KI Traveller's Levy Economic Impact Assessment - Kangaroo Island ...

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Commercial-in-Confidence KI Traveller’s Levy Impact Assessment EXECUTIVE SUMMARY Access Economics was engaged by the Kangaroo Island (KI) Council to undertake a study of the likely economic impacts of a levy on travellers to Kangaroo Island (a ‘Traveller’s Levy’). The aim of the study was to explore whether the KI circumstances justify the introduction of a Traveller’s Levy and to analyse what impacts such a levy would likely have on the local tourism industry, as well as residents, visitors and the broader economy. In addition, the study was tasked with canvassing options for design and administration and identifying practical impediments to the introduction and collection of such a levy. Context and background The financial position of KI Council necessitates it securing alternative sources of revenue and the KI circumstances warrant the introduction of a charge such as a Traveller’s Levy as one option for achieving this. The combined impacts of a small rate-payer base and higher than average per-capita service-delivery costs, together with significant levels of tourism activity – a key contributor to these service-delivery costs – provide a rationale for a userpays motivated levy on tourists. Assessing the impacts of a levy The impacts of a Traveller’s Levy on the KI economy will be determined, among other things, by its effects on tourism visitation and expenditure, which in turn are a function of the responsiveness of visitation to changes in price. Demand for visitation to KI is likely to be less sensitive to price (and hence a levy) than tourism on average due to the relatively unique nature of the KI tourism experience (i.e. the limited number of substitutes) and high level of visitation by international visitors. Raising Council’s revenue target of $1.8 million annually is estimated to require a per-visitor levy of between $8 and $11, depending on its specifications. Considering purely the price effects of a levy of this magnitude and taking no account of the impacts of any associated improvement in tourism infrastructure, the reduction in visitation to KI – and by extension tourism expenditure on the Island – is estimated to be relatively modest at between 2 and 3%. The analysis suggests this finding can be readily scaled to revenue targets of other magnitudes within a reasonable range. Five alternative levy options have been modelled (Table A, below). TABLE A: SUMMARY OF MODELLING RESULTS, $1.8 MILLION REVENUE TARGET; 2011 Levy specifications Levy rate Reduction in visitation Reduction in tourism expenditure Per-visitor levy All travellers $ 8.55 4,260 $1.87m All travellers excluding children $ 9.41 4,550 $1.84m All travellers excluding residents $10.23 5,530 $2.06m All travellers excluding res.& children $11.34 5,480 $2.03m Per-night levy $ 2.99 5,110 $2.42m 1

Commercial-in-Confidence KI Traveller’s Levy Impact Assessment The loss of visitation under the options is estimated to vary from around 4,000 to 5,500 in 2011, with the exclusion of residents placing a greater share of the burden on visitors and hence resulting in a greater impact on tourist numbers. Foregone tourism expenditure is estimated at between $1.84 and $2.42 million. Compared with a per-visitor levy, a per-night levy shifts the burden away from day visitors and onto the relatively high-yield domestic overnight and international segments of the market. Accordingly, though the net impact on visitor numbers is smaller, the impact on total expenditure is greater. In addition, though the impacts are unlikely to be great, a per-night levy would also serve as a marginal disincentive to longer stays. However, these results do not take into account the likelihood of a continued deterioration in the condition of tourism infrastructure in absence of a levy potentially reducing tourism visitation over time. Or, moreover, that improved or better-maintained infrastructure may in fact buoy tourism demand for KI – a response which would appear not unlikely given current perceptions toward the quality of road infrastructure. Indeed, the improvement in quality generated by the levy revenue could be expected to at least partially offset, and potentially entirely outweigh, the price effects of a levy. Design and administration Though the most efficient levy design would involve exclusion of residents and a differential levy based on traveller characteristics and length of stay, the logistics of collection and the need to ensure the costs of compliance and administration are not overly onerous, suggest a flat per-passenger charge, with a potential reimbursement facility for local residents travelling by air. Given SeaLink currently offer residents a concessional fare, it would be feasible within the existing pricing structure to exclude residents travelling by ferry. If it could be achieved cost-effectively, equity considerations would also warrant excluding children. While a direct charge would provide Council with greatest control over the specifications of a levy, it is not clear that the Council (through state government legislation) would have the capacity to regulate such a levy. In light of this, the most feasible mechanism for introducing a levy would likely be through an increase in wharfage and landing fees, though in this case, some control over the specifics of the levy would be foregone. Irrespective, introduction of a Traveller’s Levy would likely face a number of practical and legal impediments, including strong resistance from key operators within the industry. Conclusions Ultimately, the net impacts of a Traveller’s Levy on Kangaroo Island would depend on the how the levy revenue was expended. Though the revenue collected is estimated to be at least broadly equivalent to the foregone tourism income – and when the impacts of improved tourism infrastructure are considered may in fact considerably outweigh it – the benefits of a levy are not in the revenue itself, but rather in the value of the services this generates. Provided the additional funds are allocated efficiently, improving amenity for residents and enhancing the tourism experience for visitors, a Traveller’s Levy is likely to generate net benefits for the KI community. Access Economics July 2009 2

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