An alternative financial analysis of the watersports
complex proposal

The original (1996) Sinclair Knight Mertz (SKM) report nominated development costs of $5.17 million. After receiving a subsidiary report on project costs from R.A. Young Consulting Engineers in February 1998, these costs became $9.45 million, with the increase of $4.28 million being accounted for as follows:

Doubling of the cost of excavation and earthworks within two years of the original estimate, coupled with construction lead time and the fact that the R.A. Young estimates are now almost eighteen months old, does not fill one with confidence about avoidance of further cost blow outs.

Total project cost

After taking account of relocation costs of $1.032 million, SKM nominates a project development cost of $10.482 million. This does not take account of additional relocation costs the city is up for and other project costs.

In a letter to Mr Leon McNamara dated 30 May 1999, Mr Neil Savery, Director, City Planning, nominates an $11.5 million project cost, made up as follows:

Mr Savery advised that the bulk of the further costs of $813,000 is attributable to a Special Rates and Charge Scheme (over five years) to cover the watersports community contribution of $500,000. The balance has something to do with a qrant application for development of a regional standard baseball facility.

Operating costs (excluding dredging)

The following comment is relevant to the question: ‘What is the real extent of watersports operating costs and what proportion must be borne by the city?’

In the 1996 report it was stated that event based operating costs would be covered (via organising committee budgets) by event income (entrance and event entry fees, sponsorship, car parking fees etc).

It was noted that Council had estimated event operating costs at $6–7,000 per event.

The 1996 report indicated that Council had estimated the cost of non-event maintenance to be around $27,500 per annum, and had suggested that the Management Committee should budget to cover 20% of this.

The updated SKM report states that:

R.A. Young suggests that operating costs outside of specific events would be in the vicinity of twice the original estimate, i.e. $55,000.

R.A. Young is also of the opinion that appointment of a site manager should be considered.

City of Greater Geelong (COGG) has indicated ‘preparedness to provide an annual subsidy of $30,000 towards the operating costs of the centre, plus contribute 20% to the overall venue operating costs'.

In a report in the Geelong Advertiser (‘Blow out in rowing course cost’, 15 July 1999), the point was made that doubling of the initial estimate of the cost of ‘maintaining and operating’ the facility, would lead to the city meeting an annual bill of $48,000, with the Management Committee bearing $15,000.

If the city's share is calculated in accordance with the revised report formula, make up of the $48,000 would be:

There is no indication of how the Management Committee's contribution of $15,000 is arrived at.

If 20% of overall venue operating costs is $18,000, then 100% of those costs is $90,000.

In turn, if it is assumed that non-event operating costs are in line with the $55,000 suggested by R.A. Young, event operating costs are apparently estimated at $35,000.

After bearing in mind the 1996 estimate of event operating costs ($6–7,000 per event), the conclusion is that $35,000 would hardly cover current events on the Barwon River, let alone potential events included in economic valuations.

When related to the content of the updated report, operating costs of $63,000, split $48,000 city and $15,000 Management Committee, make no sense at all.

Until there is further clarification of estimates of overall venue operating costs, properly related to an events program, a city outlay of $48,000 per annum must be regarded as a bare minimum.

Operating costs (including dredging)

Both the 1996 and updated SKM reports specify dredging costs at $60,000 every five years. This outlay is not included in ‘overall venue operating costs’.

If $60,000 is still a realistic cost assessment and experience proved that a five-year cycle is adequate, the city's $48,000 minimum outlay noted under the previous heading must be increased to an average annual outlay of $60,000.

A more prudent assessment at this stage would be to assume a 10% increase in cost to $66,000 and a three-year cycle, thus lifting the city’s average annual outlay to $70,000.

Watersports community ability to contribute

Councillor Anthony Aitken, Chairman, Watersports Park Taskforce, has referred to the city's major events taskforce with a ‘war chest’ of $750,000 per annum and has stated that ‘Council has the funding to create opportunities at the complex’.

These statements suggest that the following comment is not out of place:

A study of the 1996 SKM report, under the complex management heading, quickly leads to the conclusion that event budgets are invariably tight.

In a future competitive scene, a Geelong complex bidding for events, would be up against:

• The Nagambie Rowing Complex, and possibly the Carrum Watersports Complex, for Victorian state events. (The Victorian Rowing Association statement in the Geelong Advertiser of 8 July supports this conclusion.)
• The Olympic complex at Penrith and all other venues, for national and international events.

Penrith will be very actively marketed and so will Nagambie. Carrum, too, might get back in the act.

Cost cutting and ample sponsorship funds will be the order of the day.

A point that supports the above scenario is contained in a statement on page 111 of the 1996 SKM report. It reads:

‘The Management Committee would be able to apply for grants from Council where appropriate, to help cover shortfall or enable entry fees to be reduced.’

The watersports community will either control or have a major influence on the Management Committee.

In addition to a $15,000 contribution to operating costs (which might turn out to be much higher) that community will also have to find around $100,000 per annum for five years to meet obligations under the Special Rates and Charges Scheme.

