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British VirginIslandsGovernmentEconomic impact ofdevelopment ofTerrance B.LettsomeInternationalAirport

Updated report

September 2015

Economic impact of development of Terrance B. Lettsome International Airport

British Virgin Islands GovernmentPwC Page 2 of 34

Contents

Introduction 4

Economic impact assessment framework and approach 5

Overall impact framework 5

Scope 5

The wider economic impact framework 5

Assessing the wider economic impact of the airport development over its lifetime 6

Data sources 6

The economic context 7

Tourism 7

Financial services 9

Impact of development of EIS on passenger arrivals by air 11

Context 11

Air passenger forecasts ‘with development’ of EIS 11

Air passenger forecasts ‘without development’ of EIS 12

Summary 13

Economic impact of the development of EIS 15

Tourism - wider economic impact 15

Direct impact of the development of EIS on tourism 17

Estimating the direct GVA impact of tourism 17

Availability of hotel beds/accommodation 18

Estimating the direct impact on employment in tourism 21

Summary – direct economic impact of EIS on tourism 22

Indirect and induced economic impacts of development of EIS on tourism 22

Indirect and induced effects on GVA of tourism 23

Indirect and induced effect on employment in tourism 24

Availability of labour 25

Financial services – wider economic impact 26

Direct impact of the development of EIS on financial services 26

Estimating the direct impact on employment in financial services 27

Indirect and induced economic impacts of development of EIS on financial services 27

Availability of labour 28

Overall impact results 28

GVA impact 28



Employment impact 29

Sensitivity analysis of economic impacts of EIS 30

Tourism 30


Conclusions 33

Tourism 33




Introduction

This report assesses the expected wider economic impact on the British Virgin Islands (BVI) of the proposeddevelopment of Terrance B. Lettsome International Airport (EIS).

Our analysis is confined to the wider economic impact of the proposed runway extension at EIS. It excludes theimpacts of the construction of the runway and the subsequent operation of the airport, including its supplychain. These impacts can only be assessed once details of the proposed development have been confirmed. Theyinclude the value added by the construction (and its supply chain), the direct operation of the airport (assumingit is positive) and the supply chain of the airport.

The wider economic impact expected to flow from the development of the airport results from two key effectsarising from the increased inbound passenger flow that would be enabled by the development:

A boost to the leisure tourism industry in BVI: the direct impact will generate further indirect andinduced effects through supply chain and employee spending; and

An enhancement to the competitiveness and attractiveness of BVI to business, especially in the financialservices sector by directly addressing one of the obstacles to development cited in the report of the

Financial Services Steering Committee1; the direct impact will also stimulate further indirect and induced

effects through supply chain and employee spending.

The rest of this report is structured as follows:

A description of the economic impact assessment framework and approach that has been used; An analysis of the BVI economy and the role of the tourism industry today; A summary of the potential number and type of air passengers using EIS if the development goes ahead

and if it does not; An analysis of the wider economic impact that is expected to arise from the airport development; An assessment of the sensitivity of the results to key assumptions; and A summary of the key conclusions.

1‘Building on a thriving & sustainable Financial Services sector in the Financial Services sector in the British Virgin Islands’

Financial Services Steering Committee, Final Report, December 2014.



Economic impact assessmentframework and approach

Overall impact frameworkEconomic impact analysis is an established way of assessing and valuing the economic impacts of investments.The technique is widely used by national governments, non-governmental organisations, multinational

companies and other stakeholders across a range of emerging and developed countries2. This section of the

report explains the methodology that has been applied to appraise the wider economic impact of the potentialdevelopment of EIS on the BVI economy.

Our approach has considered the wider economic impact of the airport development on two indicators ofeconomic activity: economic output, as measured by Gross Value Added (GVA), and the total number of jobs.

ScopeAs stated in the introduction, the scope of our analysis is confined to the wider economic impact of the airportdevelopment. We focus on the users of the airport, chiefly incoming passengers, rather than the impact of theconstruction and subsequent operation of the airport. We, therefore, also exclude the effects the airport’sdevelopment will have on its supply chain. Instead, we analyse the impact the airport development will have onpassenger flows and the subsequent expenditure incoming visitors make in the BVI economy as well as theboost to the growth of the financial services sector. Importantly, this analysis assesses the impact on the BVIonly and does not include the impact on other countries.

The wider economic impact frameworkWe consider the impact of the development of EIS on two sectors in particular:

The tourism sector; and The financial services sector.

Within the wider economic impact, we consider three impacts linked to the tourism industry:

The direct impact corresponds to the contribution made to the BVI economy in terms of profits andwages as a direct result of increased tourist spending;

The indirect impact is created primarily by the purchases of goods and services from firms in BVIdirectly involved in the tourism supply chain which support profits and wages across the supply chain;and

The induced impact is the additional impact on the economy resulting from increased expenditure bythe workforce employed directly in the tourism industry and indirectly as a result of spending in thesupply chain, as income earned by these employees is spent locally on various goods and services, leadingto further economic activity and employment in the BVI.

This division reflects the large network of interdependencies between the different parts of the tourism sectorand others parts of the BVI economy. It allows the full impact flowing from the airport development to becaptured and estimated. Figure 1 provides an overview of these impacts.

2See, for example, HM Treasury (2011) ‘The Green book – Appraisal and Evaluation in Central Government’



Figure 1: Wider economic impact analysis framework - tourism

We use a broadly equivalent structure to consider the wider economic impact on the financial services sector.

Assessing the wider economic impact of the airportdevelopment over its lifetimeOur assessment of the wider economic impact of the airport development is derived by comparing the expectedwider economic impact of the proposed development with that expected to arise in the absence of any airportdevelopment (i.e. in the counterfactual scenario).

We assess the impact of the development of EIS over a 35-year period from the opening of the lengthenedrunway in 2018 to 2053. This is consistent with the expected length of the economic life of the proposeddevelopment at the airport.

Following standard practice in economic impact analysis, we convert the expected wider economic impact thataccrues over the lifetime of the investment into a present value. To do this, we use a discount rate to convertfuture GVA to its present value. HM Treasury proposes a real social discount rate of 3.5% which we believe is

appropriate for the appraisal of this infrastructure project3. The discount rate is a key assumption in the

analysis.

Data sourcesThe analysis presented in this report is based on three principal sources of data:

An analysis of air services at EIS prepared for the BVI Government by Boyd International; Official statistics prepared by the BVI Government; and Various academic studies of the multiplier effects of tourism.

No primary research has been undertaken. This means that our analysis depends on key assumptions to fillsome data gaps. Where these are potentially important, we have undertaken sensitivity analysis.

3HM Treasury (2011) ‘The Green book – Appraisal and Evaluation in Central Government’



The economic context

The BVI is a small open economy. Its GDP reached $916 mn in 2013 with its net trade contributing 35% of GDP,

with a strong service driven export sector4.

TourismThe BVI’s tourism industry plays an important role as can be seen in Figure 2.

Figure 2: Tourism’s share of GDP in BVI (1998-2013)

Source: BVI Central Statistics Office

Historically, since 2008, tourism is estimated to have contributed around 30% of GDP and has grown at acompound annual growth rate of 2.8% per year. Furthermore, the World Travel and Tourism Council (WTTC)estimates that around 90% of employment within the BVI is supported directly or indirectly by the tourism

industry5.

