WKCD – a brief history

• See http://en.wikipedia.org/wiki/West_Kowloon_Cultural_District

• 1998 HK Tourism Board (chairman Selina Chow 1996-2007) proposed to Legco that cultural and arts exhibitions...needed

• 1998 Tung Chee Hwa proposed the WKCD project• Stage 1 – 2001 design competition

• Stage 2 – 2004 ( when Donald Tsang was CS) IFP: Invitation for Proposal from developers - much criticized on:

1. the single packaged development approach

2. giant canopy

3. excessive commercial property development• Stage 3 – 2008 Legco funded the WKCD Authority $21.6 billion

Stage 1: 2001 Design Competition winner: Norman Foster

The Hong Kong Arts Development Council (ADC)

• ADC Chairman Mr. Darwin Chen in 2004

• Proposed to Desmond Hui, a WKCD financial study at HKU

• An Academic Financial Study

• For The West Kowloon Cultural District

• FOR DISCUSSION

• Commissioned by• The Hong Kong Arts Development Council

• Written by• Wong, Kwok-Chun; BSc(Building Studies), BBuilding, PhD (HK); MRICS; M

HKIS; Department of Real Estate and Construction

• and• Hui, Desmond C.K; B Arch(Cornell); M Phil, PhD(Cantab); OAA; MRAIC; H

KIA; RA; Department of Architecture

• of• Centre for Cultural Policy Research

• The University of Hong Kong

• 10 May 2004

To build this, we’ll need

$25.1 billion: total development cost

The $25.1 billion Total Development Cost:

(In $ billion)

Commercial Portion

Arts & Cultural Portion

Foster Scheme Features

Total

Construction Cost

8.2 5.4 3.9 17.5

Estimated Developer’s

Profit on Construction *

1.6 1.1 0.8 3.5

Interest cost 2.0 1.2 0.9 4.1

Total 11.8 7.7 5.6 25.1

*Development profit depends on property prices.

To run the Arts & Cultural facilities, we’ll need:

A Trust Fund of $11.4 billion for generating income to cover operating deficits

Where would this magic $11.4 billion

Trust Fundcome from?

The Commercial Portion’s Land Value: $24.6 billion

The Commercial Portion’sMarket Value: $36.4 billion

LESS its development Cost: $11.8 billion

Basis of this $36.4 billion Commercial Portion Market Value

(Total gross floor area:

In WKCD: 726,285 m2)

% gfa

in WKCD

Valued

@

Value

(in $ billion)

Retail 22% $70,000 psm 11.2

Residential 40% $75,000 psm 21.8

Arts & Cultural related retail 2% $35,000 psm 0.5

20,000 m2 Commercial

Open Space

$17,500 psm 0.3

1,790 Car parks Each: $450,000 0.8

Interest earned 1.8

Gross Value 36.4

This $24.6 billion Commercial Land Valuewould pay for:

Foster SchemeFeatures,

$ 5.6 billion ,23%

A $11.4 billionTrust Fund to

operate the Arts& Cultural

Portion,46%

The Arts &CulturalPortion,

$ 6.9 billion,28%

Other Arts &Cultural

Facilities, $ 0.75 billion,

3%

Would $11.4 billion be sufficient? Figures in

($ million)

Operating Principles

Government* Commercial**

Trust Fund 11,376 11,376

Museum of Modern Art (3,000) (280)

(Royalty)

Museum of Ink/Design (1,200) (1,200)

Surplus Asset 7,176 9,896

Assume 6% Yearly

investment return 431 594

Yearly operating deficits

(Arts & Cultural Portion)

(459) (144)

Depreciation allowance

(Assume 30 years)

(441) (441)

Net Yearly Surplus/Deficit (469) 9* Government principles are primarily the LCSD’s. ** Commercial denotes “Quasi-Commercial” principles – ticket pricing policies as those of LCSD’s.

