Ecotourism: What does IFC Look For?

What is IFC’s involvement in the tourism sector?

• Since 1967, IFC has approved over $1.5 billion of investments in more than 180 tourism projects in over 70 countries.
• As of June 2002, IFC held $461 million in the tourism sector, with the highest number of investments in Africa.

What is IFC’s involvement in the ecotourism sector?

IFC has supported two types of ecotourism projects:

1.  Ecotourism companies that directly support conservation efforts

• Examples: Asian Conservation Foundation (Philippines): Eg-Uur Watershed (Mongolia); Boundary Hill (Tanzania); Save Valley (Zimbabwe); Pico Bonito (Honduras); El Boqueron Ecolodge (Guatemala)

2.  Ecotourism projects that help manage and fund protected areas via private concessions

• Komodo National Park (Indonesia); Inka Terra (Peru); Vilanculos Wildlife Sanctuary (Mozambique)

IFC Supports ecotourism projects with loans, equity and grants, as appropriate

What does IFC look for in ecotourism projects?

Ecotourism projects must meet triple bottom line:

• Environmental sustainability
  -- Mitigate environmental impacts + conserve biodiversity
• Social sustainability
  -- Mitigate social impacts + provide sustainable livelihoods
• Commercial sustainability
  -- Ideally, projects should be commercially viable as measured by financial return
  At minimum, projects must be self-financing to cover recurring costs

What is needed for ecotourism projects to be commercially sustainable?

• Sufficient market demand
• Good management
• Controlled costs

Sufficient Market Demand

• Demand forecasts should be conservative. Must take into account:
• Seasonality?
• Transportation access?
• Political and economic stability?
• Competition- Barriers to entry? Risk of oversupply?
• Match between market and facility/site and operator?
• Willingness to pay?
• Is government support required? (If so, that’s a risk)
• How will you get people to come?
• Don’t assume that “if we build it, people will come.”
• Good projects have strong marketing linkages (i.e., relationships with travel agents, tour operators, etc.)

Good Management

• IFC avoids ecotourism projects managed by environmentalists who don’t understand business
• IFC looks for sponsors with a good track record of successfully managing tourism operations
  -- Inexperienced players may want to consider forming a joint venture with an experienced partner
• Ecotourism projects are most likely to succeed when the company owns multiple facilities in different locations – and can therefore diversify frontier market risk

Controlled Costs

• Don’t build a facility and then figure out how much you’ll need to charge to recoup your investment.
• Instead, work backwards: How much can you realistically expect to earn? That’ll dictate how much you should spend on construction and operations.
• Need to stress- test your financial projections using conservative occupancy rates, room rates and costs overruns
• Good managers pay close attention to operating costs during implementation.
  Operating costs are affected by capital structure:
• It’s important to have adequate equity (D/E ratio of at least 50/50 is the norm)
• Debt should have longer grace periods and payback terms

Take-away Points:

• Good ecotourism projects are based on rigorous analysis, not hopeful assumptions
• A good business plan is necessary which contains:
• Realistic market assessment;
• Viable marketing plan;
• Realistic revenue forecasts considering full range of risks;
• Realistic, manageable construction and operating costs
• Capable managers; and
• Appropriate capital structure.