Recreation demand and pricing policy for international tourists in developing countries: evidence from South Africa

ABSTRACT

National park agencies in Africa often lack incentives to maximize revenue, despite the decline in conservation subsidies from the State. We explore the potential of pricing policy to generate funds for extensive conservation. We estimate recreation demand by international tourists for a popular South African park, calculate the consumer surplus and find the revenue-maximizing entrance fee. Our results suggest substantial underpricing and therefore significant forgone income. By charging low fees at popular parks despite increasing conservation mandates and declining conservation subsidies, national parks in developing countries are forgoing substantial revenue crucial for combating widespread biodiversity losses.

KEYWORDS:

• Entrance fee
• benefit sharing
• non-market valuation
• optimal pricing
• recreation demand

JEL CODES:

• C24
• Q26
• Z30

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Correction

Acknowledgements

We would like to thank Peter Berck, Gardner Brown, Jr., David F. Layton, Thomas Sterner, Inge van den Bijgaart and an anonymous referee, as well as participants at the Fourth Workshop on Non-Market Valuation in Bordeaux and the 22nd Annual European Association of Environmental and Resource Economists Conference for helpful comments and suggestions. The paper also benefited from numerous discussions with Martin Chegere, Johane Dikgang, Josephine Gatua, Richard Mulwa and Tewodros Tesemma. We thank Gerald Kibira, Stephen Kirama, Amanda Musandiwa, Realeboga Ngwanaeng and Nomsa Nkosi for assistance with the fieldwork. We are grateful to Joep Stevens of SANParks (South African National Parks) for assistance with data. An earlier version of this paper appears as ERSA Working Paper No. 743.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Sustainable conservation requires an adequate outlay of funds to share with local communities—some of which have formally reclaimed ownership of portions of protected areas, while agreeing to maintain conservation as the primary land use (e.g. contract parks, as discussed in Dikgang and Muchapondwa (2017b) and Reid et al. (2004)).

2 The South African National Parks agency uses two entrance fees – a usage fee and a conservation fee. The conservation fee varies for local, regional and international tourists. Regional tourists are classified as those coming from the 15 Southern African Development Community countries. In terms of entrance fees, they pay twice the R70 tariff levied on local residents as of July 2014 (US$1 = South African Rand (R) 10.66 at the time the survey was conducted in July 2014), while all other nationalities pay an entrance fee that is four times that charged to local residents. However, regional tourists constituted only 1.8% of tourists to the park in 2014. The use of the term entrance fee in the current paper refers to the conservation fee.

3 The term international tourists in this paper refers to overseas or intercontinental tourists.

4 The importance of appropriate user fees to support conservation is widely recognized in the literature (see Emerton, Bishop, and Thomas 2006; Inamdar et al. 1999; Spenceley, Rylance, and Laiser 2017; Whitelaw, King, and Tolkach 2014). A number of past studies, for example, Alpízar (2006), Chase et al. (1998), Dikgang and Muchapondwa (2017a) and Dikgang, Muchapondwa, and Stage (2017) have therefore tried to estimate appropriate user fees.

5 Despite the small size of the international tourist market relative to the domestic market, the international market is important, given its relative maturity, and it accounts for a disproportionate share of total revenue (Dikgang and Muchapondwa 2017a).

6 See https://en.unesco.org/biosphere/africa/kruger-to-canyon

7 While rhinoceros poaching has been a growing challenge for over a decade, a resurgence in elephant poaching has exacerbated the problem. Organized poachers often exploit the alienation of local communities who fail to access full conservation benefits. Poaching may therefore be disrupted by creating opportunities for local communities through more equitable benefit-sharing initiatives (SANParks 2016).

8 The ITCM is based on information regarding the individual visitor, and therefore derives the Marshallian consumer surplus for the individual visitor.

9 Equation (1)(1) $d_i=f\left(t{c}_i,{\mathit{x}}_i,{ϵ}_i\right)$(1) is derived from a utility-maximization problem in which individuals choose the total number of days at a recreation site. According to Larson and Shaikh (2004), the recreation choice is assumed to be made conditional on an individual’s labor-supply decision. Recreation demand then arises from the allocation of earnings from the labor market across a range of consumption activities.

10 An important objective of the current paper is to derive a revenue-maximizing daily entrance fee for KNP to finance conservation and benefit-sharing with local communities. Since a daily entrance fee is standard practice in many African parks, the current formulation of the ITCM allows us to easily compute the revenue-maximizing daily entrance fee. A related aspect is that domestic tourists usually make repeat trips more frequently. Due to the distance involved in international tourism, the majority of tourists might only visit the site once within a period of, for example, five years. For a park manager studying recreation demand for the purposes of setting an appropriate entrance fee, repeat trips by international tourists within an economically meaningful time horizon are unlikely. In this case, an analysis based on recreation days is more informative for computing a revenue-maximizing daily entrance fee.

