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ANNEX 1. NATURE AND HERITAGE TOURISM: CASE STUDY AND ROAD MAP FOR PROJECT PREPARATION

One of the findings of the OAS/IIC study is that the financial community is unfamiliar with the nature and heritage tourism sector, and that potential investors and entrepreneurs lack experience in the preparation and presentation of ecotourism projects. The following hypothetical case study is designed to illustrate the basic elements of project preparation and the areas which should be covered when approaching a financial institution to request financing. Potential investors need to have a clear project concept, a prefeasibility study, a feasibility study, a statement of the financial resource requirements, and a detailed project execution plan.

Case Study: The Flamingo Park Hotel and Nature Reserve

I. Introduction

Growth in the tourism industry as a whole and increasing public awareness of environmental issues combine to create vacation lifestyles which can be compatible with sustainable development as well as the preservation and protection of ecosystems. A commonly expressed point of view about the potential for development of the tourism industry in the Caribbean is that the island nations have to compete fiercely with other well-established destinations already known for sun, sand, and sea. However, since the region has other attributes to offer, such as unique ecosystems and a rich cultural heritage, it should be able to draw an increasing number of visitors interested in its environment and heritage.

This case study presents a detailed evaluation of an ecotourism venture. It is intended to attract the interest of financial institutions in order to complete the financial plan for the project. The total cost of the project is estimated at US$1,200,000.

II. Buenavista International Resort Developments

Buenavista International Resort Developments (BIRD) was established for the purpose of investing in the development of the Flamingo Park Hotel and Nature Reserve in a certain Caribbean country.

a. The Sponsors

BIRD, the five-member sponsoring group, is composed of citizens of Caribbean nations and the United States. Three of the investors (sponsors #1, #2, and #3) are avid nature conservationists involved in research and the preservation of indigenous flora and fauna. They will contribute to the project thirty acres of land valued at US$150,000, as well as their expertise in the field of environmental research and education. The two other sponsors are experienced hotel and business administrators who will contribute the expertise required to build and manage the Flamingo Hotel. Sponsor #4 is a reputable hotelier with more than 30 years of experience in the tourist accommodation industry. Sponsor #5, the owner of EcoAdventures Expeditions, a nature-tour operator based in the United States, will provide a vast network of contacts with the travel industry. The strong synergies between the members of the sponsoring group result in a project that meets rigorous construction, environmental conservation, education, and business standards.

b. Shareholders

As can be seen in the proposed shareholdership for the project, the sponsors are interested in attracting an additional shareholder to complete the equity composition of the venture. This would enable them to structure a more viable 50:50 leveraged project.

Investors

US$

%

Sponsor #1

50,000

8.33

Sponsor #2

50,000

8.33

Sponsor #3

50,000

8.33

Sponsor #4

150,000

25.00

Sponsor #5

150,000

25.00

Sponsor #6

150,000

25.00

TOTAL

600,000

100.00


III. The Project

a. Concept

BIRD has developed a project concept based on the following principles:

· Location in a place of distinct natural beauty
· Integration with the local community and natural environment
· Environmentally friendly buildings
· Environmentally safe disposal of solid, liquid, and gaseous effluents
· Conscientious management of a nature reserve
· Educational and research activities to promote nature conservation and an appreciation of the local culture
· Maximum use of local human and material resources
· Economic and financial viability
· Compliance with national environmental regulations
b. Location

The thirty acres of land on which the Flamingo Park Hotel will be located are adjacent to the Flamingo National Reserve Park, a 500-acre reserve owned by the government. Many species live in the area, such as nesting birds, snakes, iguanas, various land mammals, frogs, and lizards. Not far from the reserve are beautiful underwater reefs. The hotel will be built on a ridge affording a wide view of the ocean surrounding it on three sides. Flamingo Park will be a two-hour drive from the airport along coastal roads with panoramic views of the coastline and beautiful blue-green waters.

The location is ideal for those interested in a quiet, relaxing vacation. The guests will have access to sandy beaches, diving, good fishing, birdwatching, hiking, and an opportunity to learn about the importance of preserving natural resources.

The project concept was designed by expert businesspeople committed to nature and heritage conservation and seeking to operate and protect the reserve on a commercial basis, catering to researchers, nature lovers, and tourists in search of a healthy and rewarding vacation experience.

This first true ecotourism facility in the Caribbean has three components: (a) the construction and operation of a forty-room environmental hotel on a thirty-acre lot; (b) the construction of a conservation and educational center, which will be financed through grant funds to which several organizations have expressed interest in contributing in the form of funding, laboratory equipment, and technical and managerial assistance; and (c) the management of the Flamingo Reserve, which the government has leased to BIRD for twenty years with an option to renew, under a trust with strict conservation stipulations.

c. Description and Infrastructure.

