JOIHNSTAFF

Attachment

Economic AppraisalThe New Museum in Western

SEt\SM. VE:

Economics

& Planning

ECONOMIC APPRAISAL FOR THE NEW MUSEUM IN WESTERN SYDNEY OPTIONS

DRAFTNOVEMBER 2017

Prepared forJohnstaff Projects

Independent insight.

.0010 Econ

Certified

Corporation

Independent insight.

SGS Economics and Planning Pty Ltd 2017

This report has been prepared for Johnstaff Projects. SGS Economics and Planning has taken all due care in the preparation of this report. I•lowever, SGS and its associated consultants are not liable to any person or entity for any damage or loss that has occurred, or may occur. in relation to that person or entity taking or not taking action in re.sp,ert of any representation, statement, opinion or advice referred to herein.

SG') Economics and Pk-miring : LtdACNI 007 437 729

n.auOffices in Canberra, Hobart. MeIhnume, Sydney

170157•Ecorrom¢ Appraisal for The Museum Project (GRAFT) 171116.00Cx

TABLE OF CONTENTS

1. INTRODUCTION 1

1.1 Background 11.2 Scope of work 11.3 Report structure 2

2. ECONOMIC APPRAISAL 3

2.1 Method 32.2 Discrete Choice Experiment 42.3 Major data inputs and assumptions 5

3. KEY FINDINGS AND SENSITIVITY TESTS 14

3.1 Performance measures 143.2 Sensitivity tests 153.3 Interpretation of results 17

4. APPENDIX 1- VISITATION FORECASTS 19

4.1 Major data inputs and assumptions 194.2 Visitation under different options 22

5. APPENDIX 2 - REFERENCE LIST 24

LIST OF FIGURES

FIGURE 1 ATTRIBUTES AND OFFERINGS AS MODELLED IN THE DISCRETE CHOICEEXPERIMENT 4

FIGURE 2 CAPITAL COSTS OVER THE CONSTRUCTION PHASE 5FIGURE 3 LIFECYCLE COSTS 6FIGURE 4 PROJECT OPERATING COSTS 7FIGURE 5 MUSEUM OPERATING COSTS 7FIGURE 6 VISUAL REPRESENTATION OF CONSUMER SURLUS 9FIGURE 7 COMPONENTS OF CONSUMER SURPLUS 9FIGURE 8 CASH FLOW OF TOTAL COSTS, BENEFITS AND NET BENEFITS 15FIGURE 9 VISITATION UNDER THE PROJECT OPTIONS 22FIGURE 10 BREAKDOWN OF OPTION 03 VISITATION 23

LIST OF TABLES

TABLE 1 COSTS AND BENEFITS WHEN MOVING FROM THE BASE CASE TO THE PROJECTOPTIONS 3

Economic Appraisal for the New Museum in Western Sydney Options

TABLE 2 WILLINGNESS TO PAY VALUES 4TABLE 3 MUSEUM FLOORSPACE 5TABLE 4 NET PRESENT VALUE OF COSTS 8TABLE 5 ASSUMPTIONS USED IN THE CALCULATION ON CONSUMER SURPLUS 11TABLE 6 EDUCATION ASSUMPTIONS IN 2017 DOLLARS 11TABLE 7 RESIDUAL ASSET VALUE IN 2017 DOLLARS 12TABLE 8 PRESENT VALUE OF BENEFITS 12TABLE 9 PERFORMANCE MEASURES 14TABLE 10 SENSITIVTY TESTS: 3% DISCOUNT RATE 15TABLE 11 SENSITIVITY TESTING: 10% DISCOUNT RATE 16TABLE 12 SENSITIVITY TESTING: CONSTRUCTION COSTS +10% 16TABLE 13 SENSITIVITY TESTING: CONSTRUCTION COSTS -10% 16TABLE 14 SENSITIVITY TEST: 50% DIVESTMENT VALUE 17TABLE 15 SENSITIVTY TESTING: 50% OF INTERNATIONAL AND INTERSTATE VISITORSEXTEND TRIP 17TABLE 16 2015/16 VISITATION FOR POWERHOUSE MUSEUM 19TABLE 17 ATTRIBUTES SELECTED UNDER BARE MINIMUM MUSEUM AND PROJECT

