Economic Rate of Return Analysis As an Economic Planning Tool for Marine Protected Areas
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USAID SEA PROJECT ECONOMIC RATE OF RETURN ANALYSIS AS AN ECONOMIC PLANNING TOOL FOR MARINE PROTECTED AREAS October 2020 Prepared by Roderic Hodges, Senior Finance Analyst of Marine Change, USAID SEA Project Partner DISCLAIMER This report is made possible by the generous support of the American People through the United States Agency for the International Development (USAID) with the close collaboration of the Government of Indonesia (GoI). The contents of this report are the sole responsibility of Tetra Tech and do not necessary reflect the view of USAID or the United States Government (DELETE THIS BLANK PAGE AFTER CREATING PDF. IT’S HERE TO MAKE FACING PAGES AND LEFT/RIGHT PAGE NUMBERS SEQUENCE CORRECTLY IN WORD. BE CAREFUL TO NOT DELETE THIS SECTION BREAK EITHER, UNTIL AFTER YOU HAVE GENERATED A FINAL PDF. IT WILL THROW OFF THE LEFT/RIGHT PAGE LAYOUT.) TABLE OF CONTENTS 1. EXECUTIVE SUMMARY 1 2. INTRODUCTION AND SCOPE OF REPORT 4 3. FINANCIAL AND ECONOMIC FORECASTING TOOLS 5 4. ECONOMIC SECTORS ASSOCIATED WITH MPAS: POLICY CHALLENGES AND THE BENEFITS OF FORECASTING 8 TOURISM 8 ECOTOURISM 9 TOURISM TRENDS 10 TOURISM DRIVERS 12 FISHERIES 36 5. ERR MODEL CASE STUDY: MOROTAI, INDONESIA 37 ERR MODEL DEVELOPMENT: ECONOMIC ASSUMPTIONS 39 ERR MODEL DEVELOPMENT: SCENARIO ASSUMPTIONS 51 MPA-CENTERED TOURISM: SUPPORTING ANALYSIS 52 ERR MODEL DEVELOPMENT: SCENARIO ASSUMPTIONS FOR MOROTAI 57 ERR MODEL RESULTS 59 ERR ANALYSIS: ALTERNATIVE SCENARIO 61 ERR ANALYSIS AND MPA FINANCING 63 HOMESTAYS: STAY RAJA AMPAT AS A MODEL FOR MOROTAI 64 OCEAN EYE: INCENTIVIZING MPA CONSERVATION 67 7. CONCLUSION: FUTURE USES OF THE ERR FRAMEWORK 71 Figure 1. Morotai ERR model scenario comparison.................................................................................................. 2 Figure 2. Tourism arrivals (millions) in select ASEAN countries ......................................................................... 10 Figure 3. Tourism as a percentage of GDP in select ASEAN countries. ............................................................ 11 Figure 4. Tourism arrivals (in millions) from China, ASEAN, and Western countries in select ASEAN countries (Indonesia, Cambodia, Vietnam, Thailand, Philippines) ........................................................................ 12 Figure 5. Visitors to Phi Phi islands.............................................................................................................................. 14 Figure 6. Maya Bay’s beautiful, overcrowded beach ................................................................................................ 15 Figure 7. Boracay visitors by nationality, 2017 ......................................................................................................... 17 Figure 8. Boracay map .................................................................................................................................................... 17 Figure 9. Raw sewage draining into the ocean at Bulabog Beach, Boracay ....................................................... 18 Figure 10. Plastic pollution on a beach in Boracay ................................................................................................... 19 Figure 11. New regulations implemented in Boracay ............................................................................................. 20 Figure 12. Plastic waste seen while diving off Bali’s coast ...................................................................................... 23 Figure 13. Komodo National Park visitors 2010-2019 ........................................................................................... 24 Figure 14. Mandalika project location ......................................................................................................................... 26 Figure 15. Zonation of Gili Matra Water Tourism Park ........................................................................................ 27 Figure 16. Open dumpsite on Gili Trawangan .......................................................................................................... 28 Figure 17. Gili Eco Trust contributions to waste management ............................................................................ 29 Figure 18. Location of Bunaken National Marine Park, just outside of Manado .............................................. 31 Figure 19. Foreign tourist arrivals in North Sulawesi, 2004-2019 ....................................................................... 32 Figure 20. Bird’s Head Seascape Map.......................................................................................................................... 33 Figure 21. Visitors to Raja Ampat 2011-2019, foreign and domestic.................................................................. 