Town of Gawler Special Council Meeting Agenda 14 February 2017

Transcription

1 Town of Gawler Special Council Meeting Agenda 14 February 2017 ATTACHMENTS UNDER SEPARATE COVER Item 4.1 Civic Centre Redevelopment Updated Prudential Report ATTACHMENT 1 Prudential Report by Skilmar Systems P/L

2 Civic Centre Redevelopment Update to Prudential Review of August February 2017 Prepared by: David Hope Principal Consultant Skilmar Systems Pty. Ltd. Office: 20 Katoomba Road BEAUMONT SA 5066 Phone: Mobile:

3 Executive Summary The Civic Centre Redevelopment project is described as: 1 the redevelopment and adaptive reuse of the Institute Building and Town Hall incorporating the promotion of Gawler for the community and visitors, promotion of economic development and employment in Gawler and surrounding region, Gawler s Heritage Collection, an Interpretive Centre, Gawler Public Library, Digital Hub (including digital training), Conference and Meeting facilities, Visual and Performing Arts, Office Accommodation and other associated activities as approved by Council. The original prudential review was based on a total project cost of $12.6 million. As plans have been finalised and tenders assessed the total project cost has now been assessed at $14.31 million and Council deemed it prudent to obtain an update on the August prudential review. Updated Prudential Review conclusions There is a significant relationship between the Civic Centre Redevelopment project and Council s strategic direction with the project contributing to a number of goals, objectives and strategies in the Gawler Community Plan The objectives of the Civic Centre Redevelopment project are consistent with the objectives of the Development Plan for the Town of Gawler s Town Centre Historic (Conservation) policy zone. The annual economic impact on the local area, from year 4 of the project onwards, was independently assessed as an increase in Gross Regional Product ranging from $3.2 to $7.2 million and an increase in FTE s ranging from 29 to 66. Community and other stakeholder consultation has been on-going. There continues to be widespread support for the project, with the proviso that the financial impact on ratepayers is minimised. There are no significant revenue issues for the Civic Centre Redevelopment project. The net annual whole of life costs of the Civic Centre Redevelopment project are estimated at $2.23 million, of which up to $0.76 million may be non-cash. While there has been some reduction in the benefit cost ratio the South Australian Centre for Economic Studies produced, using the data provided by the Centre on sensitivity analysis cost benefit analysis the Civic Centre Redevelopment project has positive net present value of 1 Town of Gawler (2014), Minutes of Council Meeting of 25 November 2014, p.359 Skilmar Systems Pty Ltd February 2017 Page 2

4 $11.2 million and a benefit cost ratio of 1.27 compared with a positive net present value of $12.0 million and a benefit cost ratio of 1.30 in the original report. The Civic Centre Redevelopment project will not adversely affect Council s key financial performance indicators. Broadly, since the August prudential review, some of the risks associated with the Civic Centre Redevelopment project have materialised and been dealt with. The remaining risks are considered to be low and can be readily managed with good project planning and coordination. As Council does not have the resources within its own organisation to undertake a project of this nature the use of experienced contractors is the most appropriate mechanism for carrying out the work. Overall, the Civic Centre Redevelopment project provides benefits to Council, the community and South Australia. Background The Civic Centre Redevelopment project is described as: 2 the redevelopment and adaptive reuse of the Institute Building and Town Hall incorporating the promotion of Gawler for the community and visitors, promotion of economic development and employment in Gawler and surrounding region, Gawler s Heritage Collection, an Interpretive Centre, Gawler Public Library, Digital Hub (including digital training), Conference and Meeting facilities, Visual and Performing Arts, Office Accommodation and other associated activities as approved by Council. This project has a long history and the Council have worked hard to achieve project outcomes that will provide benefits to the local community as well as the sensitive refurbishment and adaptive re-use of significant heritage buildings. Since a prudential review prepared and considered by Council in August there have been a number of iterations of plans, including plans for additional office space for staff that have now been overtaken by Council acquiring the previous premises occupied by TAFE SA. The original prudential review was based on a total project cost of $12.6 million. As plans have been finalised and tenders assessed the total project cost has now been assessed at $14.31 million and Council deemed it prudent to obtain an update on the August prudential review. 2 Town of Gawler (2014), Minutes of Council Meeting of 25 November 2014, p.359 Skilmar Systems Pty Ltd February 2017 Page 3