OPTIONS 20TABLE 18 PREFERENCE SHARES; WESTERN SYDNEY MODEL 21TABLE 19 PREFERENCE SHARES: AGGREGATE MDOEL 21TABLE 20 RELATIVE PROBABILITIES OF ATTENDANCE 21

LIST OF EQUATIONS

EQUATION 1 PRODUCER SURPLUS CALCULATION 10EQUATION 2 RELATIVE PROBABILITY OF ATTENDANCE 21

SG Economic Appraisal for the New Museum in Western Sydney Options ii

Base

Option

Option

N - R O D U C - T O N

1.1 BackgroundThe Cultural Infrastructure Program Management Office (CIPMO) is developing an Extended Final Business Case for the development of a New Museum in Western Sydney (the Museum).To deliver the best possible Museum in Western Sydney, a business case has been prepared to ensure all options are investigated, tested and analysed. To support this business case, SOS Economics & Planning (SGS) has been commissioned byJohnstaff Projects (the business case lead) to prepare visitation projections and an economic appraisal for the options developed for the New Museum in Western Sydney Project (the Museum Project).The economic appraisal will examine three project options relative to a Base Case, these being:

Under the Base Case it is assumed that there is no MAAS presence at Ultimo or Parramatta

Designed to fit within the provisional project budget. Under this option the Museum will contain a mix of long and short-term collection gallery spaces, a touring gallery, auditoriums, education areas and public amenities. it will deliver a museum of 12,000 sqm net area and offers less gallery space than the Ultimo Powerhouse

Same features as Option 01 but has an additional 5,000 sqm gallery space. It will be larger in size (over 17,000 sqm net space) and will enable greater capacity

Option

for display of the MAAS collection and other temporary exhibitions.

Has comparable front-of-house floor space to the Powerhouse Museum in Ultimo. Option 03 has the same features as Option 02, with the addition of a family makers space, larger education spaces, additional functions and event space and an Omnimax. it is the largest project option with 21,000 sqm net space. The aim of this option is to maximise the wiliness-to-pay (WTP) for the Museum, elicited from the choice modelling survey

It should be noted that the business case also examines a number of options that maintain some MAAS presence at the current Powerhouse Museum site. However, this report is solely focused on the Museum Project options.

1.2 Scope of workThis report presents an economic appraisal of the identified project options. The economic appraisal draws on a number of cost estimates by Rider Levett Bucknall, Paxon Group, Johnstaff Projects and CIPMO. The economic appraisal also utilises the results of the discrete choice experiment conducted by CaPPRe, who derive WTP figures for each of the project options. The willingness-to-pay figures and other inputs are used to calculate a range of benefits over the appraisal period. In addition to the economic appraisal, SGS also forecasts visitation to each of the project options.

Economic Appraisal for the New Museum in Western Sydney Options 1

Chapter 2: Economic Appraisal

1.3 Report structureThe rest of this report is structured in the following manner:

Presents the economic appraisal including the method used, major data inputs and assumptions and the economic costs and benefits that have been quantified

Chapter 3: Key findings Presents the key findings of the economic appraisal as well asand sensitivity tests sensitivity tests on key variables

Appendix 1: Visitation ForecastsAppendix 2: Reference List

Presents the assumptions underpinning the visitation forecasts

List of sources referred to in the reporting of the economic appraisal

eft SG S. Economic Appraisal for the New Museum in Western Sydney Options 2

2, FIONOMIC APP DAIC

2.1 MethodCost-Benefit Analysis (CBA) has been chosen for this economic appraisal as it is the most comprehensive economic appraisal technique and is aimed at quantifying all the major costs and benefits in monetary terms.

The CBA gauges the marginal costs and benefits, when moving from the Base Case to three project options, from the wider community's perspective. The CBA evaluates a project using a Discounted Cash Flows (DCF) framework, thus includes broader economic, social and environmental costs and benefits, as opposed to merely 'entity specific' revenues and expenses in a financial appraisal.

