Executive Summary
This monograph is an attempt to answer the following question: Is a golf course feasible in the Negev? As such, it does not attempt to advocate a pre-determined venture, either with respect to the type of course, the associated amenities, or the location. Our analysis does in the end indicate what might be expected to be feasible, but the results are far from definitive, as much more technical analysis will be needed to justify conclusively any final decision.
It should also be noted that our approach is from the perspective of an investor from abroad. The project is seen purely as a business venture, which must yield acceptable, competitive returns. In other words, it is not considered in the same light as charitable donations to hospitals, universities or the like. That is not to say there is no legitimate public interest in such a project, and that public support should not be considered. We find to the contrary that the project would carry very significant social benefits, and they can be realized at relatively low cost to public authorities. Recognizing fiscal realities in Israel, we do not advocate any cash grants or even tax abatements. But assistance to the project in the planning, approvals, and related areas can make a considerable difference to the feasibility of the project.
The study begins with an analysis of technical matters relating to the construction of two prototypical golf courses, a modest 9-hole course, and a full feature 18-hole course. Our research indicates that with respect to most matters, there are no technical barriers. Many attractive sites exist, some at excellent locations. The Negev environment is a positive factor, permitting virtually year round play. One major difficulty is the supply of water. A golf course using new turfs can employ quite low quality water, of which there are plentiful supplies in the region, but Israel’s new health regulations do not permit that. Unless existing treated water can be used, the need for treatment will add a major cost item to the project. Our judgment is that at least for several attractive sites, this problem can be resolved satisfactorily.
A second major issue is getting approval for zoning changes to accommodate some of the related facilities, such as a clubhouse. It appears that Israeli authorities have become increasingly unwilling to make such sites available, and without them the project cannot proceed. On the other hand, those responsible for the sites, and local officials, have demonstrated great enthusiasm for the project. Related to this is the very long approvals process, which at the very least we estimate will take 3 years. Allowing for 2 years construction and grow-in means that a five-year development window is required.
We then conduct a financial feasibility study. Cost data are based on multiple sources, Israeli, foreign, and component-by-component considerations. We find that the expected average capital cost for an 18-hole course including clubhouse and interim financing would be about $6.7 million and $3.7 million for the two options. Annual operating costs are expected to be $870,000 and $550,000. From these, and assuming a return on investment of 12%, we calculate the annual revenue required to break even. That amounts to $1.7 million and $1 million.
Generating this level of revenue depends primarily on the number of rounds and the price per round that can be charged. The price is obtained by observing prices on Israel’s two existing courses, and on courses abroad. There seems to be substantial convergence for this variable.
We estimate the number of rounds by looking at various market segments, and calculating how many players might be expected from each. A rough survey of part of the local Negev market indicates that it is rather small. That result has two implications. One is that it makes the feasibility of a modest 9-hole course much more unlikely, as the other major users, international tourists and businessmen, and Israelis from outside the region, are unlikely to travel to the Negev to play on such a limited facility. The second implication is that a full feature 18-hole course, although more costly, may actually be more feasible.
We examine other sources of revenue, and factor them in, but even with them, neither of the projects comes close to being self-supporting.
The above financial calculations are crude, and to enable a more careful assessment of the two prototypes as well as the quantification and assessment of component changes, we undertook a detailed cost-benefit analysis. The base case yielded results consistent with the crude judgments, above. We then introduced a number of possible modifications to see what impact they had. One measure was to shave costs wherever possible. Another was to allow for normal market growth. A third was to promote memberships and sponsorships. All of these measures improved the Net Present Value, but none came near yielding a positive result when a 12% discount rate was used. For a 10% rate, the 18-hole course did have a positive return of almost $900,000 but we do not believe that rate reflects our prototype foreign investor’s risk adjusted opportunity cost of capital. Our conclusion is that from such an investor’s perspective, a golf course of either size is not feasible.
A golf course in the Negev offers social as well as private benefits. Among the social benefits are: increases in employment and income, which produce multiplier effects; advancing the goals of tourist development; preserving green spaces; attracting modern firms and their employees to the region; and assisting in diversifying the economic base of struggling agricultural collectives. We undertook an extension of the cost-benefit framework to incorporate some of these benefits. The result is a significant turnaround for the large course, yielding a Net Social Present Value of the order of at least $6 million. A number of unquantifiable but important benefits make the actual number much higher. The small course also becomes attractive even with the smaller social benefits to be expected.