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6 Updated Prudential Review The Local Government Act 1999 sets out nine criteria to be addressed in a prudential review 3. Each of the nine criteria is addressed in this update report but they are largely unchanged from the August prudential review. i. Relationship of the project with the Council s strategic management plans The August prudential review concluded that (t)here is a significant relationship between the Civic Centre Redevelopment project and Council s strategic direction. This conclusion is unchanged. ii. The objectives of the Development Plan in the area where the project is to occur The August prudential review concluded that (t)he objectives of the Civic Centre Redevelopment project are consistent with the objectives of the Development Plan for the Town of Gawler s Town Centre Historic (Conservation) policy zone. This conclusion is unchanged. iii. The expected contribution of the project to the economic development of the local area Council commissioned an economic impact assessment of the Civic Centre Redevelopment project which was conducted by EconSearch and a report provided in March The EconSearch report has not been updated but it is considered that there would be no material changes to the economic impact outlined in the report. The August prudential review concluded, based on the EconSearch report, that (t)he annual economic impact on the local area, from year 4 of the project onwards, was assessed as Gross Regional Product increase, between $3.2 and $7.2 million and the increase in FTE s, between 29 and 66. This conclusion is unchanged. iv. The level of consultation with the local community The August prudential review concluded that Council has placed emphasis on consultation for the Civic Centre Redevelopment project. There has been broad community and stakeholder support for the project. The August prudential review advised that Council has stated that further community consultation will occur during the life of the project. Community and other stakeholder consultation has been on-going. There continues to be widespread support for the project, with the proviso that the financial impact on ratepayers is minimised. 3 See S.48, Local Government Act Econsearch (2014), Economic Impact Assessment of the Civic Centre Redevelopment project Skilmar Systems Pty Ltd February 2017 Page 5

7 v. Project revenue projections The August prudential review advised that the project was not a revenue raising project. At the same time it indicated that there may be some minor on-going revenue to be gained from the premises. The Commonwealth Government are providing $5.6 million from the National Stronger Regions Fund which will significantly reduce Council s outlays for the project. The August prudential review advised that Council is also expecting to raise $3.5 million dollars from the sale of surplus property assets. To further this aim Council has adopted a Property Divestment Strategy and appointed a person on a three year contract to specifically progress the divestment of surplus properties. The success of the strategy will impact on the Council s need for funding for the Civic Centre Redevelopment project. There are no significant revenue issues for the Civic Centre Redevelopment project. vi. The recurrent and whole-of-life costs associated with the project Tenders have now been received and assessed for the project. The current estimated total project cost is $14,311,415. This includes a construction contingency of $603,000 and oneoff relocation costs of $80,008. The following table sets out the total project costs, including an allocation of the design, project management and other project costs (which will be capitalised) to the various elements of the project: Whole of life costs associated with the project are estimated as: Item Annual Cost Cash or non-cash Building depreciation (based on average 50 years life) Building Fitout IT Infrastructure $258,368 Non-cash Fit-out depreciation (based on 15 years life) $56,784 Non-cash IT depreciation (based on 3 years life) $92,668 Non-cash Relocation costs Building contract $ 11,640,000 $ 10,920,000 $ 720,000 IT Equipment $ 235,000 $ 235,000 Infrastructure upgrades $ 154,913 $ 154,913 Total Building $ 12,029,913 $ 10,920,000 $ 720,000 $ 235,000 $ 154,913 % total 90.77% 5.99% 1.95% 1.29% Contingency $ 603,000 $ 547,366 $ 36,090 $ 11,779 $ 7,765 Design & project costs $ 1,598,494 $ 1,451,013 $ 95,671 $ 31,226 $ 20,584 Total building plus $ 14,231,407 $ 12,918,378 $ 851,761 $ 278,005 $ 183,262 Relocation costs $ 80,008 $ 80,008 TOTAL PROJECT $ 14,311,415 $ 12,918,378 $ 851,761 $ 278,005 $ 183,262 $ 80,008 Skilmar Systems Pty Ltd February 2017 Page 6