At present, the limited length of the runway at EIS currently constrains the number of tourists that visit theBVI. As can be seen in Figure 3, the number of enplanements (departures plus arrivals) has decreased in recentyears due to service losses: for example, American Airlines cut its services to the BVI and then closed the

connecting hub in Puerto Rico6. This limits the BVI’s inter-regional service by two carriers and restricts access

to a large amount of the US market.

Lengthening the runway at EIS would allow direct flights from hub-cities in other nations, particularly the US,and this is expected to open up the BVI market to new consumers. Therefore, the development of EIS couldincrease passenger flows and enable further growth of the tourism industry since this depends on the number ofvisitor arrivals.

4BVI Central Statistics Office

5World Travel & Tourism Council (2014), ‘Travel & Tourism, Economic Impact 2014, British Virgin Islands’.

6Boyd International (2014), “Terrance B. Lettsome International Airport: Air Service Analysis and Demand Forecast”

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Tourism GDP as % of Total GDP



Figure 3: Enplanements and visitors arriving by air in the BVI (2006-2013)

Source: Boyd International

The limited ability of tourists to visit the BVI by air is reflected in our analysis of visitor types. The majority ofvisitors to the BVI stay on the island for less than one night. They typically arrive from a cruise ship or on a daytrip from another island in the region. Few utilise international air travel (see Figure 4). As these types ofvisitors are only on the BVI for a very limited time, their contribution to the GVA of the tourism industry is alsoless than that of staying visitors.

Figure 4: Total visitors to the BVI by type of visitor/mode (2001-2013)


Overnight visitors are more likely to travel by air than other visitors. Moreover, as they tend to stay longer inthe BVI, they are more likely to spend more on tourism services. Our analysis shows that overnight visitorsspent over 12 times more than other visitor types: in 2013, average spending per visitor was around $1,100

7.

Therefore, if the development of EIS leads to more overnight visitors (than other types), this will potentiallyhave important economic benefits for the BVI going forward.


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Enplanements Visitor arrivals by air

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Overnight Visitors Day Trippers Cruise Ship Passengers



As shown in Figure 5, however, the majority of visitors of all types currently utilise boats to travel to and fromthe BVI. Not only does this reflect the limiting effect that the existing air transport services available at EIS hason the ability of tourists to reach the islands, but it also indicates why the airport development may lead to somedisplacement in the tourism market. This means that, whilst the EIS development will increase the ability oftourists to travel to the BVI directly by air and so increase passenger flow, some of these passengers are likely tobe at the expense of those who would otherwise arrive by boat. Therefore, while we expect to see an increasedpassenger flow through the airport, this could be accompanied by a decline in the number of visitors to BVI byboat. We take this into account in our analysis as displaced visitors will reduce the net impact on spending andGVA arising from the airport development.

Figure 5: Visitor arrivals by mode of transport (2000-2013)


Financial servicesThe BVI’s financial services sector is based on its position as a location for company incorporations which itselfreflects its robust, easy-to-use and adaptable legal and regulatory framework. The sector has grown to becomethe largest source of government revenue and a crucial part of the economy, affecting many citizens eitherdirectly or indirectly. In 2013, it contributed 16.6% of GDP. It has fluctuated in nominal terms in recent yearsand, in 2013, was 16% below its peak level in 2007 (see Figure 7).

Nonetheless, since 2009, the landscape has changed as a result of the global financial crisis and the G20’s focuson offshore jurisdictions around the world. This has led to a decline in new incorporations in the BVI by 9percent from 2011 to 2013. A recent report which defines the sector’s future strategy concluded that the BVI willstruggle to sustain itself in the rapidly changing environment and that the issues represent a real threat to theBVI’s long-term growth and prosperity

8.

To ensure a thriving and sustainable financial services sector, public and private sector leaders in the BVI havedefined a strategy for developing the sector built on three pillars:

Building best-in-class enabling mechanisms in government with robust marketing, promotion andbusiness development functions;

Remaining a world leader in the core business of company incorporations by improving theBVI’s international reputation and level of customer service; and

8‘Building on a thriving & sustainable Financial Services sector in the Financial Services sector in the British Virgin Islands’

Financial Services Steering Committee, Final Report, December 2014.

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Air Arrivals Boat Arrivals



Expanding into value-added services by introducing innovative initiatives, attracting and retainingtop talent and developing and strengthening local capabilities so as to make the BVI an exceptionallyconvenient jurisdiction for business, through further investments in infrastructure.

Underpinning the strategy, 10 priority initiatives have been identified that will maintain and grow currentbusiness, allow BVI to expand into value-added services and build the requisite enabling capabilities (see Figure6).

Figure 6: Summary of strategic initiatives to develop financial services sector

The expansion of new value-added services is an integral part of the strategy. Success depends on being able toattract value-added services to the BVI. A key factor is how well the BVI can improve its infrastructure todevelop, attract and retain skilled labour and enhance transport and communications. Enhancement of the EISis one of the priority projects.

Figure 7: Financial services’ share of GDP in BVI (1998-2013)


• Establish a Delivery Unit for the strategy• Improve promotion of sector by International Finance Center• Strengthen business development function• Build popular support for financial services• Strengthen local capability and create more opportunities for locals to work in the sector

Build best-in-classenabling mechanisms

and enabling capabilities

• Pursue tax initiatives to improve the BVI's compliance ratings and reputation in the internationalfinancial services community

• Enhance customer service

Remain a world leader incompany incorporations

• Attract value-added services• Bring immigration and labour into line with international best practice to attract and retain skilled

labour• Invest in transport and telecommunications

Expand into new value-added services

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Financial Services GDP as % Total GDP



Impact of development of EIS onpassenger arrivals by air

This section of our report summarises the number of air passengers expected to use EIS ‘with’ and ‘without’ itsproposed development. As explained earlier, the projections underpin our assessment of the wider economicimpact of the airport development.

ContextAirline services to the Caribbean are experiencing important strategic and operational changes which have animportant potential bearing on the pattern of air travel in the region. The key trends identified by BoydInternational include:

A growing demand for non-stop flights from North America so that destinations which offernon-stop access will see more growth: the deletion of American Airlines’ connecting hub at San Juan isone symptom and the trend is driven by short-haul connecting operations being less and lesseconomically-viable;

The increasing influence of low cost carriers such as JetBlue, Rouge, WestJet, Spirit andSouthwest Airlines; and

The availability of new aircraft types with more efficient and more powerful engines which allowairlines to access airports in the Caribbean with a wider range of aircraft on shorter runways, althoughthe length of the current runway at EIS is still a constraint.

Air passenger forecasts ‘with development’ of EISOur assessment of the number of air passengers arriving at EIS after its development relies on forecasts

provided by Boyd International9; the data are outlined in Figure 8 below. The forecasts below rely upon Boyd

International’s ‘baseline’ forecasts which they consider to be ‘reasonable and achievable’.

