Investment Proposal: Lviv Conference Center

Investment Proposal: Lviv Conference Center

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

INVESTMENT OUTLINE 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 MICE 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). Financial profile USD m Y- Y- Y-3 Y-4 Y-5 Y-6 Y-7 Revenue 9.6 3.8 6.6 7.9 9. 0.3.4 Opex -.3-3. -3.8-4.3-4.7-5. -5.5 EBITDA -.7 0.7.8 3.7 4.5 5. 5.9 EBITDA margin -9% 5% 7% 0% 3% 6% 7% One time startup cost 80.0 Construction period 8 months NPV @ 0% -8. IRR 5.% Payback period >5 years The term MICE was established in 993 to define the group business tourism segment and is an abbreviation for Meetings, Incentives, Conventions, Exhibitions Contact information Lina Ostapchuk Lviv Convention Bureau Rynok Square 79006 Lviv, Ukraine (+380 3) 54-60-30 (+380 3) 54-60-99 info@lvivconvention.com.ua www.lvivconvention.com.ua

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 0,000 locals. Unique travel opportunities for fun and adventure placed Lviv among the Top 0 world cities to visit in 04, according to The Rough Guide, and among the Top 0 cities for weekend getaways in Europe, according to Lonely Planet. Lviv was a host city for EURO 0, 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 doubledigit 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 50, 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 00 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 stateof-the-art, high-capacity conference facility. Geographical position Western Ukraine, just 70 km from the EU border Population 757,500, 7th largest city in Ukraine Area 8.0 sq km Danylo Halytskyi International Airport Lviv 39,000 sq m new terminal area 9 departure gates,000 passengers per hour meets high industry standards and recommendations The railway station serves over 30 domestic and international connections links EU, CIS and domestic cities handles over.m passengers and 6,000 t of freight per month Lviv needs a new state-of-the-art, high-capacity conference facility Lviv hotel revenues, UAH m 0 00 80 60 40 0 00 003 004 6% GAGR 00-005 006 007 008 009 00 0 0 The new terminal was built for the Euro 0 football championship in line with international architectural, building and technical standards, ICAO requirements (International Civil Aviation Organization), and IATA recommendations (International Air Transport Association).

000km 90km 530km 860km 330km 800km 790km 570km,800,000 tourists visited Lviv in 03 998 UNESCO starts protecting the city centre 56 first mention of the city founded by King Danylo 65 m high City Hall with a viewing platform open to everyone 50+ universities, academies, institutes and colleges 50% architectural sigts of Ukraine 3

REVIEW OF THE POTENTIAL MARKET MICE tourism has been the key growth driver in the hospitality industry over the last 30 years. International conferences 3 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 (50-500 attendees) and large (50-,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). MICE tourism accounts for 54% of global tourist industry turnover 74% of business tourism turnover International conferences market size, 0 (ICCA) 0,500 conferences 6 million participants USD 3.7bn in turnover Ukraine is now a new growth opportunity for the MICE industry Developing countries are fueling MICE growth Conferences Growth CAGR 000 % % Asia&Middle East 734 36 9.0 North America 754 3.8 Latin America 379 4 9. Australia 6 0.8 Africa 9 9 8. Western Europe,60 6 4.9 Eastern Europe 77 6 0. Source: ICCA 4 CEE country comparison Conferences Growth CAGR 000 0 % % Poland 67 65 46 8.5 Hungary 70 5 79 5.4 Czech Rep. 5 388 5.5 Croatia 7 7 34 4.0 Ukraine 6,500 8.7 Source: ICCA 4 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 97.

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 50). 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 50). Construction cost for conference facilities limits the number of market participants. As of 03, Lviv has most of the necessary infrastructure to serve MICE events: 0 academic venues capable of accommodating up to 3,00 specialized halls for 6,800 8 unique cultural venues capable of handling,800 over 30 restaurants that can simultaneously host 7,000 guests 0 catering companies can serve an estimated 3,000 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,00), 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 Survey 5 High IMPORTANCE Low Availability of air routes Facilities size & comfort Public transport Shopping Nightlife CITY EVALUATION Safety Easy travel & information Hospitality & city image Restaurant service Heritage & cultural uniqueness Climate Sight-seeing opportunities 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 High Lviv could become a CEE leader in MICE services wit further investments in infrastructure 5 The Lviv MICE Destination Marketing survey was undertaken in 0 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. 5