These results indicate that for a modest effort, the public can realize very substantial benefits from such a project. Having rejected cash transfers and tax concessions, the solutions that are possible include enabling joint projects that can both increase demand for the facility, and offer cross subsidization to the golf course. A number of possibilities are explored, and the two most promising are a golf village and a golf resort. Simply rezoning modest-sized parcels of lands would enable such a solution to be pursued. Unfortunately, there have been fraudulent experiences with such government concessions, and only credible investors and binding agreements might open such prospects again.
Several steps are proposed if there is interest in taking up the idea. One is to determine if the necessary permissions will be forthcoming. If the process is unduly protracted, we expect interest, especially on the part of investors from abroad, will not be sustainable. At the same time, a number of steps can begin to be taken by local authorities and organizations to promote golf-related activities among the Negev population. Such programs elsewhere have laid the foundations for future successful golf development, and the social benefits that accompany it.
Introduction
A recurring dream in most desert communities, from Abu Dhabi to Arizona, has been to build a golf course. In part this reflects a desire to bring a highly visible feature of less dry climates to the desert – in particular the green turf of a golf course. And in part there is the desire to provide recreation for resident populations, which tend to be older and wealthier than the national average. Furthermore, golf adds to the booming year-round tourist business, which has become a mainstay of these regions. Finally, and partly because of the above public considerations, it is believed to be a highly profitable private venture.
Israel’s Negev region has had its share of dreamers proposing just such a project. Actual plans have been drafted for the northwestern boundary town of Ashqelon as well as the southernmost city of Eilat. A very large number of towns and kibbutzim (collective settlements) have toyed with the idea, and several have gone as far as to draw up preliminary plans. None of these plans have been realized, for a multitude of reasons that we shall consider below.
Despite these experiences, and perhaps even because of them, the Negev Center for Regional Development was encouraged to reconsider the issue by Dr. Monroe Burk, a highly respected member of its International Advisory Board. He was of the opinion that golf was not only feasible in the desert environs of the Negev, but was in fact highly desirable. The study would provide the opportunity to subject this view to critical analysis.
We decided to take the opportunity to approach the issue in a radically different manner than has prevailed hitherto. All of the above noted dreams and plans were essentially efforts at advocacy. A specific site had been identified by a promoter, and the “analysis” undertaken by the experts/consultants was meant to prove its viability. Not surprisingly, virtually all such proposals were deemed to be viable. Failure to implement the plans, when that stage was reached, has been attributed primarily to bureaucratic opposition, most often by the Israel Lands Authority, but also to the inability to secure investors. The latter failure should have called out a signal – that the projects might not have been feasible from a private perspective. But in our extensive interviews, and perhaps not surprisingly, we never heard that explanation.
Rather than being obliged to advocate a project on a predetermined site, as an academic institution we are in the fortunate position of being able to take a more objective, less partisan approach. We have attempted to provide a general assessment of the feasibility of a golf course in the Negev. In other words, our orientation is not one of advocacy but of analysis.
This document is therefore a feasibility study for a generic or model project. It is not a detailed plan, major questions remain to be answered regarding specific sites, and the prospects for meeting the Byzantine requirements of the approvals process in Israel are daunting.
In part 1, we examine technical issues facing a golf project, such as water, soil, turf, climate, space and location, in the context of the Negev’s unique environmental, legal and socio-demographic circumstances. In part 2, we turn to questions of financial feasibility, including initial capital requirements as well as operating costs, and see how they compare to expected revenues in this unique market, where the demand for golf appears to be radically different than everywhere else. In part 3, we undertake a cost-benefit analysis from the perspective of private investors. In part 4, we broaden the focus of our evaluation matrix to consider the interests of society in addition to those of private investors. The tool employed is known as social cost-benefit analysis. Part 5 summarizes our conclusions and recommendations.
The Case for Golf in the Negev
But first things first. Why should there be a golf course in the Negev? Several specific arguments from a societal perspective can be advanced, as follows:
There is a dearth of sports activities in the Negev. This is true not only in terms of the number of facilities for sports that are currently popular, such as tennis, swimming, soccer, and so forth. But also in terms of the very limited variety indicated in that short list. Simply stated, there is not much to do in the Negev. For a region that constitutes half the physical space of the country, is home to some 925,000 citizens and is among the fastest growing areas of the country, that is a serious deficiency.