34 Figure 22. Summary infographic of Morotai carrying capacity study for diving ................................................ 53 Figure 23. Scenario comparison ................................................................................................................................... 62 Figure 24. Sustainable MPA financing scenarios (figures in US$) ......................................................................... 63 Figure 25. Figure 25. Screenshot of homestay accommodations on Stay Raja Ampat website .................... 66 Figure 26. Morotai Homestay Association website financial projection scenario ........................................... 67 Figure 27. Illustration of Ocean Eye application ....................................................................................................... 68 Figure 28. Projected diver days, wildlife sightings, and diver payments in Morotai ......................................... 69 1. EXECUTIVE SUMMARY In support of the USAID SEA Project, Marine Change has developed this report presenting economic rate of return (ERR) analysis as an economic planning tool for marine protected areas (MPAs). As one of the USAID SEA Project’s primary goals is to establish a network of MPAs in Indonesia, building a compelling case for the long-term value associated with conservation is a key aspect of stakeholder buy- in. An additional and equally important aspect of MPA planning is the creation of sustainable financing and monitoring mechanisms. ERR modeling is a quantitative planning tool that can help address these twin challenges by providing a transparent, evidence-based forecast of the long-term economic impacts of conservation. It can also inform the development planning process around an MPA by allowing policymakers to consider multiple scenarios based on the potential policies and strategies to be chosen from. The model includes costs of investments that are often externalized by developers, including clean water, sewage, and waste collection, that governments are required to make to keep an MPA in good environmental health. Morotai, North Maluku province, Indonesia was selected by the USAID SEA Project as a test case for the ERR model. This report lays out in detail the assumptions, logic, parameters, and functionality of the ERR model built for Morotai, as well as the results of scenarios considered in the analysis. The report also illustrates the challenges posed by rapid increases in tourism, highlighting important regional trends and some relevant case studies from Southeast Asia (Phi Phi Islands, Thailand and Boracay, Philippines) and Indonesia itself (Bali, Komodo National Park, Lombok, Gili Islands, Bunaken, and Raja Ampat). The ERR model developed for Morotai considers the projected economic benefits of tourism (local GDP, including wages, business income, and tax revenue paid to local government) alongside the public and private sector costs of building tourism infrastructure, including MPA establishment and ongoing monitoring and enforcement. Six broad accommodation categories were considered based on the island’s current hotel infrastructure and other common types of hotels in existence elsewhere in Indonesia. Additionally, two types of restaurants, five categories of tourism activity, fishing, and seaweed cultivation were included in the analysis. Various other economic and cost estimates were made based on desk research and on-the-ground study in Morotai. All assumptions and associated data sources are presented in detail: ● Upfront capital investment, proportion of local ownership, average spend per person per day for each type of accommodation, restaurant, and tourism activity; ● Employment, wages, taxation rate, and profitability for each type of accommodation, restaurant, and tourism activity; ● Solid waste, water usage, and electricity usage for each type of accommodation; ● Capital investments related to waste management, water provision, and electricity generation; ● Upfront investments and ongoing expenses related to the establishment, monitoring, and enforcement of Morotai’s MPA. Based on our research, the upfront capital investments, solid waste production, water usage, and electricity usage of high-end hotels and luxury resorts are much higher than for other accommodation types. These categories were also found to have higher levels of employment per guest, plus higher 1 | ERR ANALYSIS AS AN ECONOMIC PLANNING TOOLS FOR MPAS USAID.GOV wages than other categories, though would likely have a higher proportion of workers from outside of the local area. Luxury eco-resorts were found to have employment and wages comparable to the high- end and luxury hotels, though with more local employment and a much