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Investment Proposal: Lviv Conference Center

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Building Capacity in Evidence-Based Economic Development in Ukrainian Oblasts and Municipalities Project (EBED Project, www.ebed.org.ua) is implemented by The Conference Board of Canada (www.conferenceboard.ca) and undertaken with the financial support of the Government of Canada.

The EBED Project aims to facilitate sustainable economic development of Ukrainian oblasts and municipalities through building capacity of local authorities in social and economic development planning of the territories using quantitative analysis and forecasting tools.

The views and opinions expressed herein are the responsibility of the authors and do not necessarily state or reflect those of the Government of Canada.

Authors:• Іgor Shevliakov, Ukrainian Institute for Public Policy• Ildar Gazizullin, Ukrainian Institute for Public Policy• Hanna Cherednychenko, Ukrainian Institute for Public Policy• Hanna Murina, Ukrainian Institute for Public Policy

Based on the Lviv MICE Destination Marketing study conducted by Oksana Bayuk, Strategy and Marketing Consultant, Quantum Leap Equity Holding GmbH

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INVESTMENT OUTLINE

Contact information

Financial profile

USD m Y-1 Y-2 Y-3 Y-4 Y-5 Y-6 Y-7Revenue 9.6 13.8 16.6 17.9 19.1 20.3 21.4

Opex -12.3 -13.2 -13.8 -14.3 -14.7 -15.1 -15.5

EBITDA -2.7 0.7 2.8 3.7 4.5 5.2 5.9

EBITDA margin -29% 5% 17% 20% 23% 26% 27%

One time startup cost 80.0

Construction period 18 months

NPV @ 10% -18.1

IRR 5.2%

Payback period >15 years

Lviv has been remarkably successful in developing its tourist industry. This success is partly due to the city’s established image as a gateway to Ukraine and also its outstanding multicultural heritage. Future growth in this industry will require additional investment in infrastructure, especially in new facilities for business travelers, the MICE1 segment.

Lviv Conference Center (LCC) is an investment project with high social significance. The project involves the construction of a conference facility with a capacity of up to 3,500 attendees. It is designed to generate sizable economic and social benefits to a diverse range of stakeholders, starting with local SMEs and extending to the broader beneficiaries of Ukraine’s increasing integration into the international community.

The LCC project is aimed at creating “public good” infrastructure that will bring extra revenue (est. USD 70m yearly) and employment (up to 3,000 full-time equivalent (FTE) jobs) to the region. It will also have a substantial positive impact on the local tourism industry by popularizing Lviv in business circles and attracting high-value visitors. The project offers a unique opportunity to invest in a high-profile business that, in combination with grant funding, will generate an attractive return on investment (ROI).

Lina OstapchukLviv Convention Bureau1 Rynok Square79006 Lviv, Ukraine (+380 32) 254-60-30 (+380 32) 254-60-99 info@lvivconvention.com.ua www.lvivconvention.com.ua

1 The term “MICE” was established in 1993 to define the group business tourism segment and is an abbreviation for Meetings, Incentives, Conventions, Exhibitions

Danylo Halytskyi International Airport Lviv• 39,000 sq m new terminal area• 9 departure gates• 2,000 passengers per hour• meets high industry standards and

recommendations2

The railway station• serves over 130 domestic and

international connections• links EU, CIS and domestic cities• handles over 1.2m passengers and

16,000 t of freight per month

Lviv hotel revenues, UAH m

Lviv needs a new state-of-the-art, high-capacity conference facility

2 The new terminal was built for the Euro 2012 football championship in line with international architectural, building and technical standards, ICAO requirements (International Civil Aviation Organization), and IATA recommendations (International Air Transport Association).

PROJECT LOCATION

Lviv is a beautiful city in the westernmost part of Ukraine, with a rich multicultural heritage and developing economy that focuses on the service markets. It has an advantageous location close to the European geographical center and midway between Warsaw and Kyiv. These inherent plusses assure Lviv’s transformation into the cultural, scientific and business center of the CEE region.

In the last two decades, Lviv has successfully developed leisure tourism with 60% of visitors being international. Tourism has become an important source of revenue for local business and the municipal budget, providing permanent employment to 20,000 locals.

Unique travel opportunities for fun and adventure placed Lviv among the Top 10 world cities to visit in 2014, according to “The Rough Guide,” and among the Top 10 cities for weekend getaways in Europe, according to Lonely Planet.