Figure 8: Historical and projected enplanements ‘with’ the development of EIS (2006-2055)



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With development of EIS' Historic



Boyd International have based their air passenger forecasts on the experience of the airport at neighbouring St.Thomas (STT) which already has a longer runway than EIS and also acts as an intermediate point for somevisitors to the BVI. At present, the number of air passengers at BVI is less than 20% of that at STT, mainlybecause EIS cannot handle larger aircraft. This reflects the difference in the average number of seats on eachdeparting plane. The Boyd report shows that this was just under 20 in the BVI in 2014 compared with over 160in St Thomas in the same year.

Boyd International’s forecasts are based on some key assumptions about business environment:

Economic conditions will remain stable, especially over the long term; The airline industry serving the region will experience no major changes in operational structure,

economics or strategies over the forecast period; Charges at the airport will remain competitive with those at other airports in the region; Other support facilities will be in place at EIS to support the expected forecast growth in air traffic

including terminal and customs, fuelling capability and ancillary customer support functions; The pattern of air transport at EIS will mirror that of nearby St. Thomas, which has a runway similar in

capability to that planned at EIS; It is not envisaged that EIS will attract the larger wide-body aircraft needed to make links with the

European Union economic: thus, the forecasts are based on demand mainly from North America; and Once new air services have been recruited, the underlying rate of growth of air passengers will be the

same as the ten year compound annual growth rate achieved at St. Thomas.

The initial growth in the number of airport passengers is expected to be very rapid as EIS is able to capturecurrent traffic potential. Boyd International do not see EIS as a new or experimental market, rather they view itas a destination airport that currently cannot accommodate the natural demand that the market can generate.Thus, it is expected (and assumed) that airlines would move quickly to take advantage of the marketopportunity.

The forecasts cover a long period and the underlying rate of growth reflects historic, long term growth.Although there are clear uncertainties, Boyd International’s view is that their forecasts are conservative albeitspikes and troughs in demand are possible.

In their baseline forecasts, Boyd International estimate that the number of enplanements will increaseapproximately fourfold after the runway extension, from just over 100,000 in 2013 to over 400,000 by 2020

when all airlines expected to serve the airport have fully established routes10

. Following this, they projectenplanements to increase at 1.35% per annum until 2053. This reflects both a gradual increase in the number ofroutes and the increasing productivity of the airport as it becomes more efficient at handling a larger volume ofpassengers.

These additional enplanements will have a positive impact on tourism in the BVI as they will increase thenumber of inbound passengers arriving. In line with historical trends, we expect that the vast majority, if notall, of the additional passengers will be inbound visitors because the BVI are an open tourism-intensiveeconomy with a small population. We assume that 90% of the net additional passengers will be inbound visitors(both for leisure and business purposes).

Boyd International expect the additional passengers to be overwhelmingly based on leisure visitors. Currently,less than 10% of arrivals are business travellers. The increased convenience of accessing financial companieslocated in the BVI, using nonstop flights from the US, means that this percentage could rise.

Air passenger forecasts ‘without development’ of EISIn order to estimate the potential net change in the number of passengers resulting from the lengthening at EISof the runway, we also need to estimate the number of passengers without the development (“thecounterfactual”).




The report by Boyd International does not provided forecasts of the number of air passengers at EIS if it is notdeveloped. So, we have been obliged to develop some scenarios.

Without any development, EIS faces two significant challenges:

The short length of the existing runway length at EIS, coupled with the lack of navigationalinstrumentation, places the BVI at a competitive disadvantage compared to other Caribbeandestinations; and

The main gateway to the BVI – St. Thomas – is now essentially full all year-round which means thatsome traffic is already being deterred, and this pressure is set to grow as point to point traffic to and fromSTT grows.

The implication is that the BVI could be relegated further to a niche destination which is unable to fulfil itspotential.

In our base case, we assume that, without the development of EIS, the number of passengers will continue todecline from its current (i.e. 2013) level at the same rate as it has changed in the period 2000 to 2013 (3.3% peryear). Such an assumption is consistent with a view that the BVI’s passenger numbers are at risk due toincreasing competition for passengers in the region. Short-term measures, such as the plan to introduce a directservice to Miami operating within the constraints of the existing airport infrastructure, may help to slow therate of decline. But the limited additional capacity that the use of small aircraft would bring does notfundamentally change our analysis.

As a sensitivity, we consider the effect of a faster rate of decline (7.85% per year, the rate of change experiencedover the period since the onset of the global financial crisis i.e. 2008 to 2013). We also consider the implicationsif the number of passengers arriving at EIS remains unchanged at the level in 2013.

Figure 9: Historical and projected enplanements ‘without’ the development of EIS (2006-2055)


SummaryThe key differences between the two scenarios ‘with’ and ‘without’ the development of the EIS are summarisedin Table 1. We recognise that enplanements through EIS could continue to move downwards from their currentlevels over the period studied due to the competition for passengers in the regional market. In Section 5 we runsensitivity analysis on this and a number of other assumptions to test the degree to which our findings areaffected by them.

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Table 1: Summary of scenarios

Scenario Expected outcome

With airport development Increased passenger flow enhancing ability of tourists to reach the BVI directly:

rapid growth to capacity in 2020, them follows long term trend in growth of STTEasier direct access to the BVI enables diversification and development of thefinancial services sector

Without airport development Enplanements through EIS continue to decline at 3.3% per year, the averagerate of change over the period 2000-2013

Source: PwC



Economic impact of thedevelopment of EIS

This section of our report analyses of the net wider economic impacts on the BVI of the proposed developmentof EIS. It starts by considering the impact on the tourism sector and then the financial services sector.

Tourism - wider economic impactThe development at EIS is expected to lead to a wider (net) economic impact due to increased passengerinflows. Specifically, it is expected to enable more spending by additional international visitors to the BVI,especially by those travelling for leisure purposes (who historically comprise the largest share of visitors).

Our approach to estimating the net wider economic impact of the airport development involves analysis ofcascading expenditure flows through the economy. As Figure 6 shows, in order to estimate the incrementaleconomic impact of the airport development, we consider the likely change in spending by air passengers.Visitors to the BVI will generate a direct benefit for the local economy through expenditure on tourism services.This, in turn, will generate economic benefits as their spending will provide income for suppliers who are thenable to generate additional GVA in the BVI by spending on other locally supplied goods and services or payingtheir employees (who then spend some of their income locally).

Figure 10: Expenditure flows and wider economic impact of tourism

Source:PwC

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Reflecting these flows of expenditure, our analysis is structured in two stages as shown in Figure 11.

Figure 11: Stages in the wider economic impact assessment

In analysing the wider economic impact of the development on the tourism sector, the key parameters are:

The number of additional visitors to the BVI who arrive by air; The average spending per visitor per night during the stay: this captures the direct additional

contribution increased visitor levels make to spending in the BVI; The level of displacement of visitors who use other modes of transport: this accounts for those

international arrivals who would have visited the BVI anyway in the absence of the airport development,through alternative means of travel. Removing them from those passengers who arrive in the BVI via theexpanded airport means that we estimate the net impact on the BVI economy;

The proportion of tourist spending which is value added: by deducting the cost of bought in goods andservices consumed as a result of the increased expenditure, this means that only the value-addingcomponent of tourist spending contributes to the economic impact; and

The multiplier effects of incremental visitor spending: this reflects both the indirect (value resulting fromincreased supplier spending) and induced (value generated through increased employee expenditure)effects which occur as a result of the airport development.