11 In recreation studies, it is crucial to note that time can be as important as monetary costs in the decision to engage in recreational activities (Feather and Shaw 1999). According to Cesario (1976), opportunity cost reflects the value placed on alternative uses of leisure time; therefore, it is appropriate to value travel time at only a fraction of the going wage rate.

12 While it can be argued that the last part of the trip from Johannesburg to KNP may yield some positive utility, we follow Fix and Loomis (1998) by assuming consumptive benefits from this part of the trip are zero on average; otherwise, the estimated benefits would be amplified. One must also consider that for international tourists, this last part of the journey to KNP is completed after a long intercontinental flight. Therefore, while most visitors are likely to engage in a few other activities on their way to KNP, we argue that these other activities are incidental.

13 While it is ideal to sample visitors when they depart the recreational site (Mendes and Proença 2011; Parsons 2003), this was not practical in this case because the majority of international visitors were on tours, leaving little time to interview them when they were leaving the park.

14 While the sampling of international visitors was random, those who stayed longer had a greater chance of being sampled.

15 Unless otherwise indicated, all ‘$’ amounts are in United States Dollars. US$1 = South African Rand (R) 10.66 at the time the survey was conducted in July 2014.

16 The upfront cost can be treated as a kind of long-run capital cost. In the case of international tourists traveling long distances, it might be expected, as in Smith and Kopp (1980), that the length of the trip and travel cost will be positively related. However, this contradicts the traditional ITCM, which hypothesizes an inverse relationship between travel cost and participation in recreation.

17 This way of classifying the costs associated with participating in recreation goes back to Pearse (1968), who viewed recreation costs as composed of a fixed component and a variable component, which varies with respect to the number of days at the recreation site. There is also a transaction cost, associated with making a decision on which recreation site to visit. However, we ignore such costs, as they are most likely to be negligible, and also hard to quantify.

18 We note that trying to retrieve the KNP portion of the recreation cost through scaling RCT by γ_KNP can result in very low values for the first RHS term, in cases where a respondent reports a low value of subjective utility for the park. An alternative would be to consider scaling RCT by the fraction of days at KNP. However, many respondents who visit KNP plan the trip as part of an extended tour that usually includes other countries in southern Africa, as well as other sites within South Africa. The trip would therefore most often tend to be much longer than usual, resulting in very low values of travel cost. Another weakness is that the travel cost allocated this way assumes that a day in KNP is the same as a day at any other site, since all days are assigned similar weights.

19 There are also park-imposed constraints on movement outside the designated campsites between 6pm and 6am. However, tourists staying within the park can undertake tourist activities during these times by making use of the exclusive SANParks guided tours offered.

20 While an increase in income might have an indeterminate effect on demand for recreation as it also has the effect of increasing the opportunity cost of leisure, we expect its effect on the number of recreation days spent at a site to be positive at the margin because of the huge sunk cost associated with the trip that the visitor has already undertaken.

21 This variable captures a number of site-specific characteristics, such as wildlife diversity, tourism infrastructure, accessibility, and price. For the purposes of the analysis of this variable and also the variable wildlife interest, we combine the first five categories into a single category as they have fewer observations in them.

22 If we restrict the analysis to only the countries in our sample in 2014 (they provide 86% of total international tourists to KNP), the annual recreational value for international visitors is $460 million and ranges from $354–$658 million (or $492 million, ranging from $382–$689 million when travel time is valued at 3/4).

23 For comparison purposes, it is important to note that the consumer surplus estimate presented by Hatfield and Malleret-King (2007) is for a one-hour activity tracking Mountain Gorillas.

24 For example, a change in the entrance fee at KNP might induce substitution effects among other local or even regional parks, unless the park offers a unique tourist experience.

25 See Laarman and Gregersen (1996) for an overview of pricing policies in nature-based tourism.

26 The corresponding recreation days per tourist $d^{\ast }=1.2$ (1.4 with time valued at 3/4 of the wage rate) with $\hat{\rho }=1.19$ (and 1.32 with time valued at 3/4 of the wage rate) using the data in Table 1 and parameter values in columns II and IV of Table 2.

Additional information

Funding

This work was supported by Economic Research Southern Africa (ERSA); and the Swedish International Development Cooperation Agency (Sida) through the Environment for Development Initiative (EfD).