Lviv was a host city for EURO 2012, which significantly raised the city’s profile around the world. In addition, it brought Lviv major investments to upgrade infrastructure, such as a new airport terminal, highway repairs, a new stadium called Arena Lviv, and more.

Lviv’s advantage for a successful tourist industry includes a positive image, known as very safe, attractive prices, strong hospitality traditions, extensive restaurant and hotel networks, interesting historical sites, and diverse entertainment options. Weak areas include insufficient general and specialized tourism infrastructure, a shortage of flights, and relatively expensive air tickets. These weaknesses can be resolved in the medium term as Lviv’s positive results as a tourist destination grow.

Recently, Lviv has been gaining ground as a business destination through effective promotion and drawing more and more corporate, trade and other commercial events. Group business tourism has been identified as the core source of future growth to sustain the double-digit pace of the hospitality industry. Lviv has plenty of capacity to accommodate small and medium sized conferences, exhibitions, corporate events and other business activities. But it still has no specialized top-rated large-scale facilities to host such conferences. Growing demand for such facilities is partly being satisfied by hotels with capacity below 250, as only a handful of Lviv hotels can handle conference-style events for up to 400. Local universities could also serve as a base for conferences, although there is little support among university administrations and most premises are poorly equipped. Currently, market demand for large quality events is being redirected to other locations, such as the town of Truskavets, a famous resort 100 km south of Lviv, which can handle up to 600. In order for Lviv’s MICE industry to grow more quickly and for large non-sporting events to be hosted there, the city needs a new state-of-the-art, high-capacity conference facility.

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120

2002

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2009

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2011

2012

16% GAGR 2002-’12

Geographical positionWestern Ukraine, just 70 km from the EU border

Population 757,500, 7th largest city in Ukraine

Area182.0 sq km

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3

330km

530km

860km

920km

790km

570km

1800km

2000km

1,800,000 tourists visited Lviv in 2013

1998 UNESCO starts protecting the city centre

50% architectural sigts of Ukraine

50+ universities, academies, institutes and colleges

1256 first mention of the city founded by King Danylo

65 m high City Hall with a viewing platform open to everyone

MICE tourism accounts for• 54% of global tourist industry turnover• 74% of business tourism turnover

International conferences market size, 2011 (ICCA)• 10,500 conferences• 6 million participants• USD 13.7bn in turnover

Ukraine is now a new growth opportunity for the MICE industry

Developing countries are fueling MICE growth CEE country comparison

3 ICCA criteria for International conferences are: (i) organized on a regular basis, (ii) at least 3 countries of destination, (iii) at least 50 conference participants. The most popular types of international conferences are meetings of associations and corporate events.

4 International Congress and Convention Association, established in 1972.

Source: ICCA4

Source: ICCA

REVIEW OF THE POTENTIAL MARKET

MICE tourism has been the key growth driver in the hospitality industry over the last 30 years. International conferences3 are the most popular types of MICE activities and comprise about 73% of total MICE turnover.

The distinctive features of MICE events include:• high-value tourists who generate significant direct and indirect

revenue to the local economy;• low seasonality;• unique opportunities for the exchange of knowledge and

expertise;• environmentally-friendly business activities.

The MICE segment in Lviv and other Ukrainian cities is very underdeveloped.

Demand for MICE services is powered by economic growth, increasing cooperation among business entities and integration within industries and countries. Today, Ukraine is only at the beginning of these positive changes.

Ukraine’s integration into the international economy and specifically with the EU requires space for dialog and large-scale communication. Given the size and growth potential of the Ukrainian economy and society, the intensity of conferences is likely to reach levels of Eastern European countries over time. Acute demand is expected for medium (250-500 attendees) and large (501-2,000) conferences.

Ukraine currently represents a unique growth opportunity, being only at the very beginning of MICE tourism development and likely to follow the CEE pattern. In recent decades, there was a well-defined relocation trend of MICE activities from western Europe to the CEE region, mainly due to novelty and price advantage. Poland has been the leader in the MICE industry among CEE countries. It is expected that Ukraine will be the next destination for this relocation trend.

The key feature that determines demand for MICE services is the City Destination Image. CDI is defined by a set of indicators based on demand preferences (factor importance) and supply features (factor evaluation for the city).