Table 2 summarises the key assumptions which underpin our estimates. In Section 6 of this report we run aseries of sensitivity tests to evaluate the impact on the results of adjusting these assumptions.

Table 2: Key assumptions underpinning estimated wider (net) economic impact of development of EIS

Parameter Assumption

% of displacement of other modes of

transport

50% We assume that for every two additional visitors by air,

there is one less visitor who arrives by boat and staysovernight

Year when capacity is reached 2020 We assume that EIS reaches its capacity Boyd Group

International demand forecasts11

% of arriving air passengers that are

international visitors

90% We assume that 90% of air passengers will be

international visitors; this is in line with the historicpattern

Average spending per visitor per night $103 We assume that real visitor spending remainsunchanged at the 2013 level

% of tourist spending which is value added 45% We assume that 45% of spending is value added

reflecting the evidence in the WTTC analysis12

Appraisal period 2053 We assume a 35-year economic lifetime for the

development

Annual long-run productivity increase 0% We assume no change in productivity across theeconomy: this is a continuation of the trend seen in theten years preceding the global financial crisis (1998-2007)

Source: PwC



Direct impact Indirect and induced impacts



Direct impact of the development of EIS on tourism

We have estimated the net direct economic impact of the additional passenger spend in the BVI following thedevelopment of EIS. This impact is measured in terms of GVA by estimating the net present value of its keycomponent parts (profits and wages) over the 35 year period of the development (2018-2053). We have alsoestimated the number of additional jobs supported by the development.

Estimating the direct GVA impact of tourismThe first step in estimating the economic impact of the development of EIS on tourism is to estimate how thenet change in inbound international passengers which occurs as a result of the airport development affects thevolume of tourist spending. We estimate the impact on the level of spending by multiplying the number ofadditional visitors by the average level of expenditure per visitor per night and then the average length of stayfor overnight visitors to the BVI. Although the development of EIS is expected to affect the forms of transportused by visitors to access the BVI, we assume that the visitor profile (e.g. the country of origin) will not changesignificantly. Currently, more than 70% of visitors are from the USA. As a result, we assume that this proportionwill remain constant at 2013 levels after the airport development.

We then adjust the number of inbound visitors by air to allow for the possibility that other visitors (arriving bysea) will be displaced as they switch to air transport and/or they are ‘crowded out’ by a lack of accommodation.We have little evidence with which to estimate the extent of this effect: we assume that for every two additionalvisitors by air, there will be one less visitor arriving by boat.

These steps enable us to estimate the increase in expenditure in the BVI as a result of increased inboundpassenger flows. In order to estimate the level of increased value added by this expenditure, we need to removethe cost of the goods and services required to support this increased consumption. Based on previous researchby the WTTC, we assume that 45% of the additional tourism expenditure constitutes additional value added.

Figure 12 shows the estimated increase in GVA in the 35 years from opening the extended runway in 2018 to2053. The trend here runs parallel to the expected increase in enplanements above, increasing rapidly until thenew airline routes are fully established in 2020, and then gradually beyond that as passenger numbers increasein line with productivity. The magnitude of the increase in GVA should be noted: Figure 12 shows that anadditional $60m in GVA will result from the airport development at EIS in 2020 through the direct impact ofincreased passenger flows alone. This amount increased to $80m incremental GVA by 2030 and approximately$100m by 2040. The $60m in 202o is more than 6% of the current GDP of the BVI and, therefore, represents asignificant increase.

Applying an annual discount rate of 3.5%, as per the guidance in HM Treasury’s Green Book, gives an estimatednet present value of the direct economic impact of the development of EIS of $1,473m over the 35 years of thedevelopment.




Figure 12: Increase in direct GVA in tourism relative to without development scenario ($m, 2018-2053)

Source: PwC analysis

Availability of hotel beds/accommodationWhen estimating the direct economic impact of the airport development on tourism, it is important toemphasise that the benefit in terms of GVA and employment can only be fully achieved if the domestic economycan support the increased passenger flows. Our analysis indicates that the BVI is projected to have over130,000 net additional visitors per annum by 2020. As we expect all of these visitors to stay overnight, this willpotentially put a strain on accommodation capacity (compared to the baseline of 2013).

Based on 2013 figures, we know that 30% of overnight visitors to the BVI stay in hotels, 60% utilise rental

accommodation such as villas or charter boats and the remainder stay in private residences13

. As hotels are themost likely accommodation type to require large single investments we choose to focus on them when weconsider a capacity constraint. Similar analysis could be applied to other forms of accommodation, but lack ofdata availability has meant we were unable to do this. For the purposes of our analysis, therefore, we assumethat current accommodation patterns remain the same going forward.

Based on historical occupancy rates and the average length of stay, we estimate that the existing BVI hotels have

approximately 3,865 hotel rooms and could accommodate around 207,000 visitors per annum in 201314

.Historically, around 40% of hotel capacity is unused during a year reflecting the seasonality of the hotel marketin the BVI from 2000-2013 (see Figure 13).


14Hotel ‘rooms’ in this analysis should be interpreted as the space required to sleep one visitor per night. Evidently hotel

rooms can accommodate more than one person, but we do not have the necessary data to convert this estimate into thenumber of physical rooms which would be required to house this many visitors.

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Figure 13: Level of hotel occupancy (% of capacity, 2000-2013)


If we assume that hotel capacity is flat on a monthly basis and overnight visitors utilising hotel rooms areapportioned by the number of overnight visitors through the year, our analysis shows large seasonal variations.In particular, in each year of the historical period studied, hotel occupancy reaches a peak in March (an averageof 98.3% in the period 2000-2013) while dropping to its lowest level in September (an average of 21.5% in theperiod 2000-2013). This is clearly seen in Figure 14 for 2013.

Figure 14: Hotel occupancy and capacity by month (Number of overnight visitors, 2013)

Source: BVI Central Statistics Office, PwC analysis

While it may be true that existing rooms can be filled in the short run, these are too few to accommodate all newvisitors, especially in the peak months. Our analysis indicates that the number of arrivals will grow byapproximately 133,000 up to 2020 (compared to the 2013 baseline). In order to estimate the extra roomsrequired to house this increase in visitor numbers, we use the percentage of overnight visitors that stay in hotels

0

10

20

30

40

50

60

70

80

90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2013 Capacity



and the average length of stay for hotel users, assuming these patterns continue15

. Our calculations are shown inTable 3.

Table 3: Estimated number of hotel rooms required in 2020

Statistic Value

Projected additional visitors over 2013 baseline in 202016 132,682

% of overnight visitors in hotels (2013)17 30%

Estimated additional hotel visitors 40,383

(additional visitors x % overnight visits in hotels)

Average length of stay (2012)18 6.8 days

Estimated extra room nights required in 2020 274,782

(additional hotel visitors x average length of stay)

Estimated extra rooms required in 2020(100% capacity)

753(extra rooms nights divided by 365 days)

Estimated extra rooms required in 2020(Average historical capacity: 66.8%)

1,127(extra rooms required in 2020 divided by 66.8%)

Estimated extra rooms required in 2020(80% capacity)

942(extra rooms required in 2020 divided by 80%)


As Table 3 shows, assuming 100% occupancy in 2020, the BVI would require a further around 750 rooms. Morerealistically, however, we would expect there to be a frictional level of occupancy in the long term due to theseasonality of the market. This is also evidenced in St. Thomas and St Croix which have average occupancy ratesof around 60% and 50% respectively, even with a developed airport. In the case of the BVI, we assume that theaverage occupancy would remain stable at 66.8% (the 2000-2013 average). The implication of this is that theBVI would require around 1,130 additional rooms by 2020. Even if we assume that the new rooms couldoperate at 80% occupancy on average, the number of additional rooms required would still be around 940.