Economic evaluation does not directly consider the payment of interest. Rather resource flows are expressed in real terms and social time preference is taken into account by the use of a real discount rate. The NSW Treasury Guide to Cost-Benefit Analysis (TPP17-03) recommends using a real discount rate of 7 percent in the CBA with sensitivity tests on the use of 3 percent and 10 percent.

A discrete choice experiment was conducted by CaPPRe, in order to determine a willingness-to-pay value for each of the project options. A number of wider economic benefits have been quantified.

Cost is recognised in the CBA as an opportunity cost of committing the resources that would otherwise be available for alternative uses, instead of an expense to a specific entity. Adopting this principle also reflects that the CBA is conducted from the perspective of society as a whole. On the other hand, the utility derived from the use of a facility can be measured through how much the user is willing-to-pay in the CBA, even if it is free to access the facility and therefore accrue no revenue to the facility provider in the financial analysis.

The CBA has been conducted from the perspective of the NSW society. As such, the CBA contrasts the costs with the benefits to all members within the NSW society.

This approach has been applied to compare the potential value propositions of the Museum Project options (relative to the Base Case) to the NSW community. A list of costs and benefits to NSW, when moving from the Base Case to the three project options are identified in Table 1 below.

TABLE 1 COSTS AND BENEFITS WHEN MOVING FROM THE BASE CASE TO THE PROJECT OPTIONS

Costs

Construction costs

Benefits

Consumer surplus

Lifecycle costs Business WTP

Project operating costs Producer surplus

Museum operating costs Government revenue

Land costs Education benefits

Divestment revenue

Willingness to Pay (per NSW

2.2 Discrete Choice ExperimentA discrete choice experiment was designed and conducted by CaPPRe, using data collected by Survey Sampling International (SSI). The discrete choice experiment provides the following inputs to the business case development:

Optimal offering of features for the new facilityConsumer willingness-to-payExpected levels of demand.

The last two inputs were used directly in the calculation of consumer surplus and relative attractiveness of Museum Project options discussed in this report. It should be noted that the scope of the CaPPre study is limited to solely valuing the Museum Project as no reference to the Powerhouse Museum at Ultimo was made.

Consumer Surplus, has two components, use and non-use values. The design of the experiment resulted in a WTP figure including both use and non-use components. The results of the experiment can be seen in Table 2 below.

TABLE 2 WILLINGNESS TO PAY %/ALLIES.

The results indicate that the average household is willing to pay between $115 and $129 in the form of a one-off government levy, for the Museum, based on its attributes and offerings. It should be noted that the survey participants were not informed that the questions were surrounding a museum to be opened under the MAAS brand, as this could introduce biased responses.Discrete choice experiments operate by asking respondents their preferences for hypothetical scenarios, goods or services (Mangham, Hanson & McPake 2009). In this context, respondents were asked about their preferences for museum attributes and offerings. The modelled attributes and offerings can be seen in Figure 1 below.

FIGURE 1 ATTRIBUTES AND OFFERINGS AS MODELLED IN THE DISCRETE CHOICE EXPERIMENT

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As discussed above, the discrete choice experiment was also used to determine the relative probability of attendance between the museum options. The usage of this is expanded upon in appendix 1- visitation forecasts.

2.3 Major data inputs and assumptionsThe economic appraisal, conducted by way of cost-benefit analysis, has been conducted over a period of 26 years, commencing in the FY 2017/2018 and concluding in 2042/2043. Thus, following construction, 20 full financial years of costs and benefits will be analysed in the economic modelling.

The following sub-sections will identify and explain the main data inputs and assumptions used and their sources.

Costs

Construction costsCosts associated with the construction of the Museum Project under various options have been provided by Rider Levett Bucknall. There are significant differences in construction costs, as can be seen in Figure 2 below. This can be explained by the different museum offerings under each option as well as the museum sizes (see Table 3 below).