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 03-00. 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 () a market survey of conference participants about preferred locations and () 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. Preliminary project timeline. Initiation Market research Negotiations with key stakeholders Preliminary investment proposal 6 months. Preparation Construction design Feasibility study and property selection Call for funding 6 months 3. Construction Construction works Start of promotion campaign and events booking 8 months 4. Launch Start of event hosting Active promotion Intensified of events schedule 36 months 5. Regular functioning Further promotion Events hosting above the breakeven level.6 km Possible construction sites relative to key infrastructure Property # is conveniently close to the historic center but communication links are limited 6.5 km.0 km Property # has all the necessary utilities, but transport and general are currently undeveloped 9.0 km 6.5 km 0.0 km City center Train station Airport Multifunctional Arena Bus station Lviv Arena Stadium 6

FINANCIAL OUTLOOK An LCC business case has been developed in line with assumptions set in Lviv Tourism Strategy 03-00 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 7,000 sq m of gross floor space to accommodate up to 3,500 attendees. Construction will take 8 months. Key operational targets in the third year after launch: 35 conferences, including 5 international, 6,900 attendees, including 3,400 international, 46% or 67 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 04. 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 0% 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. Project investment evaluation, USD million Y- Y- Y-3 Y-4 Y-5 Y-6 Y-7 Revenue 9.6 3.8 6.6 7.9 9. 0.3.4 Cost of sales -9.4-0. -0.8 -. -.5 -.8 -. Gross profit 0. 3.7 5.8 6.8 7.6 8.4 9. % of Revenue 6 35 38 40 4 43 Selling costs -.0 -.0 -.0 -. -. -. -. G&A and other -.0 -.0 -.0 -.0 -. -. -. EBITDA -.7 0.7.8 3.7 4.5 5. 5.9 % of Revenue -9 5 7 0 3 6 7 FCFF -80.0 -.7 0.7.6 3.4 4.0 4.6 5. NPV @ 0% -8. IRR 5.% Payback period >5 years Business case assumptions reflect conservative expectations based on MICE industry benchmarks in CEE Target conference volumes Conference type Domestic Europe Global Total Small, <49 4-6 Medium, 50 499 5 7 3 Large, 499 999 7 4 Major, >000-3 4 Total 0 7 8 35 Target attendee profile Conference type Domestic Europe Global Total Small, <49 600 300-900 Medium, 50 499,000,800 400 5,00 Large, 499 999 900 6,300 3,600 0,800 Major, >000 -,500 7,500 0,000 Total average 3,500 350,900 700,500,438 IRR sensitivity to meeting area rent rate and capex, % capex, USD m IRR sensitivity to meeting area rent rate and grant amount, % grant, USD m 6,900 769 In combination with grant funding, the project offers attractive return prospects for a high-profile business Meeting area rent rate, USD per m 30 33 35 38 40 60 -.% 4.5% 8.7%.% 5.% 70 -.7%.7% 6.8% 0.% 3.0% 80-4.0%.3% 5.% 8.4%.% 90-5.% 0.0% 3.8% 6.9% 9.6% 00-6.0% -.%.6% 5.6% 8.% Meeting area rent rate, USD per m 30 33 35 38 40 0 -.5%.9% 6.9% 0.% 3.0% 0-0.7% 4.7% 8.8%.% 5.0% 30.3% 6.8%.0% 4.4% 7.4% 40 3.7% 9.3% 3.6% 7.% 0.% 50 6.6%.4% 6.8% 0.5% 3.5% 7

GOVERNANCE STRUCTURE 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 private investors will lead and exercise full operational control over the project RISK ANALYSIS 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. 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 Positive Negative STRENGTHS WEAKNESSES Internal factors Hight safety level Novelty and positive surprise effect Multinational and multicultural European city Infrastructure upgrades after EURO-0 Steady growth in traditional sight-seeing tourism Reasonable pricing for basic tourism services Strong support by local authorities 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 OPPORTUNITIES THREATS External factors 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 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 8

The LCC project faces two types of risks: () the conventional risks of doing business in Ukraine and () projectspecific 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. COST BENEFIT ANALYSIS 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.5-5.5 times more to other commercial entities in the destination city. Thus, we expect the project to bring in extra USD 40-00m 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. City Council is primarily interested in a positive impact on the local economy and wellbeing Private investors are primarily interested in return on investment 9