Therefore, hotel room capacity could potentially limit the wider economic impact of the proposed airportdevelopment as the number of hotel rooms available constrains visitor numbers. To fill this potential void thereare a number of developments planned to take place from now through the airport development. Included inthese planned projects is the development of the Oil Nut Bay resort which currently has eight villas (providing8,395 rooms nights per year) with plans for future expansion

19. Additionally there is large planned

redevelopment of the government owned Prospect Reef resort. Other projects in the Havers area, Village Cayand Treasure Isle will also allow for an expanded capacity and should ease concern, allowing BVI to reap thewider economic benefits the airport development will bring and allow for

As discussed above, we would also expect similar strain to be placed on alternative forms of accommodation,but due to the more flexible nature of these accommodation types (particularly in the form of charter boats), itcould be that capacity in these areas could be expanded more easily.



17BVI Central Statistics Office - latest available data

18BVI Central Statistics Office - latest available data

19Oil Nut Bay Resort Development (2014), www.oilnutbay.com/villas_for_sale



Estimating the direct impact on employment in tourismTo estimate the additional employment associated with the additional value added, we have used information

on GVA per employee from the BVI Central Statistics Office20

. The implied values, calculated for a range ofindustry groups, are outlined in Table 4.

Table 4: GVA per employee by industry ($’000, 2013)

Industry group GVA per employee ($'000s)

All industries 50.0

All industries, excluding financial services 48.3

Hotels & restaurants only 37.2

Financial intermediation 115.8

Source: BVI Central Statistics Office, PwC analysis

These values drive the estimated direct employment supported by the airport development. In order to estimatethe direct employment impact we assume that all direct jobs would be as productive as the average across thehotel & restaurant sector as this is the sector that is the most tourism-intensive part of the economy. We assumethis in the absence of detailed information on tourist spending patterns. The GVA per employee in the hotel &restaurant sector is roughly 25% lower than the all industry average. If we assume that that the jobs supportedwould be across the whole economy, then the estimated number of jobs would be lower (because productivity ishigher). Figure 15 shows that the number of jobs directly created as a result of the airport development wouldbe over 1,700 in 2020. This increases to nearly 3,200 in 2050 as the number of arrivals increases gradually eachyear.

Historical data from the ten-year period preceding the global financial crisis (1998-2007) demonstrate thatthere was no productivity growth. In our baseline scenario we have assumed that this 0% growth in productivity

continues from 2014-205521

. However, we would expect productivity to increase over the time period and so wehave included a sensitivity for a 1% annual increase in productivity. If this were to occur, then the number ofjobs created would fall to 1,620 in 2020 and around 2,200 by 2050.

Figure 15: Estimated number of direct jobs created in tourism by additional tourist spending associatedwith development of EIS




-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2018 2023 2028 2033 2038 2043 2048 2053



Summary – direct economic impact of EIS on tourismThe results of the analysis described above are summarised in Table 5 which shows the direct impact of theairport development on GVA and employment.

Table 5: Estimated (net) direct wider economic impact of the development of EIS on the tourism sector

Net direct wider impact Impact

GVA ($m, NPV) $1,473m

Additional employment in 2020 1,740

Additional employment in 2050 3,187


Indirect and induced economic impacts of development of EIS ontourism

The second step in our approach applies economic multipliers to the direct GVA and employment impacts oftourism to estimate the indirect and induced impacts. The indirect impact on the BVI economy results from thepurchase of goods and services from local suppliers to the tourism industry. The induced impact results fromthe increased expenditure in the BVI by the workforce employed directly by the tourism industry and indirectlyby people employed in its supply chain. They are determined by:

Estimating the value of spending on locally sourced goods and services; Estimating the (local) value added element of this spending; Determining the multiplier effects; and Establishing the most appropriate multipliers.

As Figure 11 illustrates, ‘multipliers’ are used to estimate the indirect and induced impacts expected to resultfrom the development of the airport. Multipliers are a way of estimating how direct economic impacts cascadethrough an economy. They measure the ratio of the indirect and induced GVA impacts on the economy to theinitial direct GVA impact. They can also be expressed in terms of employment, determined by the ratios of jobscreated in the wider economy relative to the direct employment impact of the airport development.

Multipliers vary across sectors and across countries as they reflect the unique structure and inter-dependenciesin the sectors and economies being analysed. They are usually estimated using Input-Output tables or SocialAccounting Matrices. We have not, however, been able to calculate multipliers for the BVI on this basis, becausethe data required are not readily available.

Instead, we have reviewed the international literature and identified two potential sources of multipliers:

The first source is the analysis by the World Travel & Tourism Council (WTTC) of the economic impact oftravel and tourism across 184 countries, including the BVI

22. The WTTC analysis provides a basis for

understanding the potential indirect and induced effects of tourism although some adjustments areneeded to take account of the wider scope of the analysis, for example to exclude the effects ofGovernment promotion spending.

The second source is based on a review of existing studies of the impact of tourism in island economieswhere tourism is well developed and plays a significant part and where the multipliers can potentially betransferred to the BVI. PwC has identified two potentially relevant studies:





Tian et al. analyse the economic impact of tourism in Hawaii23

which has two benefits: it isrelatively recent and Hawaii has some similar economic features to the BVI (e.g. it is also an islandeconomy with comparable per capita income levels and a significant tourism sector); and

Meyer who looks at the economic impact of Caribbean tourism24

.

The tourism multipliers vary significantly depending on the structure of the economy in which the tourismactivity takes place and the spending patterns of the beneficiaries of these expenditures. This explains thedifferences between the Caribbean countries listed in Table 6. The larger and arguably more diversifiedeconomies such as Jamaica and the Dominican Republic have higher multipliers than smaller economies suchas the Bahamas and Bermuda. This indicates the linkages to other sectors are more developed in largereconomies.

Table 6: Tourism multipliers – selected countries

Country Size of multiplier

Antigua 0.88

Bahamas 0.78-0.79

Bermuda 1.03 - 1.09

Dominican Republic 1.2

Jamaica 1.23 - 1.27

Source: Meyer (2006) Caribbean tourism, local sourcing and enterprise development: review of the literature, Centre for Cultural

Change, Sheffield Hallam University

Table 7 summarises the multipliers that we have used in this analysis, which are derived from WTTC data25

. Aswe would expect, these are similar in size to other smaller economies listed in Table 6.