Detailed Operations

Figures in $ million

Operating Principles

Government Commercial

10,000 seats Venue 24 48

2,500 seat Concert Hall (2) 7

Theatres A,B,C (9) 88

Broadway

Museum of Moving Image (18) (14)

Museum of Modern Art (205) (70)

Royalty

Museum of Ink/Design (120) (114)

Art Exhibition Area (7) 6

Water Amphitheatre & Piazza Areas (72) (65)

Programme Expenses (50) (30)

Yearly Operating Surplus/deficits (459) (144)

Alternative Market ScenariosScenarios: Price/ Rental levels :

Residential: price /m2

Per square feet (psf)

$95,000

$8,830

$85,000

$7,900

$75,000

$6,970

$65,000

$6,040

$55,000

$5,110

Retail portion: price /m2

Price psf

Monthly rental psf

$88,667

$8,240

$44

$79,333

$7,373

$40

$70,000

$6,506

$35

$60,667

$5,638

$30

$51,333

$4,771

$26

Land Value & Trust Fund (in $ billion)

Commercial Portion’s

Land Value 34.3 29.4 24.6 19.7 14.9

Arts & Cultural Facilities 13.2 13.2 13.2 13.2 13.2

Trust Fund 21.1 16.2 11.4 6.5 1.7

Yearly Surplus/Deficits: (in $ million)

Government principles 114 (178) (469) (761) (1052)

Commercial principles 592 300 9 (283) (575)

Stage 2: 2004 Invitation for Proposals 3 major proposals from developers

Dynamic Star HK World City Arts.. Parc (park of arts recreation & Culture)

Subsidiary of

Cheung Kong Henderson Sino , Chinese Estates

Wharf,

1. Dynamic Star (Cheung Kong)

1. Dynamic Star – the team

2. World City (Henderson)

2. World City – the team

3. Parc (Sino, Chinese Estates, Wharf)

3. parc – the team

Stage 2 –Invitation for Proposal – 2005 Rafael Hui’s “solution”

much criticized on: Rafael Hui’s solutions:

the single packaged development approach

Require HKD 30 billion deposit from developers

giant canopy Scrap the giant canopy

excessive commercial property development

50% residential commercial land to be

auctioned openly

Specialist Advisor to the Subcommittee on West Kowloon Cultural District (WKCD) Development

for the study on The Financial Aspects of the WKCD Project for the Legislative Council Commission

Final Report 21 May 2008

Presentation on 24 may 2008by K C Wong, K W Chau, S K Wong, and P Yung

of Versitech Limited

( a wholly owned subsidiary of the University of Hong Kong)

Stage 3 – project completely re-viewed in 20062008 Legco funded $21.6 billion to WKCD

Authority

contents

• 1. a financial overview• 2. scenarios of private sector involvements• 3. on “design and build”• 4. capital, on-costs and operating costs• 5. risk and sensitivity analysis• 6. management organisation• 7. financial sustainability• 8. the question of M+• 9. on RDE: retail, dinning, and entertainments• 10. key parameters to be monitored• 11. funding priorities• 12. summary

GHK’s Financial Summary

GHK’s Financial Summary

1. a financial overview figures in NPV, 2008 prices, HK$, millions capital operations total %

1 WKCDA management (1,230) (1,015) (2,245) 9%

2 master planning (34) - (34) 0.1%

3 M+ (4,749) (5,917) (10,666) 40%

4 exhibition centre (535) 281 (254) 1%

5 mega performance venue (2,706) 1,014 (1,692) 6%

6 great theater 1 (1,220) (5) (1,225) 5%

7 great theatre 2 and medium theatre 3 (986) (318) (1,304) 5%

8 medium theatre 4 (303) (128) (431) 2%

9 concert hall & chamber music hall (1,421) (307) (1,728) 7%

10 xiqu centre (1,174) (213) (1,387) 5%

11 medium theatre 1 (515) (159) (674) 3%

12 medium theatre 2 & black box theatre 1 (699) (213) (912) 3%

13 black box theatres 2 & 3 (320) (140) (460) 2%

14 black box theatre 4 (195) (104) (299) 1%

15 piazzas (310) - (310) 1%

16 other arts and cultural facilities (331) - (331) 1%

17 transport facilities (1,049) 179 (870) 3%

18 communal facilities (1,027) (537) (1,564) 6%

sub-total (18,804) (7,582) (26,386) 100%

19 RDE: retail, dinning & entertainment (2,765) 8,448 5,683 21.5%

total (21,569) 866

to be met by land values 21,288

30

2. scenarios of private sector involvements

options: 1A 1B 2

M+ ’s procurement

& operation

Same for all 3 Scenarios: design competition, design & build

Operate, Manage and Maintain by Not-for-Profit Organisation

private sector’s roles

on performing arts (PA) facilities

design & build only

do NOT finance, maintain, or

operate

design & build design & build

finance & maintain finance & maintain

do NOT operateown & operate

packaged PA facilities*

level of private sector involvement small medium large

total cost:

capital & operating $29,950 Mn5.8% more expensive

than 1A8.1% more expensive

than 1A

finance cost 6.1% p.a. 12.5% p.a. 12.5% p.a.

risk premiums allowed 23% 29.5% (p 34) 20.8%

operating costs

(over 50 years)

$8,333 Mn $8,333 Mn

same as 1A?