The Hotel. Flamingo Park will consist of twenty two-unit cabanas (thirty square meters per room), and a central lodge with a reception area, restaurant, bar, kitchen, and a large open veranda. There will also be manager’s quarters, a storage room, a laundry area, and a generator room. The buildings will have reinforced concrete frames and hollow clay block walls faced on both sides with concrete. The floors will be of wood and the roof of wooden shakes. The hotel will be constructed in compliance with current fire and earthquake safety standards.

The Environmental Education Center (EEC). The EEC will include a 150-square-meter, air-conditioned room with a seating capacity of fifty people. It will house a natural history library and four rooms (forty square meters each) with teaching aids for small groups. The rooms also can be used for reading. Audiovisual equipment will include video, slide, and overhead projectors, blackboards, and screens. Leaflets and other environmental education material will be available for visitors.

The Flamingo Nature Reserve. Twenty miles of trails with varying degrees of difficulty will be opened and maintained in the park. Guided tours will provide a comprehensive review of the flora and fauna; self-guiding brochures and trail signs will be available as well. Observation points will be constructed at strategic locations for birdwatchers and photographers. No food, radios, or cassette players will be allowed into the park. An entry fee will be charged to visitors not lodged at the hotel. Hotel guests will be informed that a portion of the room rate is earmarked for park conservation and management.

Electricity will be brought to the site via a three-phase high-voltage line. A standby generator will provide emergency power. Water will be piped from a regularly supplied storage tank in the village; telephone lines will be brought in and a basic telephone system will be installed at Flamingo Park. Sewage will be disposed of via septic tanks and soakaways. Garbage will be transported daily to a public dump.

d. Implementation

Given the pro-environment nature of the project and the level of tourism services required to guarantee occupancy levels that will ensure its commercial viability, the project will be implemented by means of a turnkey contract with Environmental Engineers, a reputable engineering firm that will act as project manager. A detailed project execution program has been drafted. The project manager will follow the detailed program established by BIRD with the assistance of (a) civil engineers for site preparation, road design, and building construction; (b) architects for layout and design; (c) electrical engineers; and (d) a supervisor for procurement services and cost monitoring. Construction is expected to take fifteen months. BIRD has received from the relevant authorities the necessary permits for the construction and eventual operation of the hotel, the center, and the nature reserve.

e. Operation

The Flamingo Park Hotel will be managed by Sponsor #4, who has ample experience in hotel management. He will be responsible for installing effective management information systems, including on-line data processing for accounting, reservations, billing, food and beverage purchases, inventory control, and compliance with environmental regulations. Day-to-day operations will be carried out with the support of locally hired staff trained under the guidance of the general manager.

Sponsors #1 and #2 will manage the Flamingo Nature Reserve through a trust to be funded by grants from national and international agencies which have expressed a keen interest in the project. Sponsor #3 will be the director of the Education Center and will manage the tour services within the reserve, supervising a group of ten well-trained guides.

IV. Project Cost and Financing

a. Total Cost

The estimated total investment is US$1,200,000, or US$30,000 per room. The combined interests and roles of the sponsoring group, together with the experience of the project manager, the firm quotes obtained from other suppliers, and the detailed cost plans, will ensure that cost overruns are kept to a minimum and the project is completed on schedule. The total costs are summarized below by major category.

Total Project Costs

Major Category

US$000

Land

150.0

Perimeter fence

10.0

Construction

370.0

External works

150.0

Equipment

50.0

Furniture

40.0

Vehicles

30.0

Subtotal

800.0

Contingency allowance

80.0

Pre-operating expenses

50.0

Professional fees

70.0

Interest during construction

100.0

Working capital

100.0

Subtotal

400.0

TOTAL

1,200.0


b. Financial Plan

The proposed financial plan is summarized below.

Financial Plan

US$

% Equity-Debt

% Total

Sponsor #1

50,000

8.33

4.17

Sponsor #2

50,000

8.33

4.17

Sponsor #3

50,000

8.33

4.17

Sponsor #4

150,000

25.00

12.50

Sponsor #5

150,000

25.00

12.50

Sponsor #6

150,000

25.00

12.50

Subtotal

600,000

100.00

50.00

Lender A

600,000

100.00

50.00

TOTAL

1,200,000


100.00


As can be seen, in order to complete a financial plan the investors require an additional US$150,000 in capital from one or more investors and a loan in the amount of US$600,000. The resulting debt-to-equity ratio is expected to be 50% to 50%.

Financial projections prepared by the sponsors indicate that a loan with a twelve-year term and a three-year grace period are required to ensure healthy cash flows permitting profitable operations, provide for appropriate depreciation allowances, and service the financial obligations.

V. The Market

a. Trends

Caribbean tourism industry development strategy is placing increasing emphasis on the countries’ natural resources, cultural heritage, and history. It is expected that development will try to maximize the benefits of each country’s flora and fauna, rather than merely perpetuating the image of sun, sea, and sand.