It is by no means untoward to suggest that Council might find itself providing funds way above the minimum operating costs noted above.

Assessment of regional financial benefit

The first point that must be made under this heading is that if it were a matter of considering viability for a commercial enterprise, no independent and self-respecting financial analyst would let this project get past first base.

As is noted below, the foundation for assessment of financial benefit is just not good enough.

When rejecting criticism of economic merit Councillor Aitken stated, in the press, that:

Current events on the Barwon River, which generated $5.8 million, would be enough to pay for the capital investment in the long term, without expanding the event calendar.

The forecast of $5.9 million to $8 million to be derived from the facility is a conservative figure, because it is based partly on 1996 tourism figures.

These statements demonstrate lack of appreciation of the real issues, which are:

• Application of tourism expenditure rates to numbers of visitors points to a financial benefit to the region which common sense suggests is an ‘of the order of’ figure. A minor updating of the tourism figures would be virtually meaningless.

• The 1996 assessment of annual value to the region of the ‘base case' (current events) was $5.4 million (including bi-annual events) and $4.6 million (excluding bi-annual events).

• In the revised SKM report a consistent annual net value of $5.4 million is inferred, i.e. it is assumed that bi-annual events are annual.

• The assumption that if there is no new course, events will be lost, has very little, if any, foundation. Even to a rowing rookie the Barwon River is obviously a boutique-style course that will always have worthwhile event calendars.

• It is absurd to suggest that $11.5 million (or more) should be invested just to preserve a net annual value to the region that already exists.

• The revised SKM report suggests that a new course and additional events will lead to an annual net value to the region somewhere in the range $5.9 million to $9 million, i.e. an increase over current events in the range $0.5 million to $2.6 million. This additional annual net value is certainly not in the world shattering class.

• The ‘development option’ discounted cash flow statement includes (in three particular years) considerably higher benefits attributable to major events that are not specifically identified.
  
  Whilst these higher benefits have been left out of the estimation of net annual value to the region (no doubt because they are in the ‘most unlikely’ class) they do have a major influence on calculation of discounted cash flow over 25 years and the Net Present Value (NPV) noted in table 1.3 of the revised report.
  
  This inconsistency negates the claim that return on investment over 25 years is 120%. There is insufficient data available to allow specific re-calculation of NPV, but it would not be far off the mark to suggest that the return on investment over 25 years, relevant to annual net value to the region in the range $5.9 million to $8 million, is no more than 60%, which is hardly an impressive figure.

A careless approach to the benefit estimation section of the revised SKM report is demonstrated by:

• Attachment of table 1, which is identified as the Regional ‘Most Likely Scenario’ NPV, and is, in fact, the National NPV calculation.
• Presentation of NPV statements for 25 years commencing in 1998, with at least two major events worth $1 .2 million in 1999 and 2000.

Other fantasy benefit claims

When expressing an opinion (Geelong Advertiser, 29 May 1999) that those people opposing the watersports complex were short sighted and selfish, Premier Jeff Kennett talked about a ‘huge multiplier effect’ and the hundreds of jobs that will be created by this project.

This is nonsense. Event organisational labour will be handled by volunteers and a temporary influx of visitors for short events spread over a year would, at best, add a few hours to part time jobs in the accommodation and entertainment fields.

The president of the Geelong Chamber of Commerce suggested (Geelong Advertiser 29 May 1999) that the complex could inject $10 million into the local economy. Obviously the injection (over and above what comes in now from current events) would be struggling to get just one-fifth of that figure.

Can the city of Geelong afford a watersports complex?

The answer to this question is obviously ‘no’, because:

• There is no doubt about the fact that the city's current rating base does not provide sufficient funding for quality community services, adequate asset maintenance and regional capital works.
• A projection of financial position to 2003–04 (in the 1999–2000 budget documentation) indicates that after nominal rate increases in each year, adequate funding for the community's real needs will still be a problem, well into the new century.
• In these circumstances, a watersports complex demanding a very substantial capital investment and a maintenance/operating outlay that could be around, or well over, $100,000, is ‘not on’, even if it could provide a substantial community economic benefit, which it cannot.
• The fact that $9.4 million of the capital investment is to be provided by the State Government, is irrelevant.

Only so much cash is contributed from this source. If the city takes $9.4 million for watersports, another major project will miss out. Geelong has already been directed to the end of the queue.

The above financial considerations, combined with the fact that a watersports complex would meet the needs of only a small segment of the community, wipe out the needs of a much wider segment of that same community, uproot 333 acres of public open space, destroy 6000 trees and generally upset the environment in the Belmont Common area, lead to a conclusion that support for the project is arbitrary and illogical.

It is highly likely that the extent of funds injected into the Geelong economy by a watersports venue would be quite ordinary. It would also appear that development cost will be nowhere near recovered in the twenty-five year span used for valuation.

On top of this, ratepayers would be footing the bill for Council's development costs and the substantial annual contribution for maintenance, venue operating costs and general financial support.