Conferences

2000

Growth

%

CAGR

%

Asia&Middle East 734 136 9.0

North America 754 32 2.8

Latin America 379 141 9.2

Australia 226 20 1.8

Africa 129 119 8.2

Western Europe 2,602 61 4.9

Eastern Europe 277 162 10.1

Conferences Growth

%

CAGR

%2000 2011

Poland 67 165 146 8.5

Hungary 70 125 79 5.4

Czech Rep. 25 122 388 15.5

Croatia 17 72 324 14.0

Ukraine 1 16 1,500 28.7

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Lviv enjoys a positive destination image that can be reinforced in the mid-term with additional investments

Lviv has well developed basic tourism infrastructure and diverse options for small and mid-sized group tourism...

… but lacks high-profile, high-capacity conference facilities

Lviv could become a CEE leader in MICE services wit further investments in infrastructure

5 The Lviv MICE Destination Marketing survey was undertaken in 2012 by the Euro MBA program to discover opinions of conference attendees in Lviv. Most of the respondents regularly attended international conferences in Ukraine and abroad.

Survey results show that Lviv has strong, unique embedded MICE advantages in its positive image, safety, hospitality, restaurant service and multicultural heritage. At the same time, all the important factors with poor evaluations can be corrected in the medium term. The LCC project is designed precisely to raise the level of conference facilities, their size and comfort levels. Other critical medium-term improvements are also needed: • better public transport infrastructure,• more air travel options by attracting low-cost operators,• better, newer conference equipment at existing venues.

City Hall and MICE operators need to carefully analyze market needs and join efforts to improve key city factors.

Similarly to the situation in other big cities, the Lviv MICE competitive landscape is not uniform but is segregated by the size of the events:• relatively intense competition in the local and regional market

for small events (up to 250). The key market players are hotels, though universities and specialized agencies can satisfy market demand under certain circumstances,

• less intense competitive pressure on the national / international level for medium and large MICE events (above 250). Construction cost for conference facilities limits the number of market participants.

As of 2013, Lviv has most of the necessary infrastructure to serve MICE events:• 10 academic venues capable of accommodating up to 3,100• 12 specialized halls for 6,800• 8 unique cultural venues capable of handling 1,800• over 130 restaurants that can simultaneously host 17,000 guests• 10 catering companies can serve an estimated 13,000• more than 70 hotels, including 38 in the 3-5 star range• many experienced operators to organize various types of turnkey

events• many event agencies and subcontractors ready to provide a wide

range of related services.

However there is a severe deficit of medium and large size conference halls. The only large-ish facilities that meet high standards for comfort and equipment are a few hotels (for up to 400) and Arena-Lviv (up to 1,200), although Arena-Lviv is primarily a sports venue. To provide a proper intellectual and cultural exchange platform and spur tourism development, Lviv needs a new, large, contemporary conference facility capable of handling up to 3,500 attendees.

With its built-in advantages, Lviv can eliminate these shortages in the medium term and become a major CEE center for international MICE services.

Lviv Destination Image matrix Results from Lviv MICE Destination Marketing Survey5

Availability of air routesFacilities size & comfortPublic transport

High

HighLow

IMPO

RTA

NCE

CITY EVALUATION

Shopping Nightlife

Safety Easy travel & informationHospitality & city imageRestaurant service

Heritage & cultural uniqueness Climate Sight-seeing opportunities

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Preliminary project timeline

PROJECT RESOURCES

This project is a joint initiative of the Lviv City Council and tour operators as part of the strategy to develop MICE tourism. The rationale of a new, modern conference facility repeatedly came up for discussion at “Win with the Lion” tourism conferences and was emphasized in the Lviv Tourism Development Strategy for 2013-2020.

Lviv Convention Bureau has initiated and carried out market research and negotiations with interested parties, which resulted in the preliminary estimates of key project indicators presented in this investment proposal.

Project resources include:• Two possible parcels of land proposed by the city for the

conference hall site. The selection process will include (1) a market survey of conference participants about preferred locations and (2) a detailed feasibility study.

• Lviv City Council is ready to sponsor the project by providing the chosen parcel under a long-term lease.

• Municipal funding is not available due to the weak local budget, but grant funding is possible,

• The initially-proposed design needs a detailed review with a possible design competition and selection.

• Other key MICE infrastructure is already in place and available in the city, including modern airport, hotels, restaurants, and so on.

