Money & WKCD - 21 Nov, 2004

Demand the Financial Numbers

Dear Subscribers & Friends

The reason for a 3rd eNewsletter on the West Kowloon Cultural Development (WKCD) is that a lot of money, public money, is involved. While the public relations are being fought over museums and brand name international museum management, the real issue is about governance, particularly over process and public money.

A. Assessment Criteria … how proposals were assessed

1. FOUR criteria: The criteria relate to the capability of the developer; technical plans; post-construction management plan; and financial proposal.

2. Developer: The larger and richer the developer the better, who can create a “prominent landmark in Victoria Harbour”.

3. Canopy: Must have and must cover at least 55% of development area like the Foster Scheme that won the concept design competition in 2001 (see next Newsletter).

4. Brand name culture: The better known the museums and arts facilities management the better.

5. So basically: The winner must be big, be a big name, teamed up with big names, give us a giant canopy, and can run big things.

6. don’t forget the $$: Give us a deal too (see B. below).

B. Follow the money … still a secret by the way

The tendering developers had to state:

1. Investment: spend a lot and have rich bankers.
2. Guarantees: give indemnities and/or performance bonds.
3. Land premium: how much will you pay the government for the right to develop?
4. Royalties: what portion will you give the government?
5. Profits: how will you share profits with the government?
6. Risks: do you expect the government to share shortfall in revenues, losses etc?

C. How much money may be made …

1. Academic estimates: University folks published a report in May 2004 using 1.8 times plot ratio (Foster Scheme), 8% interest, 5/04 prices, and concluded that the winning developer could still make 20% return on HK$25.1 billion development costs, plus put HK$11.4 billion profit into a trust fund for the arts. www.hkadc.org.hk/ad/wkcd_study/index_eng.htm

2. Plot ratios: The 3 finalist developers used 2.5; 3.28; and 4.3 times plot ratio. On average, that’s more than double the Foster Scheme’s plot ratio.

3. CLSA’s estimates: Investment bank CLSA Asia-Pacific Markets described the WKCD as “extremely lucrative” based on available information and assumptions. CLSA did not know what the financial proposals were in reality but made estimates, which were nevertheless interesting because they provide us with indicative numbers:

(a) Henderson Land (2.5 x plot ratio): 15.7% enhancement to share value - current HK$48.17/share + HK$7.57/share.
(b) CHK+SHKP (3.28 x plot ratio): 7.4% and 7.5% enhancement to share value respectively - current HK$84.64/$80.38 + HK$6.23/$6.01.
(c) Sino+Wharf+CE (4.3 x plot ratio): 46%, 22.6% and 54.6% enhancement to share value respectively - current HK$9.82/$35.15/$8.48 + HK$4.52/$7.95/$4.62.

D. Big development, big profits and no transparency

1. Public asset: The development right is a public asset. Yet, there is no transparency on the financial arrangement of WKCD.

2. Opaque decision-making: The decision to give the developer almost unlimited development rights on the site [eNewsletter 19/11] was made by a government committee with no consultation.

3. Post-tender public consolation: There is now a 15 weeks consultation period but it’s on whether the public likes the designs than over the structure of the financial/development arrangements.

4. Its not about Guggenheim: The public should not be diverted by the sexy arts PR. Go for the financial arrangements. The government will not release them but the public can demand a lot more transparency by using what’s been published.

CHRISTINE LOH
Civic Exchange - HK’s independent think tank