8 Infrastructure depreciation (based on average of 50 years life) Cost of capital (real interest rate of 4% on $7.2 million [$14.31million less $5.6 million grant]) Annual operating costs staffing, operational and maintenance ($1.56 million as advised to EconSearch 5 ), revised upward by CPI increases since initial estimate $3,665 Non-cash $348,457 Potentially all noncash if no actual borrowing $1,620,000 Cash This provides an annual operating cost of $2.38 million (August prudential review - $2.36 million), of which up to $0.76 million (August prudential review - $0.8 million) may be non-cash. Offsetting these costs will be the avoided cost of maintenance on the buildings as they currently exist of approximately $0.15 million. The net annual whole of life costs of the Civic Centre Redevelopment project are estimated at $2.23 million, of which up to $0.76 million may be non-cash. vii. The financial viability of the project Council commissioned the South Australian Centre for Economic Studies to carry out a cost benefit analysis of the Civic Centre Redevelopment project and received a report in November The report concluded that the Civic Centre Redevelopment project, based on the assumptions and assessments made in the cost benefit analysis, had a positive net present value of $12.0 million, with a benefit cost ratio of The report advised that some benefits were unable to be quantified such as additional tourism expenditure and the improved experience for users of council services. The sensitivity analysis carried out by the South Australian Centre for Economic Studies included an analysis of the impact of a cost increase of 20% in the project cost. This analysis concluded that there would still be a positive net present value of the project of $10.8 million, giving a benefit cost ratio of The analysis conducted by the South Australian Centre for Economic Studies was based on a project cost of $12.6 million. The project cost is now estimated at $14.31 million. This represents an increase of $1.71 million, or 13.6% on the original project cost. This is well within the sensitivity analysis conducted by the South Australian Centre for Economic Studies and gives a positive net present value of $11.2 million and a benefit cost ratio of The impact of the project has been included in the Council s current 10 Year Long Term Financial Plan (LTFP) but not the now identified increase in project costs. This is currently being addressed in the annual review of the LTFP. While there may be some short term 5 Econsearch (2014), Economic Impact Assessment of the Civic Centre Redevelopment project, p.11 6 SA Centre for Economic Studies (2104), Cost Benefit Analysis of the Civic Centre Redevelopment Project Skilmar Systems Pty Ltd February 2017 Page 7

9 impact on Council s key financial indicators it is expected that the indicators will stay within the target range set by Council. It is possible that the net financial liabilities indicator could peak above 100% for a short time unless Council takes action to reduce its capital spend in other areas. The Civic Centre Redevelopment project may have a marginal impact on Council s key financial performance indicators, but not to the extent of adversely affecting financial sustainability. viii. Project risks There are a number of project risks that need to be considered and, wherever possible, action taken to minimise the possibility of the risk occurring or to mitigate the impact of the risk should it occur. The key risks are: Project Timeline Council must let a tender this month to meet the requirements for the grant from the National Stronger Regions Fund and this is now highly likely to be achieved. The August prudential review discussed the potential impact on temporary accommodation costs and staff morale if the project took longer to construct than was planned. This has now been avoided by the Council s acquisition of the previous premises occupied by TAFE SA and the permanent relocation of staff to those premises. The risk of a time blow-out is considered to be low. Construction Cost With final negotiations on the tender price underway and the letting of a contract for the construction and fit-out work imminent most of the construction cost risk has already materialised as noted above. The project budget still contains a contingency for further cost blowouts of $603,000. The risk of a construction cost blow-out is now assessed as low. Financing The project is being financed through grant funds, asset sales, internal resources and borrowings. The grant funds have now been secured, subject to Council meeting its obligations under the grant funding agreement. Funding from asset sales is less certain and there is no guarantee that the proposed surplus property asset disposals will realise the expected $3.5 million. Conversely, it is possible that the asset sales might realise more than expected. Overall, the risk of not raising sufficient funds from asset sales is considered to be low to moderate. Funding from internal sources (budget provisions, investments, surpluses from operations) also has inherent risks. The main risk is that the sources will be required for operational reasons that may not have been anticipated. The likelihood that there would be a significant unanticipated requirement for the substantial re-direction of internal funds is considered to be low to moderate. However, this can be mitigated by diverting funds from, or delaying the implementation of, other projects or council activities, rather than the Civic Centre Redevelopment project. Skilmar Systems Pty Ltd February 2017 Page 8

10 The amount of borrowing required will depend on the funds provided from other sources and the final construction cost. Increased borrowings will result in increased direct financing costs through interest costs. There is a moderate risk that borrowings may be more than estimated. The potential effect of this risk can be offset by taking actions to mitigate the risks that can affect funding from asset sales and internal sources. Interest Rate Risk Depending on how the borrowings are structured and when the funds are drawn down there is the potential for some interest rate risk. In the current climate this could be either a downward or upward movement in interest rates, although the current forecast is for a downward movement. Council should follow its Treasury Management policy in structuring the borrowings to minimise the interest rate risk. It is considered unlikely that there would be such a substantial increase in interest rates to the extent that it would adversely affect the viability of the project. The interest rate risk is assessed as very low. Broadly, since the August prudential review, some of the risks associated with the Civic Centre Redevelopment project have materialised and been dealt with. The remaining risks are considered to be low and can be readily managed with good project planning and co-ordination. ix. The most appropriate mechanisms for carrying out the project Council intends to carry out the work using skilled contractors. A number of specialist teams have already been engaged and the final engagement will be letting the tender for the construction and fit-out works. Council has appointed a project manager to oversee the whole process. As Council does not have the resources within its own organisation to undertake a project of this nature the use of experienced contractors is the most appropriate mechanism for carrying out the work. Skilmar Systems Pty Ltd February 2017 Page 9