FIGURE i CAPiTAL COSTS OVER THE

CONSTRUCTION PHASE

S160,000,000 S140,000,0a) 5120,000,0,)0 S100,000,0X) S81.),OCO,LUU S60,000,000 411,0141,011) 5

20,00D,CO0

5-1V\ loll I cd2° \9 .10\ --,l -

L01\12011 11,07 702 10.;

Project Option Fioorspace m2)

Option 01

Option 02

Option 03

17,847

26,872

28,570

tl~itinn a niltinn 1) a (Ipt 1.1

TABLE 3 MUSEUM FLOORS" ACE

FIGURE 3 LIFECYCLE

$35,000,

000

530,000,

000 S

25,000,0

00

$20,000,

5

Lifecycle costsLifecycle costs refer to the costs associated with replacing assets once they reach the end of their useful life. Lifecycle costs commence in 2027/2028, 4 years after the construction of the Museum Project has been completed. As can be expected, the more features and floorspace the museum option has, the greater the lifecycle costs will be. The lifecycle costs associated with each of the project options are shown in Figure 3.

ol$ccbt, 0„‹, 6„,\ „cb „0, czp,v,0,A 61,c6, csv.) ecvot,N.9- -9 -0 0‘

c s b t i t i t i t i t i t i pSource: Rider Lever( Bucknall (2017)

Project operating costsDespite the Base Case for this Economic Appraisal operating under the assumption that there will be no museum at Ultimo, there are costs involved in maintaining existing collections at Ultimo and moving them to the Museum Project site in Parramatta, which are relevant costs to the Museum Project. More specifically, the project operating costs included in this Economic Appraisal comprise the following:· Collections and logistics costs· Continuation of services and other building costs to maintain the collection· Costs associated with supporting business systems and contract re-tender costs

for the Museum Project.As can be expected, these costs will not differ between the various project options, and can be seen in Figure 4 below.

air SGS Economic Appraisal for the Mew Museum in Wesrern Sydney Options

P e S

art SGS art Nf-Ti•Z

Economic Appraisal for the New Museum in Western Sydney Options 7

FIGURE 4 PROJECT OPERATING COSTS

S25,000,000

5)0,0113,o00

S15,000,000

510,000.000

55,000,000

100 \ oN .611°19 011-010 0-201 10- -2A11022

739:211-°23201317-32 •- -

Source: Poxon Group (2017)

Museum operating costs

Operating costs of the Museum Project are the second greatest contributor to total costs, and include things such as:

· Wages and salariesa Utilities· Advertising6 Repairs and maintenance· Various other expenses associated with the continuous operation of the museum.

It should come as no surprise that the bigger a museum and the more features it has in place, the greater it will cost to operate and run the museum and its facilities. As can be seen in Figure 5 below, project options 02 and 03 follow the same trend, while option 01 differs slightly in terms of steeper increases and decreases in operating expenses.

FIGURE 5 MUSEUM OPERATING COSTS

$50,000,000 $45,000,000 $40,000,000 $35,000,000 $30,000,000 $25,000,000 $20,000,000 S15,000,000 $10,000,00055,000,000

5-

-..,---W",'..,.W.,-_,---,

09 0:°-0° 0°° 0°.';'' 09 09 9°41 " e-19 19' 1.59 lq ;1 ' " 4 b le -e : 1 - Option 01 =Option 02 =Option 03

Source: Paxon Group (2017)

Land costsAs per advice from Property NSW, the site where the Museum will be located is valued at $115 million. Since the NSW Government has entered an agreement with City of Parramatta to acquire this site, there is an opportunity cost to the Government as a result of using the land for the Museum Project. This is measured by the current valuation of $115 million advised by Property NSW in 2016.

Summary of costsA summary of the costs for each of the project options can be seen in Table 4 below. Note that the figures in Table 4 are the net present value (NPV) of the future cash flows and not the summation of costs for each of the line items. As can be expected, construction costs make up the majority of the costs, due to the construction of a new state-of-the-art museum. This is closely followed by the museum operating costs. Because the museum will be a new build, lifecycle costs are relatively low, as extensive asset replacements and capital works would not be required during the early years of the new build's life.