$8,569 Mn

almost the same as 1A?

efficiency gain due to larger private involvement

- Not allowed for

WKCD Authority’s costs Same for all 3 Scenarios : $2,117 Mn

* Package A: MPV + hotel 2,3 + RDE; B: MT1+ BBT2,3 + hotel 1 + RDE; C: residential, others A&C + transport, communal facilities

3. on “design and build”design & build conventional: separating design & build

Full performance specification needed tender after detailed design

This specification is never exhaustive

Could be reviewed and adjusted after detailed design, and before tendering

How to specify performance in terms of

comfort, space, aesthetics, quality of architectural detailing?

Without detailed design, BD contractor may cut costs to meet minimum

performance only

With detailed design, there can be much more accurate costs estimates for both

contracting parties:

lacks an architect’s independent view has architect’s independent view

May save time before tendering, but could be problematic if competition is used to

choose a design

Little longer time for detailing, but will pay off in terms of value for money

May be more costly to rectify problems, such as contractual dispute that occurs at

a later stage

Client knows exactly what it will get before committing resources

Suitable for, civil engineering projects, building services or buildings with

functional requirements only

More suitable for artistic and innovative complexes, like M+ and PA facilities

Appointment of an operator before conceptual design is most essential in both cases

4. capital, on-costs, and operating costs

Capital costs

NPV 2008

$ million

as % construction

cost

Compared to

Conventional/

Alternative

direct construction cost 11,012 100% unit costs are comparable

professional fees1,869

6% to 14.6% 6%

contract management 8% to 9% conventionally included in the developer’s normal profit: either the WACC(12.5% p.a.), or 10% profit on construction (H-11)WKCDA’s costs years 1-8 1,230 11.2%

risk allowances 2,850 25.9% 10% to 15% contingencies

major repair and renovation 2,891 26.3% Conventionally half-replaced

Not allowed for after 50 years

museum development 1,717 15.6% franchise fee $156 million for international operator

Total capital cost 21,569 195.9%Ref. FA page H-11 ; and WKCD-511

Annex 2, and 5(a)To be met by land value 21,288

Operating deficits

CACF, transport, communal 6,567

WKCDA’s costs years 9-50 1,015

Total operating deficit 7,582

To be met by RDE rental 8,448

5. risk and sensitivity analysis: any contingency plan?

Sensitivity Tests

AssumptionsFinancial

impactsin billion HK$

As % of $21.6 billion

ST2 Pessimistic Outcome in procurement and operations

- 5.7 -26%

ST4 50% Real Decrease in Land Premium -10.4 -48%

ST9 3% Real Discount Rate (instead of 4%) - 4.1 -19%

Tests still missing

Construction costs escalation(over 6% p.a. over past 30 years, much

higher than FA’s assumption of 2%)

mostSignificantespecially

first 5 years

to be assessedVolatility in investment returns

(no risk free investment tools at 6.1%)

6. management organisation

WKCDA management costsyears 1-8 development phase

WKCDA management costsyears 9-50 operation phase

1 Directors 90(5 departments: chief executive, planning

& development, property, finance, procurement. excluding consultants)

33(5 departments: chief executive,

area management, finance)Staff

2 Duties

land assembly and property master planning and project development

strategic and business planningcultural and arts policy liaison

legal, procurementcontracting and finance

estate management area marketing and programmingstrategic and business planning

cultural policy liaisonlegal, contract management

procurement and finance

3 Annual costs (HK$) 189.4 million 60.3 million

4 In 2008 NPV 1.23 billion 1.015 billion

5 Other supports out-source consultants Operations of individual facilities budget separately

Relevant questions:

1. What are the detailed duties, ranks, salaries, for these 90 (or 33) staff? 5. Would their duties overlap with the out-source consultants?

2. Would it be more cost effective to out-source some of these duties?

3. What are the detailed breakdowns of $189.4 and $60.3 million?

4. Compared with CACF (details down to the smallest theatre are provided), is the information too coarse to justify the funding of $2.245 billion?