Golf is the preferred sport of the new entrepreneurial class. For a region that is anxious to attract modern industry, and a class of entrepreneurs and skilled workers to run that industry, the lack of golf facilities is not just a deficiency, it is a fundamental handicap. The sport of choice of many in this group is golf, both because they were trained and/or educated in western countries where such is the case, or because they themselves are immigrants from such countries. The importance of golf, not only for personal recreation, but also for social networking and business communication is well known, mainly outside of Israel.
Golf and tourism. Apart from the Dead Sea and Eilat, the Negev has failed miserably to attract recreational tourists to the region, and this includes Israelis no less than foreign tourists. There is simply nothing much to do there compared to the rest of the country. Tourists like things such as good hotels, fine restaurants, and lots of recreational variety. Other than a few historic sites and impressive natural venues like the craters and the Zin wadi, there is almost nothing to attract foreigners to the metropolitan area of Beer Sheva, the capital of the Negev, which lacks in all such tourist attractions. Leisure tourism, such as visiting forest or crater picnic sites does somewhat better, but primarily on weekends and holidays. Such tourism contributes very little to the local economy, however.
Golf and the greening of the Negev. There have been massive investments in the Negev by Keren Kayemeth L’Yisrael (KKL, the Jewish National Fund) to store water, to grow forests, and to encourage agriculture, all with the aim of turning the desert green. Without entering the debate as to whether or not this is desirable from an ecological perspective, the fact is that much of this activity has done little to stimulate economic development in the Negev, and arguably, has done much to deter it. Consider the forests around Beer Sheva. While green, they have not achieved any major economic goals, such as attracting large-scale tourism, nor, with a few exceptions, have they even provided popular recreational activities for residents. Or consider the promotion of agriculture, which has only survived with the aid of huge water subsidies, and even then, most kibbutzim in the region are drowning in debt.
Golf as the new green export. There appears to be resistance to the idea of building golf courses, as somehow this is believed to be an inferior form of “greening” compared to agriculture or forestry. But if it could be shown that golf could be efficient in the use of water, could be a much more profitable use of space than agriculture, and could be a more effective generator of employment and exports, would this be a reasonable stance to take?
Golf as a booster for the local economy. A golf course offers both direct employment benefits, and indirect multiplier effects. To the extent that it employs marginal groups who are otherwise unemployable, it offers social as well as economic benefits. It also generates local and national tax revenues.
The above are of course primarily social arguments for golf – why governments and the larger community should at least be willing to give the subject serious consideration. But the bottom line is the private issue of profitability. For unless a golf course can generate an acceptable risk-adjusted after tax rate of return, then the project will not happen regardless of these wider benefits. Regrettably, these two issues, the combined private and public benefits from golf in the region, have rarely if ever been jointly explored.
The importance of the above argument is that even if a private venture is not feasible on its own merits, its capacity to offer public benefits might encourage governments to provide assistance in seeing it realized. In this sense, it is no less meritorious than offering subsidized water to agriculture, subsidized rail and roads to commuters, and tax incentives to investors.
While not exhaustive, the above arguments suggest that the subject is worthy of in-depth examination, despite the disappointing history of past initiatives. Fortunately, we are in a position to learn from those initiatives, both with regard to technical and financial as well as procedural experiences. But we must reiterate that we are not promoting the idea of golf regardless of all considerations. We do think it is worthy of serious study, and we hope that this monograph will contribute to an informed discussion.
I would like to acknowledge the assistance and support of a large number of persons who helped make this study as broad and as stimulating as it has turned out to be. They are noted in Annex I, and while they may not agree with all or even any of our conclusions, I do want them to know how much I appreciate their openness and kindness in allowing me to draw on their wealth of expertise.
A word of thanks to Itay Reznick, my research assistant who also helped with the translation of the Hebrew Summary. And to my colleague and partner, Prof. Yehuda Gradus, for encouraging me in this project and reviewing the final result. Finally, Roni Bluestein-Livnon has always been indispensable for preparing graphics for and typesetting my many publications for the Negev Center. The sterling quality of her work can be seen in this publication as well. Thank you once again, Roni.