TABLE 4 NET PRESENT VALUE OF COSTS

Construction costs

Option 01 Option 02

$ 489,686,195

Option 03

$ 534,827,662$ 362,644,699

Lifecycle costs $ 30,320,083 $ 38,941,870 $ 42,508,813

Project operating costs $ 53,568,823 $ 53,568,823 S 53,568,823

Museum operating costs

$ 285,491,610 $ 310,803,765 $ 355,892,172

Land costs $ 115,000,000 S 115,000,000 $ 115,000,000

Total costs $ 847,025,215 $ 1,008,000,653 $ 1,101,797,469

Benefits

Consumer surplusConsumer surplus refers to the surplus derived when consumers of a good/service are willing to pay more than the cost of consuming that good/service (see Figure 6 for a visual representation). As can be seen from the graph, consumer surplus is the area under the demand curve, that is, above the price that consumers are willing-to-pay for a good or service

Consumer surplus is composed of two main components, use value and non-use value (see Figure 7). As its name suggests, the use value refers to the value consumers place on a good or service for the direct consumption of the good or service (Throsby 2007). In other words, this refers to the value consumers place on the museum if they were able to visit the museum.

Non-use value refers to the value placed on goods or services by consumers if even they will not be consuming the goods or services. There are three main components of non-use values, these being: existence value, option value and bequest value.

Economic Appraisal for the New Museum in Western Sydney Options 9

FIGURE 6 VISUAL REPRESENTATION OF CONSUMER SURLUS

2 0Q u a n t i t y

Source: Agorwol (2017)

FIGURE 7 COMPONENTS OF CONSUMER SURPLUS

Consumer Surplus

- -NUse value Non-use value

Existence value

Option value

Bequest value

Source: Throsby (2007)

The discrete choice experiment survey resulted in an all-inclusive WTP value comprising use and non-use values. In a general sense, the WTP for users of the museum would be multiplied by the number of NSW visitors, whilst the non-use WTP value would be multiplied by the number of NSW households. Because the output of the CaPPRe model is an all-inclusive WTP value, the WTP values in Table 2 were multiplied by the number of households in 2018.The Department of Planning and Environment (DPE) issues household projections for each LGA from 2011-2036, in 5-year intervals. The number of households in 2018 were interpolated using the 2016 and 2021 household projections. The 2021 DPE household

projections were modified to take into account the expected housing targets for Western Sydney from the Greater Sydney Commission (GSC). Thus an adjustment factor of 8% was applied to the 2021 DPE household projections.On advice from NSW Treasury, consumer surplus was also derived for the additional households over the remainder of the appraisal period. Thus, the incremental increase in dwellings was multiplied by the WTP for each of the project options.

Business WTPAccording to CIPMO, MAAS is expected to raise $75 million through business sponsorships and private endowments to help assist with the funding for the construction of the Museum Project. According to a discussion paper prepared by NSW Treasury on the Issues for the Economic Appraisal of Proposed Investments in Cultural Venues (Aug 2014), this can be regarded as indicators of social use benefits of the Museum, as this reflects a willingness of NSW businesses to contribute towards the development of the Museum Project. Since the consumer surplus is derived from a WTP survey on NSW households, it is reasonable to assume that the business WTP is in addition to the consumer benefit discussed above.According to CIPMO, this will be collected over two tranches, with $25 million collected in 2018/2019 and $50 million in 2019/2020.

Producer surplusProducer surplus refers to the benefits that accrue to NSW businesses as a result of new infrastructure projects or the attraction of new events. Producer surplus may either be direct, that is, where the organisation directly benefits from the project, usually in the form of net revenue, or indirect, where the wider NSW society benefits. In this instance, since the Museum is projected to be in operating deficit, there is no direct producer surplus as a result of the project. Indirect producer surplus has been captured through the attraction of international and interstate visitors to the Museum.

For the purpose of this appraisal it is assumed that international and interstate visitors will extend their trip by one additional night so that they can attend the Museum. This is considered reasonable, given that the location of the Museum is in Western Sydney, and travelling to see the Museum and spending a few hours in the museum will take up the majority of a day.Indirect producer surplus is comprised of two components, business surplus and laboursurplus. As a result of international and interstate visitors spending an additional night, they will spend their money in NSW businesses, thus this needs to be captured as an economic benefit, as under the Base Case this would never have been realised.The economic benefits will be realised in the form of increased business profits and wages. However, the entire spending will not be realised by the businesses or employees. The additional wages needed to facilitate the additional visitors and additional profits earned on products and services sold are what are captured.Producer surplus is calculated using Equation 1 below.