Table 7: Multipliers used for BVI to estimate indirect and induced impacts on tourism

Type of multiplier Multiplier Impact

Indirect 0.66 Additional value added through effects on the supply chain

Induced 0.16 Additional value added through effects of spending by employees directly

and indirectly employed in travel & tourism sector

Source: PwC analysis based on WTTC data

Indirect and induced effects on GVA of tourismBased on the multiplier analysis outlined above, we estimate the indirect and induced impact on GVA for eachyear studied. The results of this analysis are shown in Figure 16 below. The indirect and induced impactsremain a constant ratio to the direct impacts, as established by the multipliers. These are shown to be smallerthan the direct effects, but remain significant, with the indirect effect four times bigger than the induced effect.

23Tian et al (2011), ‘The direct and indirect Contributions of Tourism to Regional GDP: Hawaii’, the Economic Research

Organisation at the University of Hawaii.24

Meyer (2006) Caribbean tourism, local sourcing and enterprise development: review of the literature, Centre for CulturalChange, Sheffield Hallam University.25

World Travel & Tourism Council (2014), ‘Travel & Tourism, Economic Impact 2014, British Virgin Islands’



Figure 16: Direct, indirect and induced impact of the development of EIS on GVA from tourism by year($m, 2018-2053)


The NPVs of these impacts, calculated using a discount rate of 3.5% as explained previously, are summarised inTable 8.

Table 8: Estimated indirect and induced economic impacts of the development of EIS on GVA fromtourism ($m, 2018-2053, NPV)

Economic impact With development

Indirect GVA $972m

Induced GVA $236m


Indirect and induced effect on employment in tourismTable 4 summarised estimates of the GVA per employee across different industry groups within the BVI. Forthe direct impact we estimate the number of jobs supported through the additional value created, assuming thatthese jobs would be as productive as those in the hotel & restaurants sector. This is appropriate for the directimpacts, but we would expect the indirect and induced impacts to be distributed across the whole economy, asthey capture all supply chain and employee spending. For this reason, we use the all economy average GVA peremployee to estimate employment.

Figure 17 summarises the number of direct, indirect and induced jobs which would be expected as a result ofthe airport development in the period 2018 to 2053. This shows that total employment created is estimated tobe just over 2,800 in 2020 and nearly 5,400 by the end of the period studied. As with the direct employmentimpact, we assume no change in productivity from 2014 to 2053 in the baseline scenario. If it increased by 1%per annum, then the number of jobs created would fall to 2,615 in 2020 and less than 3,620 by the end of theperiod studied.

$-

$50

$100

$150

$200

$250

2018 2023 2028 2033 2038 2043 2048 2053

Direct GVA Indirect GVA Induced GVA



Figure 17: Direct, indirect and induced employment impact on tourism of the development of EIS byyear (Number of jobs)


Using data from Figure 17, Table 9 shows the estimated net employment impact in 2020 for the direct, indirectand induced employment effects.

Table 9: Estimated net direct, indirect and induced impact on employment of the development of EIS(number of jobs, 2020)

Economic impact 2020 2050

Direct employment 1,740 3,187

Indirect employment 856 1,567

Induced employment 207 380

Total employment 2,803 5,134


Availability of labourHaving established that the development of EIS has the potential to increase the demand for labour by 2,803jobs by 2020 and 5,134 by 2050, we have considered to what extent the lack of labour supply might constrainthe wider economic impact in the tourism sector. The labour force grew at a compound annual growth rate of4.9% per annum between 2000 and 2008, but since the global financial crisis the rate of growth has tailed off,declining by 1.2% between 2008 and 2013.

Total employment in 2012 was 18,19826

. Adding our estimate of 2,803 additional jobs to be filled to the 2012figure gives 21,001 jobs to be filled in 2020, which equates to a 15% increase in jobs. This gives an indication ofthe expected increase in total employment in the BVI if the airport development goes ahead. To fill these jobs

26BVI Central Statistics Office – latest available data

-

1,000

2,000

3,000

4,000

5,000

6,000

20

18

20

20

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52

Direct employment Indirect employment Induced employment



would require the BVI labour force to increase at 1.8% every year until 2020. This contrasts with the recent

decline, and is equivalent to 10% of population (based on 2012 figures)27

.

If this gap is to be filled, especially in the short term, it is likely to require more migrant workers. This wouldadd to the existing large share of foreign labour in the labour force which averaged 63% between 1999 and 2012.Additionally, if we look across all sectors, the hotel & restaurant sector had the second highest share of foreignlabour as a percentage of those employed in 2012 (see Figure 18). This suggests that foreign labour finds theBVI an attractive location to work. Looking forward, they key issue is whether the BVI will be able to attractsufficient labour to the islands to fill the gap expected going forward.

Figure 18: Foreign workers as % of total employed in sector (2012)


The influx of additional workers implied would place a strain on the BVI’s public services, particularly itsinfrastructure. To support the increase in population, investment in infrastructure is likely to be required. Thisitself will require funding but has not been considered as part of this analysis. Also, having a labour forcecomprised of a large number of foreign workers will likely lead to an increased amount of remittances to theirhome nations. Again, this might be expected to reduce the economic impact on the BVI but, in the absence ofrobust evidence, this has not been factored into the analysis.

Financial services – wider economic impactWe have also examined the potential economic impact of the development of EIS on the financial servicessector since it is expected to remove one of the key barriers to the development of the BVI’s financial servicessector and to enable faster diversification and growth of the BVI economy.

Again, this impact is measured in terms of GVA over the 35 year period of the development (2018-2053) andthe number of additional jobs enabled by the development.

Direct impact of the development of EIS on financial servicesCompared to our assessment of the impact on tourism, we have less evidence with which to assess the potentialimpact on the financial services sector. As we noted earlier, the BVI Government is seeking to accelerate therate of growth of the financial services sector and has identified several barriers that it will need to overcome.


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Agriculture, Hunting and ForestryFishing

Mining and QuarryingManufacturing

Electricity, Gas and WaterConstruction

Wholesale and Retail TradeHotel and Restaurants

Transport and CommuniationsFinancial Intermediation

Real Estate, Renting and Business ActivityGovernment Services

EducationHealth and Social Work

Other Community, Social and Personal ServicesPrivate Households with employed persons

Extra-territorial organizations and bodiesNot Stated



One of these is the development of better connections by air between the BVI and the rest of the world. Thedevelopment of the EIS has the potential to contribute to overcoming this barrier.

To illustrate the potential economic significance of this effect, we have estimated the impact on the GVA of thefinancial services sector if the development of the EIS enables it to grow 1% faster than it would otherwise beexpected to do. We assume that without the EIS the financial services sector would grow at its average rate ofgrowth over the preceding ten year period (1.3% per year).

Applying an annual discount rate of 3.5%, as per the guidance in HM Treasury’s Green Book, gives an estimatednet present value of the direct economic impact of the development of EIS on the financial services sector of$605m over the 35 years of the development if the growth premium is 1% per year.

Estimating the direct impact on employment in financial servicesTo estimate the employment associated with the additional value added, we have used information on GVA per

employee for financial intermediation from the BVI Central Statistics Office28

. The implied value in 2013 is$115,800. This value drives the estimated direct employment supported by the airport development. In order toestimate the direct employment impact we assume that all direct jobs would be as productive as the averageacross the financial intermediation sector. On this basis, the number of jobs directly created as a result of theairport development would be 43 in 2020 with a 1% growth premium. This increases to 825 in 2050.