7. financial sustainability

*3.378 billion = 20.639 billion x (1/1.04)^50 + (1/1.04)^100+… 20.639 billion = 21.568 – 0.873 billion (for museum collection) - 0.056 (for land cost of off site storage) in 2008 NPV

Under the current proposal of a 21.6 billion endowment fund

Capital costs: met by land values

Operating cost: met by RDE rental

After 50 years, there will be no funding provided for:

Major repair and renovations of

FFE , M&E

Renovation/reconstruction of building structures & fabric: assuming the buildings last only for 50 years

The additional seed fund needed for this purpose is $3.38 billion *

(i.e. 16% of the endowment, in PV terms, )

Museums M+

Solomon R.

Guggenheim Museum

(New York)

San Francisco Museum of Modern

Art

Museum of Modern

Art, New York

Metro-politan

museum of Art,

New York

Art Institute

of Chicago

Tate Modern London

Centre Pompidou

Paris

Exhibitarea sq. m

26,000 4,600 4,647 11,612 78,366 19,600 7,827 22,000

GFAsq. m

61,950 n.a. 20,911 73,420 200,000 64,400 43,000 103,305

ExhibitsDesign, popular culture, moving

image, visual art

Modern art

Modern art

Modern & con-

temporaryart

One of world’s

largest & finest art museum

Art museum

and schoolModern

art

Modern art & contemporary

creation,including design

& architecture

collection/history/

franchise fee

Cost$ 1,717 millionto be collected

in 4 years & developed

Franchise fee$156million in the 1990s

for Bilbao

Since 1935;nowover

22,000 objects

Founded in 1929;

now 150,000 pieces[7]

Opened in 1872;now

over 2 million works

Founded in 1879;

now over 25,000 pieces

Collection began in

1847;Tate Galleryfounded in1897; now 65,000 pcs

PreviouslyNational

Museum of Modern Art

opened in 1947;now

53,000 pcs *

Full time staff

336 95 F/T 232approx

590 F/T20 P/T

1,783 F/T744 P/T

725 F/T46 P/T

1,157 FTE 918 F/T63 Ct

Yearly acquisition

$20 million

$16 million

$11 million

$395 million

$774 million

$125 million

$264 million

$70 million

Adult fee $27.5 - $30 $137 $98 $156 $156 $94 various $103

Visitors per year

1.2 – 2 million 0.9 million

0.8 million

2.7 million

Over 4.0 million

1.4 million

4.0million

5.5million

cost recovery

18 - 22% 66% 59% 57% 55% 50% 54% 27%

8. the question of M+ : is it like Pompidou?

* Long collection history achieved “through the generosity of artists such as Picasso, Braque, Matisse, Chagall and Brancusi, which had hitherto been passed over by other institutions.”

8. the question of M+ (cont’d): the Guggenheim model

The FA’s conclusions on the Guggenheim model:

Question:

Guggenheim is not interested Did Guggenheim joint venture with Pompidou and HK’s Dynamic Star in 2005 for WKCD (IFP)? There was an open statement*

looking for “an open purse from the government”

Is this a serious claim, which should be supported by evidence and assessed financial figures?

want design, operational, curatorial control

Should this be welcomed? The FA also pinpointed that “The only direct local experience of large-scale museum operation lies with LCSD’s operation of public museums.”

Yet the largest local art museum that could provide local experts with suitable experience, namely the Hong Kong Museum of Art, is only 16% of the proposed size of M+.

Is this the best way for knowledge transfer? After all M+ is a $10.7 billion investment.

a pricey model Inconsistent with FA’s data: this model could save up to $4.8 billion, according to FA’s data provided so far. This is financially so significant that it should have been studied and compared very seriously than the way it is treated now.

* Statement still available on the web: http://www.guggenheim.org/press_releases/release_140.html

9. on RDE: Retail, Dining and Entertainment

119,000 sq.m gfa:( 2012 construction) a considerable size: bigger than Elements, potentially a rival if not planned very differently

Valued at monthly rental of $30 psf: Comparables are large malls: not scattered

scattered shops: how to ensure sufficient pedestrian flow in order to sustain $30

psf?

full integration of cultural venues and shops: a lengthy evolution process. London Theatre Land has more than 200 years history

Physical plan unknown: complements or conflict to arts facilities

RDE: CACF ratio = 2:5

A rather large ratio to be planned into CACF

not all developers are successful in RDE/malls. most successful ones own

substantial shares of their malls

successful malls/RDE depends on: expertise in planning, design, tenant mix, tenants’ relative locations, pedestrian flow, leasing, theme, promotion, management

Experience shows that public owners are likely to be less successful:

the level of private participation in WKCD’s RDE should be carefully considered

the current proposal might have implied 100% WKCDA ownership?