EQUATION 1 PRODUCER SURPLUS CALCULATION

Surplus = (Vint x Sint x Sint) + (V1„ x Sist x Sist)where:

V = Number of visitors who extend trip by one nightS = Spending per night

LS = Surplus ratio (either labour or business)

Subscripts:

Economic Appraisal for the New Museum in Wester n Sycine,e. Options 10Int = International visitors

1 9 $413.International visitors

8 %12% $ 407.31Interstate visitors

Average spend per night (2017

Labour Business

1st = Interstate visitors

The assumptions underpinning the labour and business surplus can be seen in Table 5 below. The surplus ratios have been established based on discussion with Infrastructure NSW and Department of Industry. The average spend per night has been advised by CIPMO.

TABLE 5 ASSUMPTIONS USED IN THE CALCULATION ON CONSUMER SURPLUS

Government revenueThe NSW Treasury Guide to Cost-Benefit Analysis (TPP17-03) states that 'there may be rare instances where additional revenues may be a benefit, but this would only occur when there is an injection of expenditure into NSW from parties outside the NSW community'. On advice from NSW Treasury, the revenue to the Museum Project from international and interstate visitors has been included as an additional benefit. This can be considered as interstate and international spending that would otherwise not be injected into the NSW economy without the museum project.

Using the revenue data from Paxon Group, revenue attributed by international and interstate visitors was apportioned based on the share of visitation by international and interstate visitors.

Education benefitsMuseums are likely to attract many student and school groups, and as a result there is a benefit of students attending museums and learning content outside school curriculum. Education does not have to be constrained to or occur in a classroom setting.On advice from CIPMO, the first year of the Museum operation will result in 81,840 students, based upon students from the annual report and escalated in line with population growth. Following years are based upon the proportion of students in the first year of visitation and the proportion applied to the growth in Western Sydney population. Note that Western Sydney population is defined as the Local Government Areas (LGA's) that are classified as Western Sydney.

According to the Productivity Commission (2016), the value of one hour of education is $12.76, or $13.74 in 2017 dollars, and on advice from CIPMO students are likely to spend 3 hours at the Museum. Based on these assumptions, the education benefit derived from each student visit is estimated by multiplying the number of hours spent at the Museum and cost of education per hour as illustrated in the table below.

TABLE c EDUCATION ASSUMPTIONS iN 2017 DOLLARS

Assumption

Cost of education per hour $13.74

Hours per student 3.0

Education benefit per visit $41.22

Option 01 Option 02 Option 03

Residual asset

Divestment revenue from siteAs per advice from Johnstaff Projects and CIPMO, part of the Museum site will be rezoned and divested by the NSW government to facilitate the development of two residential towers.Based on modelling completed by Paxon Group (2017), the potential revenue raised from the divestment following the rezoning is estimated at $293.4 million in today's dollars. This value extraction has been included as a revenue to the government in this economic appraisal, as it is assumed that the site would not be rezoned under the Base Case.

Grant release benefitOn advice from NSW Treasury, the benefit of the release of the Government Grant from the Ultimo site is accounted for as a benefit in this economic appraisal. The Grant to be received by MAAS to subsidise the operation of the existing Powerhouse Museum at Ultimo, should it continue to exist, is estimated by Paxon Group over the assessment period.

Residual asset valueResidual asset value refers to the value of an asset or infrastructure at the end of its useful life. NSW Treasury Guide to Cost-Benefit Analysis (2017) advises that the general assumption for economic appraisals is to assume that assets have no remaining value at the end of their useful life. The guidelines also recommend that for major new capital expenditure projects, the practical asset life is 20-30 years. The period over which the economic benefits and costs are accounted for in this economic appraisal is 20 years. However, since the useful life of the Museum is

expected to last more than 20 years, Paxon Group has estimated the following residual values at the end of the appraisal period.