These estimates also assume no growth in productivity from 2014 to 205329

. However, we would expectproductivity to increase over the time period and so we have included a sensitivity for a 1% annual increase inreal productivity. If this were to occur then the number of jobs created would fall to 570 in 2050 with a 1%growth premium.

Indirect and induced economic impacts of development of EIS onfinancial servicesThe second step is to estimate the indirect and induced impacts. The indirect impact results from the purchaseof goods and services from local suppliers to the financial services sector. The induced impact results from theincreased spending in the BVI by the workforce employed directly by the financial services sector and indirectlyby people employed in its supply chain.

As noted earlier, these impacts are often estimated using economic multipliers. In the case of the financialservices sector, we are not aware of any estimates of the relevant multipliers for the BVI.

We have, however, identified an earlier analysis of the economic contribution of the financial services sector inthe Cayman Islands. The Cayman Islands have enough economic similarities to the BVI to provide a plausiblebasis for illustrating the potential economic impacts. Table 10 summarises the implied multipliers in theCayman Islands for different parts of the financial (and business) services sector. Also shown is the averageGVA per person employed in each sector. The table highlights the important variations which exist in terms ofthe linkages between the sectors and shows how they relate to the average productivity of the sector. Those sub-sectors with the largest multipliers tend to be those with the lowest GVA per person employed and vice versa.

Table 10: Indirect and induced GVA multipliers in the Cayman Islands

Indirect Induced Total

GVA per capita(Financial

services = 100)

Banking 0.172 0.339 0.511 95.5

Insurance 0.105 0.292 0.397 151.9

Law 0.025 0.429 0.453 81.9





Indirect Induced Total

GVA per capita(Financial

services = 100)

Estate & trust 0.270 0.474 0.744 66.4

Fund administration 0.179 0.491 0.669 96.9

Accountancy 0.125 0.360 0.485 140.5

Support 0.172 0.342 0.514 97.6

Total 0.137 0.408 0.545

Source: PwC analysis based on ‘Economic Benefits of the Financial Services Industry in the Cayman Islands’, February 2009

We use the multipliers from the Cayman study for the whole of the financial services sector to illustrate thepotential scale of the indirect and induced impacts of the EIS. Table 11 summarises our estimates.

Table 11: Estimated indirect and induced economic impacts of the development of EIS on GVA on thefinancial services sector ($m, 2018-2053, NPV)

Economic impact 1% growth premium

Indirect GVA $83m

Induced GVA $247m


Availability of labourThe impact of the development of the EIS on the financial services sector has the potential to add to increasethe demand for labour by 43 jobs by 2020 and by 825 by 2050. This will add to the pressure on labour supplydiscussed in the context of the effect on the tourism sector. Significantly, at least some of the skills required bythe financial services sector are likely to be different to those needed in the tourism sector. Nonetheless,consideration needs to be given to the possibility that a lack of labour supply could constrain the widereconomic impact.

Overall impact results

GVA impactIn the final section of our report, we bring together the results from our assessment of the wider economicimpact of the airport development at EIS. We separate out the expected direct, indirect and induced impactsand present the total impact in terms of GVA over the lifetime expressed as the net present value (i.e. afterapplying the discount rate). We consider the impacts on the tourism and financial services sectors separately.

As shown in Table 12, the total net wider impact of the airport development over the lifetime of the project isequivalent to $3,615m. The largest component of this impact is the direct effect, although both indirect andinduced effects are significant.

Table 12: Expected wider economic impact of EIS development (NPV of GVA, $m)

Economic impact Tourism sector Financial servicessector

Total

Direct GVA $1,473m $605m $2,478m

Indirect GVA $972m $83m $1,055m

Induced GVA $236m $247m $483m

Total GVA $2,680m $935m $3,615m




Employment impactSimilarly, Table 13 separates out the expected direct, indirect and induced employment impacts of the airportdevelopment in 2020, the year in which short run capacity is reached.

Total additional employment in 2020 is estimated to be 2,894, of which nearly 1,800 related to the directeconomic impact on the tourism and financial services industries. This projected impact increases to 6,644 by2050.

Table 13: Expected employment impact of EIS development (2020 and 2050)

Economicimpact

2020 2050

Tourismsector

Financialservicessector

Total Tourismsector

Financialservicessector

Total

Direct 1,740 43 1,783 3,187 824 4,011

Indirect 856 12 868 1,567 174 1,741

Induced 207 36 243 380 512 892

Total 2,803 91 2,894 5,134 1,510 6,644




Sensitivity analysis of economicimpacts of EIS

The final section of this report analyses the sensitivity of our results to the key assumptions that underpin themseparately for the tourism and financial services sectors.

TourismTable 14 summarizes the seven key sensitivities that have been tested. It shows the assumptions that have beenused in the base case, the sensitivities that have been tested and the reasons why the sensitivities were felt to beappropriate.

Table 14: Summary of key sensitivities - tourism

Sensitivity Base caseassumption

Sensitivitytested

Reason for sensitivity analysis

‘Without

development’ –rate of growth ofair passengers

-3.3% -7.85% to

+0.0%

Our base case assumes that the number of passengers will

continue to decline from its current (i.e. 2013) level at thesame rate as it has changed in the period 2000 to 2013(3.3% per year). As a sensitivity, we consider the effect of a

faster rate of decline (7.85% per year, the rate of changeexperienced over the period since the onset of the globalfinancial crisis i.e. 2008 to 2013). Such an assumption isconsistent with a view that the BVI’s passenger numbers areat risk due to increasing competition for passengers in the

region. We also consider the implications if the number ofair passengers remains unchanged at the level in 2013.

Share of grossactivity changed

which is displaced

50% 25-75% As highlighted above, a substantial share of visitors to theBVI currently arrive by boat. There is a risk that increased

arrivals by air would displace some of this activity for tworeasons: passengers may switch between modes of transportas their relative convenience and cost changes or they may

be ‘crowded out’ by lack of accommodation in the BVI.In the base case, we assume that half of the additionalactivity is displacement of other demand. As a sensitivity, wehave allowed this to vary from 25-75%.

Share of airpassengers which

are inbound

90% 80-100% Historically, the majority of passengers have been inbound:over the period 2006 to 2013, over 80% of air passengers at

EIS were inbound. We assume that this will continue withthe additional passengers: our base case assumption is that90% of additional passengers are inbound.

To test the sensitivity of our results to this assumption, weallow it to vary between 80 and 100%.

Spending pernight perpassenger(relative tocurrent levels)

100% 75-125% We assume that the additional overnight passengersattracted to the BVI by the airport development will spend atthe same level as current passengers. It could be argued thatthis could change: reduced costs of travel may allow formore “low-cost” tourism. It may also allow more, shorter

trips. On the other hand, the expanded routes may allow fora greater reach to more long-haul and/or wealthier

passengers.To test this assumption, therefore, we have allowedspending per night to vary between 75 and 125% of current




Sensitivitytested


levels. This assumption is also equivalent to adjusting thenumber of nights which each passenger may stay.