The figures for Country A, where the project will be located, approach the region’s average for trends and market segments. This positive trend is expected to continue with occupancy rates in excess of 70 percent, as economic growth strengthens in tourism originating areas. A market report commissioned by BIRD indicates that nature and heritage tourism is the fastest-growing sector of the tourist industry worldwide and that in Country A in particular there has been a steady increase in the number of nature and adventure travelers such as birdwatchers, divers, and hikers. Statistical evidence indicates that over half of the visitors to Country A went there because of the variety of activities available, such as sea bathing, bird watching, hiking, observing flora and fauna, and scuba diving. The Flamingo Park Hotel and Nature Reserve stands to benefit from the growing demand for environmentally conscious vacations, given its privileged location providing immediate access to all these activities.

b. Competition

There are two tourist facilities already operating in the target area. Facility #1 is a fifty-room hotel situated directly on the beach. It has an established clientele and enjoys an average occupancy rate of 70 percent. Facility #2 is a seventy-eight-room hotel catering to the vacationer interested in quiet family holidays close to nature; it offers horseback riding, biking, tennis, and water sports. This hotel has conducted aggressive market campaigns and last year reported an average occupancy rate of 80 percent during the peak season and year-round occupancy of 70 percent.

Although Flamingo would not compete with these facilities directly, its proposed room rates will be 25 percent lower. Given the trends and the success of facilities #1 and #2 in attracting significant tourist traffic to this part of the country, it seems reasonable to expect that Flamingo will be able to attain similar occupancy levels.

c. Marketing Strategy

Flamingo Park will be marketed through arrangements made with Sponsor #5, who is the owner of EcoAdventures Expeditions, a nature tour-operator based in the United States. He will provide a vast network of travel-industry contacts and concentrate on linking up with specialist outbound tour operators who cater to the growing nature and heritage tourism market in the United States, Europe, and Japan. Contacts with specialized research centers and universities will also be established to promote Flamingo Park as a privileged research site. The national airline has three flights from Miami every week, and airport facilities are adequate for all commercial flights coming to the island.

VI. FINANCIAL PROJECTIONS AND PROFITABILITY

a. Profitability5

5The amounts presented in this hypothetical case study are used for presentation purposes only. The "Net long-term debt” row indicates that the project had no need of the grace period.
A summary of the projected financial statements is shown below. All operating expenses are based on estimates derived from reports from other comparable operating hotels in the industry.

Selected Items from Projected Financial Statements

Income Statement (US$000)

YEAR 1

YEAR 2

YEAR 3

YEAR 4

YEAR 5

Average occupancy

50%

60%

70%

80%

80%

Room rate (US$)

65.0

65.0

65.0

65.0

65.0

Sales revenue

1,430.0

1,716.0

2,002.0

2,288.0

2,288.0

Cost of sales

644.0

738.0

821.0

915.0

915.0

Operating expenses

686.0

824.0

941.0

1,075.0

1,052.0

Interest expense

100.0

95.0

90.0

80.0

70.0

Depreciation

100.0

100.0

100.0

100.0

100.0

Net Income

(100.0)

(41.0)

50.0

117.0

150.0

Balance Sheet

Net fixed assets

1,190.0

1,090.0

990.0

890.0

790.0

Net long-term debt

600.0

560.0

510.0

460.0

410.0

Net worth

700.0

670.0

680.0

690.0

700.0

Return on equity

2.0%

6.0%

12.0%

16.0%

16.0%

Margins/Ratios

Gross income/sales

54%

57%

59%

60%

60%

Net income/sales

0.0%

0.0%

6.9%

10.0%

13.1%

Current ratio

1.8

2.1

2.3

2.7

3.0

Debt-service coverage

0.7

1.1

1.8

2.2

2.4


These projected results, which are considered well within reach, show Flamingo earning profits after the second year of operation. The venture is expected to carve out a market niche in the island and in the region, and to attain increasing occupancy rates as it establishes its name. Under current regulations, which promote investment in tourism projects, Flamingo will enjoy a tax holiday during the first ten years of operations.

The project’s liquidity appears to be satisfactory throughout the projection period, with a current ratio of 1.8 in the first year and improving thereafter. The debt-service coverage is also adequate, with a minimum of 0.7 in the first year and over 1.1 thereafter.

The base scenario shows an internal rate of return (IRR) of 20.2 percent. The net present value of the project’s cash flows before interest and depreciation is calculated at US$551,400. The economic rate of return (ERR) is estimated at 30 percent. There is a positive net foreign-exchange impact, reflected by a ratio of 2 to 1 between net foreign-exchange results and total investment cost. The project generates value-added that mainly accrues to local economic agents. The ratio of value-added to investment cost is estimated at 3 to 0, i.e., for each dollar (equivalent) invested in the project, three dollars’ worth of value-added is generated for the local economy.

The sensitivity analysis indicates that the project is sensitive to changes in room rates and occupancy levels. However, the impact of changes in Flamingo’s capital costs and its room and occupancy rates on its profitability and debt-service coverage ability were all calculated in the studies and the base-case scenario was prepared using very conservative assumptions. Flamingo can sustain a drop in occupancy rates of as much as 10 percent and a 10 percent decrease in room rates without jeopardizing its long-term profitability and debt-service coverage capability.

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