.74BLE 7 RES.DIJ:1,1 ASSET VALUE IN 2017 DOLLARS

Summary of benefitsA summary for each of the benefits can be seen in Table 8 below. As can be expected, consumer surplus is the greatest contributor in terms of economic benefits. Divestment revenue from the residential towers on the Parramatta site also brings in very significant revenue to the NSW government with an estimated revenue stream of $256 million.

TABLE S PRESENT VALUE OF BENEFIT

Consumer surplus

Option 01

$ 415,970,091

Option 02 Option 03

466,609,928S 426,821,485

Business donation

Producer surplus $ 164,715,468 $ 132,425,892 $ 174,055,004

Government revenue S 33,962,785 $ 34,006,941 $ 60,516,640

Education benefits $ 31,010,102 $ 31,010,102 $ 31,010,102

Divestment revenue

Grant release benefit $ 241,509,464 $ 241,509,464 $ 241,509,464

Residual asset value $ 42,163,057 $ 57,279,549 $ 62,648,967

Total benefits $ 1,252,634,312 $ 1,246,356,778 $ 1,359,653,451

Source: SGS Economics and Planning (2017), Johnstaff Projects (2017),

oft SG.S, Economic Appraisal for the New Museum in Western Sydney Options 13

SG S

K E Y F I N D I N G S A N D S E N S F I V I T Y T E S T S

3.1 Performance measuresThe results of the CBA can be seen in Table 9 below. The results in Table 9 are calculated on the basis that all figures are in real terms are cash flows are discounted using a real discount rate of 7 per cent per annum.

The following performance measures were calculated from the CBA:

Net present value (NPV): The present value of future benefits minus future costs, discounted back to current valuesBenefit-cost ratio: The ratio of the present value of the marginal benefits to the present value of the marginal costs

TABLE 9 PERFORMANCE MEASURES

As the results indicate, all project options return a benefit-cost ratio greater than 1.00. Option 01 returns the greater result, with a BCR of 1.48. This result can be interpreted as, for every $1 in costs borne by the NSW community, there will be a whole-of-society benefit of $1.48.It should also be noted that all the project options return positive net present values (NPV's). The NPV indicates the present value of net community benefits generated by the Museum Project. Thus, given the future resource inflows and outflows, Option 01 provides a net community benefit of over $405 million in present day values.

The cash flows of Option 01 can be seen in Figure 8 below. The first two huge surges in benefits can be explained by the consumer surplus in 2017/2018 and the divestment value being realised in 2019/2020 from the sale of part of the Museum land to developers. As can be expected, costs will be high during the construction phase and will peter out as construction ends. The significant benefit in the final year of the economic appraisal is attributed to the residual asset value of the Museum. Because the Museum would not have reached the end of its useful life, the Museum still has monetary value, therefore this has been captured.

FIGURE S CASH FLOW OF TOTAL COSTS BENEFITS AND NE'

BENEFITS

400,

000,

COO

5Rno,0

00,100

5.200,0

00,C00

5100,0

00„CO

O

S-

- 5100,000,000

- 2 00,000, Ct./U

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OEM Total Costs MUNI Total fl ,•nefits =------ Net Rsl.fit;

3.2 Sensitivity testsAn integral part of the CBA should be the testing of key inputs and assumptions to see how sensitive the CBA results are to changes. The purpose of sensitivity testing is to assess how robust the proposed project options are to changes in the variables that determine its viability (NSW Treasury Guide (TPP17-03)).

The following key variables have been tested in isolation:

Discount rateConstruction costs

Divestment revenue

Producer surplus.

Discount rateAs per NSW Treasury Guide (TPP17-03), sensitivity testing on the discount rate should be undertaken at 3 per cent and 10 per cent. The result of sensitivity testing at 3 per cent can be seen in Table 10 below.

Option 01 Option 02 Option 03

NP V

B CR

$ 582,680,236

1.52

$ 365,024,522

1.27

$ 409,340,577

1.28

TABLE 10 SENSITIVIN TESTS: 3% DISCOUNT RATEAs can be seen, the NPV's of each of the project options significantly increase, with results

increasing by more than $177 million under Option 01, $127 million under Option 02 and

$151 million under Option 03. The BCR's on the other hand do not fluctuate considerably.