Indirect andinducedmultipliers

0.82 (0.66 and0.16respectively)

0.67 – 0.97 The base case draws on multipliers estimated from WTTCdata. They suggest that the total impact is nearly two timesthe direct impact.We test the sensitivity of our results to the multipliers. This

is relevant because there are reasons for believing that thescale of growth anticipated as a result of the development ofthe EIS could change some of the structural relationships in

the BVI economy. For example, as the pressure on capacitygrows, it is possible that a greater share of the value addedwill flow from the BVI economy (as more goods and servicesare imported or more foreign labour is recruited).We test the effect of adjusting the combined indirect and

induced multiplier to between 0.67 and 0.97.

Lifetime of

development

35 years 20-50 years Our base case captures the impact of the EIS development

over a 35 year period from the completion of construction in2018. As a sensitivity, we allow this period to vary from 20

to 50 years (i.e. running the analysis to 2038 and 2068respectively).

Discount rate 3.5% 2.5-4.5% In line with the HM Treasury’s Green Book, we discount thefuture value generated at an annual rate of 3.5%. To test theimpact of this assumption we allow the discount rate to varybetween 2.5 and 4.5%.


Figure 19 summarises the results of these sensitivity tests relative to the baseline NPV estimate of $2,680m.

The greatest range in the estimated NPV occurs as a result of the displacement assumption. This causes theNPV to vary from $1,349m to $4,021m over the appraisal period. It reflects how far the visitors arriving throughthe airport after the development represent a net increase in the level of tourism which is a key driver of thescale of economic impact. We have tested a broad range of options for this assumption because of the lack ofdata or evidence to suggest what the most appropriate value might be.

Figure 19: Summary of sensitivity analysis


$0m $1,000m $2,000m $3,000m $4,000m $5,000m

Without development' growthrate

Displacement

Inbound passengers

Spending per night

Indirect/ induced multiplier

End date of study

Discount rate



Aside from the level of displacement, the largest ranges arise from the assumptions on the appraisal period andthe level of visitor spending per night. Both provide a range of over $1,000m around the baseline estimate. Thesmallest effects are seen in the multiplier and inbound passenger share assumptions. In the case of themultiplier, this reinforces the earlier conclusion that the majority of the impact occurs through the direct effect.Similarly, even in the low sensitivity, most passengers are inbound due to the nature of the BVI economy, andtherefore this has little effect on the economic impact.

Financial servicesWe have also examined the sensitivity of our illustrative analysis of the potential impact of the development ofthe EIS on the GVA of the financial services sector to the assumed boost to growth it would provide.

Table 15 summarizes the key sensitivities that have been tested. It shows the assumptions that have been usedin the base case, the sensitivities that have been tested and the reasons why the sensitivities were felt to beappropriate. It also shows the results of the sensitivities.

Table 15: Summary of key sensitivities – financial services


Sensitivitytested

Sensitivityresult(Base vase -$935m)


Boost to growthof financial

services sectorgrowth

1.0% 0.5% $442m Our central assumption is that development of theEIS would boost the rate of growth by 1%: as a

sensitivity, we estimate the impact if the effect isonly 0.5%.

Underlyinggrowth of

financial servicessector

1.3% 0% $666m We assume that, without the development of EIS,the financial services sector would grow at its

average rate of growth over the preceding ten yearperiod (1.3% per year). As a sensitivity, we test theimplications if the underlying growth was zero.

Indirect and

inducedmultipliers

0.55 0.94 $1,055m The base case draws on multipliers estimated for

the financial services sector as a whole in theCayman Islands. They suggest that the total impactis nearly one and a half times the direct impact.We test the sensitivity of our results if the activitiesenabled by the development of the EIS are estate &trust where the combined indirect and induced

multiplier is larger at 0.94.

Lifetime ofdevelopment

35 years 20-50 years $382m -$1,586

Our base case captures the impact of the EISdevelopment over a 35 year period from thecompletion of construction in 2018. As a

sensitivity, we allow this period to vary from 20 to50 years (i.e. running the analysis to 2038 and2068 respectively).

Discount rate 3.5% 2.5-4.5% $709m -

$1,240m

In line with the HM Treasury’s Green Book, we

discount the future value generated at an annualrate of 3.5%. To test the impact of this assumption

we allow the discount rate to vary between 2.5 and4.5%.


Conclusions

This section summarises the key conclusions emerging from our analysis. It considers the tourism and financialservices sectors in turn:

Tourism Applying the assumptions listed in Table 2, we estimate that the net present value of the direct impact of

the airport development will be $1,473m over the length of the development (2018-53). This estimaterelates only to the wider economic impact generated through increased international passenger arrivals.This is more than 6% of the current GDP of the BVI.

Based on the level of additional value generated, we estimate that the direct impact of the airportdevelopment could support in excess of 1,740 additional jobs in 2020 and 3,345 by 2050. Theseestimates are based on the employee productivity assumption set out in Table 4, and assuming a greaterrate of productivity growth is shown to lower the predicted number of jobs created.

The magnitude of this increase in economic output (GVA) suggests that a substantial change in theisland’s infrastructure would be required to accommodate the additional visitors associated with thehigher passenger flows. We have focused our analysis on the requirements for additional hotelinfrastructure. We estimate that an additional 940-1,130 rooms will be required by 2020 in order torealise this benefit. Without this additional hotel infrastructure, we would expect the economic impact tobe significantly lower.

We estimate that the total economic impact of the airport from 2018-53 will be $2,680m. This includesthe indirect and induced impacts (those relating to supply chain and employee spending respectively).These impacts are estimated using multipliers derived from WTTC data, and sense-checked againstprevious studies in the region. Including indirect and induced impacts increases the estimate ofadditional jobs supported to 2,800 in 2020 and over 5,130 in 2053.

In order to fill the estimated number of additional jobs would require an increase in the population of10% by 2020, relative to 2013 levels. To achieve this, the labour force would need to increase by 1.8%each year until 2020. This would require a reversal of the recent downward trend in population. Theestimate of total impact assumes that there will be sufficient working-age population; were there to beinsufficient labour supply it is again likely that the additional impact generated would be reduced.

We have run a number of sensitivities on the assumptions used to generate the baseline estimates ofeconomic impact. These demonstrate the range of factors which could vary, and cause the actual impactto move materially from our estimate. The sensitivity analysis demonstrates that the estimate of impact ismost sensitive to the displacement assumption, which caused the NPV to fall between $1,200m and$3,700m, based on a displacement assumption of 25-75%. Other assumptions shown to generate themost significant ranges were those on the appraisal period, the ‘Do Nothing’ growth rate and the level ofvisitor spending.

Financial services The development of the EIS also has the potential to enable the BVI to accelerate the rate of growth of its

financial services sector although we have less evidence available with which to assess the scale of thisimpact. As an illustration, however, we estimate that if the development of the EIS were to boost the rateof growth of the sector by 1% per annum over its rate of growth over the period from 2018 to 2053, thenthis would lead to GVA being $935m higher.

This publication has been prepared for the British Virgin Islands Government solely for the purpose and on the termsagreed with British Virgin Islands Government. We accept no liability (including for negligence) to anyone else inconnection with this note, and it may not be provided to anyone else without our prior written consent.

© 2015 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers toPricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers International Limited, eachmember firm of which is a separate legal entity.

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