit Analysis T.2 Guide to Cost-benefit Analysis of Investment Projects Guide to Cost-benefit Analysis of Investment Projects Economic appraisal tool for Cohesion Policy 2014-2020 (ISBN : 978-92-79-34796-2)

17. Economic and Social Cost Benefit Analysis T.2 Measure project outputs: Comparison of “with” and “without” the project situations

18. Economic and Social Cost Benefit Analysis T.2 Calculate the project’s investment profile

19. Economic and Social Cost Benefit Analysis T.2 Net Present Value (NPV) of a stream of benefits: discounting and the time value of money

20. Economic and Social Cost Benefit Analysis T.2 Calculate the project’s NPV

21. Economic and Social Cost Benefit Analysis T.2 Steps of the appraisal

22. Economic and Social Cost Benefit Analysis T.2 Steps of the appraisal (cont)

23. Economic and Social Cost Benefit Analysis T.2 Financial Analysis The main purpose of the financial analysis is to use the project cash flow forecasts to calculate suitable net return indicators. In this Guide a particular emphasis is placed on two financial indicators: • the Financial Net Present Value (FNPV) • the Financial Internal Rate of Return (FRR), respectively in terms of return • on the investment cost, FNPV(C) and on FRR(C), and return on national capital, FNPV(K) and FRR(K). • The cash inflows and outflows to be considered are described in detail below. The different definitions of net cash flows for the calculation of the project performance indicators used in this Guide (as in the international practice for project appraisal) must not be confused with the ‘free cash flow’ under other accounting conventions, particularly those used in standard company accounts.

24. Economic and Social Cost Benefit Analysis T.2

25. Economic and Social Cost Benefit Analysis T.2 Demand forecasting • Demand forecasting is an important step in the feasibility study of a project • It allows assessing demand of a good or a service in the future • Also, it allows assessing the revenues that can be expected from the sale of that good or service. • Need to forecast income and cost evolution in order to have accurate forecasts • Various methods of forecasting demand • Elasticities is a central element in forecasting demand • Expert opinion is necessary • Using growth rates and elasticities • Trend extrapolation • Regression techniques • More complex models

26. Economic and Social Cost Benefit Analysis T.2 Demand analysis and feasibility • Demand analysis identifies the need for an investment by assessing: • - current demand (by using models and actual data); • - forecast demand (from macroeconomic and sector forecasts and elasticity estimates of demand to relevant prices and income). • Both quantifications are an essential step in order to formulate an hypothesis concerning the project’s induced demand and its • productive capacity size. • For example, it is necessary to investigate which part of the demand for public services will be matched by the project. • Such hypotheses should be tested by analysing the conditions of both the present and coming supply that are independent from the project and the technological options available. • Often such options cannot be identified along a continuum of factor combinations, but they consist of a relatively small number of alternatives characterised by discontinuity

27. Economic and Social Cost Benefit Analysis T.2 An example: Forecasting demand for visitors of a new museum • Financial viability of the museum project is heavily dependent on the accuracy of the forecast of visitors and of the admission price • Future demand is the basis for the economic and social appraisal of any infrastructure project. The accuracy and reliability of data regarding visitor volumes, time and season distribution and competition with alternative cultural sites or means is crucial for assessing project performances. • Forecasting volume of visitors. Demand characteristics, price, income and cross elasticity, value of time, value attributable to different segments of the market, type of service demanded etc. • Disaggregate visitors demand into homogeneous segments. The characteristics of the different type of services, the income group to which the individuals belong as well as the purpose of the visit are important determinants in predicting visitor demand • Forecasting admission price for the service provided is one of the most crucial determinants of demand and hence of financial analysis.

28. Economic and Social Cost Benefit Analysis T.2 An example: transport demand

29. Economic and Social Cost Benefit Analysis T.2 Economic and social analysis Methodological points • The starting point for the economic and financial analysis • Discounted Cash Flow Analysis - Method Discounted Cash Flow • How to treat depreciation, interest and loans • How to treat secondary effects • Treatment of transfers, taxes and subsidies Shadow prices • Shadow prices of traded goods • Shadow prices of labour and land • Shadow prices of foreign exchange Discount rate

30. Economic and Social Cost Benefit Analysis T.2 Steps of the economic and social analysis • Start with the conversion of all market prices to shadow prices • Proceed with the quantification and valuation of non-market goods and services • Make any adjustments for any transfers, taxes and subsidies • Calculation of the resource flows of costs, of investment flows, of operating costs, of benefits and net resource flow • Proceed with the discounting the Net Resource flow and calculate the investment criteria • NPV, Net present Value • IRR, Internal Rate of Return • BCR, Benefit Cost Ratio

31. Economic and Social Cost Benefit Analysis T.2 Sensitivity analysis for addressing project risk and uncertainty Sensitivity analysis enables identification of ʻcriticalʼ variables of a project. Such variables are those whose variations, either positive or negative, have the largest impact on the project’s financial and/or economic performance. The analysis is carried out by varying one variable at a time and determining the effect of that change on the NPV. An example with variation in both costs and benefits by 10% is given in the table below

32. Economic and Social Cost Benefit Analysis T.2 Decision rule for accepting or rejecting an investment project • Economic and Social Feasibility. Calculate the value of the investment or intervention and decide whether it is worth undertaking it from the society’s point of view, i.e. whether scarce resources should be invested. • Decision rule E-NPV > 0 • Financial Sustainability. Examine whether the project generates enough revenues for covering AT LEAST Operation and Maintenance expenditure. It is desired but not necessary that the project recovers some of the capital that is invested. • Decision rule F-NPV > 0

33. Economic and Social Cost Benefit Analysis T.2 The decision for public support of a private project of common interest • If theΕ-NPV > 0 AND F-NPV>0 • Then the project does not need public support, since it is financially viable • If the Ε-NPV > 0 AND F-NPV < 0 • Then the project does need public support, since it is NOT financially viable

34. Economic and Social Cost Benefit Analysis T.2 Project performance indicators of EU Funds

35. Economic and Social Cost Benefit Analysis T.2