The results of using a discount rate of 10 per cent can be seen in Table 11. The increase in discount rate does not have as large an impact on the NPV as using a 3 per cent discount rate, with NPV's decreasing by $63 million under Option 01, $37 million under Option 02 and $44 million under Option 03. The BCR's also do not experience any change (if rounded to 2 decimal places).

TABLE 11 SENSIT Ri! TY TESTING: DISCOUNT RATE

Option 01 Option 02 Option 03

NPV 342,276,889 $ 201,644,567 $ 213,805,286

BCR 1.48 1.24 1.23

Construction costsAn additional test is to see how sensitive the project options are to changes in the cost of construction. This has been modelled by increasing and decreasing construction cost estimates by 10%.

Increasing construction cost estimates results in slight reductions in the BCR's of each of the project option as can be seen in Table 12 below.

TABLE 12 SENSITIVITY TESTING: CONSTRUCTION COSTS 1-10

NPV $ 369,344,627 $189,387,505 S 204,373,216

BCR 1.42 1.18 1.18

Reducing the cost of construction by 10%, further increases the benefits to NSW society as can be seen in Table 13. As expected, a 10% reduction in costs results in a slightly increase in BCR across all options.

TABLE 13 SENSITIVITY TESTING: CONSTRUCTION COSTS -10%

Option 01 Option 02 Option 03

NPV $ 441,873,567 $ 287,324,744 $ 311,338,748

BCR 1.55 1.30 1.30

Divestment revenueThe economic appraisal includes the divestment revenue operating under the assumption that the site can be rezoned and sold to property developers to construct two residential towers. The divestment value is the second largest benefit, therefore the results of the economic appraisal are very sensitivity to what the assumed divestment value will be.

1 i SGS

Option 02 Option 03

As an additional sensitivity test, it is assumed that divestment value will be 50% of what is assumed in the central BCR. The results can be seen in Table 14 below.

TABLE 14 SENSITIVITY. TEST: 509O D;VESTNIENT VALUE

As can be seen, the results do fluctuate considerably. This can be expected since the divestment value is essentially halved. Although, this sensitivity test is quite extreme, it highlights the fact that even if half of the assumed divestment value is realised, the economic benefits still outweigh the costs of the project options.

Producer surplusThe economic appraisal assumes that all of the international and interstate visitors will extend their trip by one day in order to attend the Museum. Whilst the majority of visitors may do so, some may not extend their stay as a result of attending the Museum. This will have a direct impact on the producer surplus.

Thus, as an additional sensitivity test, it is assumed that only 50% of international and interstate visitors will extend their trip by one day. The results of this sensitivity test can be seen in Table 15 below.

TABLE 15 SENSITIVT? TESTING: 50% -'' OF INTERNATIONAL AND INTERSTATE VISITORS EXTEND TRIP

Option 01 Option 02 Option 03

NPV $ 323,251,364 $ 172,143,179 $ 170,828,480

BCR 1.38 1.17 1.16

Comparing the results between this sensitivity test and the central BCR, it becomes evident that assuming only 50% of international and interstate visitors extend their trip by one day does have a significant impact on the NPV. Nevertheless, the overall impact is still positive NPV's and BCR's above 1.00.

3.3 Interpretation of resultsThe NSW Treasury Guide (TPP17-03, pp. 19) states that an 'initiative is potentially worthwhile if the NPV is positive or the BCR is greater than 1.00'. As has been showcased through the economic appraisal and the various sensitivity tests, each of the project options return positive NPV's and BCR's above 1.00, indicating that all project options are worthwhile from a net community benefit perspective.The greatest contributor to the positive results is the consumer surplus, derived by the discrete choice experiment. The results of the experiment indicate that, on average, households are willing to pay between $115 and $129 for the Museum. The re-zoning of part of the Museum site for high rise residential development will also result in very significant divestment revenue to the NSW Government, which could be used to partially fund the capital costs of the project.

While all project options considered in this Economic Appraisal return a net community benefit, option 01 outperforms the other project options from an economic perspective. This is mainly driven by its significantly lower cost of construction compared to Option 02 and Option 03.

SGS Economic Appraisal foi the New Museum in Western Sydney ()gnarls 18