1. Initiation• Market research• Negotiations with key stakeholders• Preliminary investment proposal

4. Launch• Start of event hosting• Active promotion• Intensified of events schedule

5. Regular functioning• Further promotion• Events hosting above the break-

even level

3. Construction• Construction works• Start of promotion campaign and

events booking

2. Preparation• Construction design• Feasibility study and property

selection• Call for funding

≥ 6 months

≥ 6 months

≥ 18 months

≥ 36 months

City center

Possible construction sites relative to key infrastructure

Property #1 is conveniently close to the historic center but communication links are limited

Property #2 has all the necessary utilities, but transport and general are currently undeveloped

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1

2Bus station

Train station

Multifunctional Arena

Lviv Arena Stadium

Airport

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2

1

2

1.6 km

6.5 km

6.5 km

2.0 km

9.0 km

10.0 km

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Project investment evaluation, USD million

FINANCIAL OUTLOOK

An LCC business case has been developed in line with assumptions set in Lviv Tourism Strategy 2013-2020 and benchmarks for similar situations in the CEE region. The key assumptions include

• City Council provides full support to MICE development and join efforts in promoting and representing Lviv on international markets.

• Transport and other city infrastructure are gradually improving.

• The LCC building will have 27,000 sq m of gross floor space to accommodate up to 3,500 attendees.

• Construction will take 18 months.

• Key operational targets in the third year after launch:

— 35 conferences, including 25 international,

— 26,900 attendees, including 23,400 international,

— 46% or 167 days per year occupancy.

• The USD 80m capex estimate is based on the building cost of the ICE Krakow Congress Center that began operation in October 2014.

• Core revenue is based on rent income from conference area rentals paid by organizers:

— USD 35/sq m rent cost for conference area,

— 3 sq m required meeting area per an attendee.

• Other revenue is estimated at about 20% of core revenues and includes rent income from other premises and income from other services.

In combination with grant funding, the project offers attractive return prospects for a high-profile business. The Internal Rate of Return (IRR) is considered the primary project profitability measure. The three key IRR drivers are: • capex amount,• meeting area rent rate,• grant amount.

IRR sensitivity tables illustrate how IRR under different assumptions about the key drivers turns into a double digit return rate.

Y-1 Y-2 Y-3 Y-4 Y-5 Y-6 Y-7Revenue 9.6 13.8 16.6 17.9 19.1 20.3 21.4

Cost of sales -9.4 -10.2 -10.8 -11.1 -11.5 -11.8 -12.2

Gross profit 0.2 3.7 5.8 6.8 7.6 8.4 9.2

% of Revenue 2 26 35 38 40 42 43

Selling costs -2.0 -2.0 -2.0 -2.1 -2.1 -2.2 -2.2

G&A and other -1.0 -1.0 -1.0 -1.0 -1.1 -1.1 -1.1

EBITDA -2.7 0.7 2.8 3.7 4.5 5.2 5.9

% of Revenue -29 5 17 20 23 26 27

FCFF -80.0 -2.7 0.7 2.6 3.4 4.0 4.6 5.2

NPV @ 10% -18.1

IRR 5.2%

Payback period >15 years

Target conference volumes

Target attendee profile

IRR sensitivity to meeting area rent rate and capex, %

IRR sensitivity to meeting area rent rate and grant amount, %

Conference type

Domestic Europe Global Total

Small, <249 4 2 - 6

Medium, 250–499

5 7 1 13

Large, 499–1999

1 7 4 12

Major, >2000 - 1 3 4

Total 10 17 8 35

Conference type

Domestic Europe Global Total

Small, <249 600 300 - 900

Medium, 250–499

2,000 2,800 400 5,200

Large, 499–1999

900 6,300 3,600 10,800

Major, >2000 - 2,500 7,500 10,000

Totalaverage

3,500350

11,900700

11,5001,438

26,900769

Meeting area rent rate, USD per m2

30 33 35 38 40

cape

x, U

SD m 60 -1.2% 4.5% 8.7% 12.2% 15.1%

70 -2.7% 2.7% 6.8% 10.1% 13.0%80 -4.0% 1.3% 5.2% 8.4% 11.2%90 -5.1% 0.0% 3.8% 6.9% 9.6%