(otherwise, there is insufficient RDE rental to cover operating loss)

Comparing to operating details of CACF, those for RDE are clearly insufficient

Needs a good business plan for this life line

10. Key parameters to be monitoredThe publication of these information are essential:

The early appointment of operators

A time line for inviting proposals from

and appointment of operators

Investment return Investment portfolio and performance

Design quality Rules of design competition (open or by invitation)

IPF for professional services, design brief, selection criteria

Winning designs

Quality specifications Specifications for quality of materials and workmanship

Information on expenditures

Unit construction costs (CFA and GFA)

Professional fees

Project and contract management costs

Status of contingencies and risk allowances

Major repair and renovation costs

Management organisation Staff numbers, respective ranks, performance pledged and achieved

Utilization rates Number and types of visitors

Cost effectiveness Cost recovery rates for individual facilities

Cost item

Factors to consider

UncertaintyImprovement

PotentialFinancial

Significance

1WKCDA

Management

MediumRole & responsibility

not clear

Mediumin efficiency

Medium

2a M+ (capital cost)

HighCost, quality & outcome

highly uncertain with Design and Build

Highin procurement

(Except for costs of design competition

and consultant fees)

High

2b M+ (operating cost)High

Limited options available

Highin operation mode

HighMajor cost centre

3 Exhibition centre Medium** Low if procured traditionally

Low Low

4 Mega performance venue Medium* Low Medium

5 Great theater 1 Medium* Low Medium

6Great theatre 2 and medium theatre 3

Medium* Medium ## late in program

Medium

7 Medium theatre 4 Medium* Medium # Low

8Concert hall & chamber

music hallMedium*

* Low if procured traditionally Low Medium

11. funding priorities

Cost item

Factors to consider

UncertaintyImprovement

PotentialFinancial

Significance

9 Xiqu centre Medium* Low Medium

10 Medium theatre 1 Medium* Low Low

11Medium theatre 2 & black box theatre 1

Medium*Low Low

12Black box theatres 2 &

3Medium*

Low Low

13 Black box theatre 4 Medium* Low Low

14 Piazzas Medium* Low Low

15Other arts and cultural

facilitiesMedium*

Low Low

16 transport facilities Low Low Low

17 communal facilities Low Medium Medium

18Retail, dinning &

entertainment

HighLimited study on

demand, business concepts, and their

integration with other facilities

HighCan consider other modes of operation

such as private sector participation

High

Life line for financial sustainability

11. funding priorities (cont’d)

12. executive summary

1. This report assumes the principle that the WKCD should be financially self sufficient and financially sustainable within the 40 hectares of land.

2. The Method of comparing Scenarios of private sector involvement is questionable. Scenarios 1B and 2 are not sufficiently realistic to allow meaningful comparisons. Despite greater private sector participation in, no additional efficiency gain has been allowed for.

3. "Design and Build" is not a suitable procurement method for M+ and possibly not the best option for other core arts and cultural facilities as well.

4. Unit construction costs are within a reasonable range. On-costs are, however, higher than conventional.

5. The Financial Advisor’s (FA) sensitivity analyses have not covered the financial implications of risks in investment returns and in construction cost escalation. There are also no contingency plans for the worse cases scenario.

12. executive summary (cont’d)

6. There is no fund set aside for major renovations or re-constructions after 50 years, beyond which the WKCD may not be financially sustainable. An extra saving of $3.38 billion on capital and operating costs, equivalent to 16% of the $21.6 billion seed fund, is needed.

7. Under the FA’s operating assumptions, M+ would cost $10.7 billion to construct and operate for 50 years. By 2059, M+ would account for 89% of the WKCD’s yearly deficit. M+ might become a long term financial burden of the WKCD.

8. According to the information provided by the FA so far, should M+ be run by an international operator, the potential saving of $4.8 billion, in very crude terms, could be as high as 22% of the $21.6 billion seed fund.

9. RDE is the life line of the WKCD. Yet compared to the financial and operating details for Core Arts and Cultural Facilities (CACF), those information provided for RDE are clearly insufficient.

10. To build up the financial strength of the WKCD, one has to cut spending and earn more. It’s worthwhile to consider options for (a) reduction of on-costs; (b) a more efficient operation mode of M+; and (c) an effective business plan for RDE facilities, are essential.

Offices at WKCD?

Offices at WKCD - Cont’d

Cost data

• Davis Langdon & Seah International, Current Building Cost Information Data in Hong Kong, Quarterly; or

• http://www.dlsqs.com/ice/index.jsp?mod=newsview&showmodonly=newsview&op=view&catid=71