100 -6.0% -1.1% 2.6% 5.6% 8.2%

Meeting area rent rate, USD per m2

30 33 35 38 40

gran

t, US

D m

10 -2.5% 2.9% 6.9% 10.2% 13.0%

20 -0.7% 4.7% 8.8% 12.1% 15.0%30 1.3% 6.8% 11.0% 14.4% 17.4%40 3.7% 9.3% 13.6% 17.2% 20.2%50 6.6% 12.4% 16.8% 20.5% 23.5%

Business case assumptions reflect conservative expectations based on MICE industry benchmarks in CEE

In combination with grant funding, the project offers attractive return prospects for a high-profile business

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GOVERNANCE STRUCTURE

RISK ANALYSIS

The key stakeholders of the project are expected to be:

• City Hall with a <50% stake based on providing the site property and grant funding on behalf of sponsors.

• Private investors with a >50% stake based on providing the necessary capital

The stakeholders are to establish a special-purpose entity to manage the project and oversee commitments and benefits for each of the key stakeholders. Operational control will belong to the private investors, while the city will maintain a blocking vote to protect city and public interests.

The success of the LCC project will be determined by the capacity to transform Lviv into an attractive MICE destination, particularly for international conferences. Our SWOT analysis indicates that Lviv has unique strong inherited strengths, whereas the weaknesses can be corrected in the medium term. The external environment offers attractive opportunities to benefit from increasing interest in Ukraine and intensified integration into the international community, while posing the threats of insufficient investment due to economic and geopolitical turmoil. Still, Lviv has a unique opportunity to position itself as an attractive MICE destination during the next 5 years based on novelty and price advantages. The city should not ignore this opportunity.

The private investors will lead and exercise full operational control over the project

Project success will depend on joint efforts between private investors and city authorities in developing high-quality MICE services

SWOT analysis for Lviv as a MICE destination

Inte

rnal

fact

ors

Exte

rnal

fact

ors

Positive Negative

STRENGTHS

• Hight safety level• Novelty and “positive surprise“ effect• Multinational and multicultural European city• Infrastructure upgrades after EURO-2012• Steady growth in traditional sight-seeing tourism• Reasonable pricing for basic tourism services• Strong support by local authorities

OPPORTUNITIES

• Increasing interest to Ukraine• Intensified protion of Ukraine and Lviv MICE

opportunities on international level • Low seasonaly in demand for MICE services• Insufficient international transport accessibility

(direct air and railway routes)• Lviv transformation into passenger transport hub

WEAKNESSES

• Lack of specialized facilities for top-rated medium and large MICE events

• Weak coordination between enterprises in the hospitality industry

• City transport accessibility (quality of public transport and parking areas)

• Insufficient knowledge of foreign languages among tourism employees

• Defivient infrastructure for people with special needs

THREATS

• Political and macroecomomic instability in Ukraine• Insufficient funding fot hosting new events,

marketing and promotion• Contracting MICE tourism due to global economic

downturn• Skilled workforce outflow• Conference facilities overbuilt in other cities of CEE

region

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City Council is primarily interested in a positive impact on the local economy and wellbeing

Private investors are primarily interested in return on investment

COST BENEFIT ANALYSIS

The LCC project faces two types of risks: (1) the conventional risks of doing business in Ukraine and (2) project-specific risks.

Conventional risks of doing business in Ukraine:• macroeconomic instability• weak political system• geopolitical confrontation• uncurbed corruption and unfair competition• unreliable property rights system

Project specific risks:• overestimation of market demand• overestimation of rental rates for meeting space• delays in construction• hidden problems with the selected property• higher than estimated capex• lack of funding• higher than projected operating costs• surplus MICE capacities in Lviv and in CEE region.

The LCC project has a well-defined cost breakdown that includes a property in an advantageous location, the cost of building the facility and project management costs.

City Council is primarily interested in a positive impact on the local economy and the wellbeing of its residents, such as:

• new full-time, permanent jobs.

• financial inflows to the local economy from high-value visitors. Industry benchmarks show that every dollar of conference center income brings 2.5-5.5 times more to other commercial entities in the destination city. Thus, we expect the project to bring in extra USD 40-100m in revenue to local economy every year.

• environmentally friendly development.

Private investors are primarily interested in return on investment, which should be ensured by keeping full operational control over the project and partial grant funding. In addition, private investors are likely to enjoy reputational benefits from investing in a top-notch project with high social significance.