Enginineer Economic and Costing Essay

The HKSAR government announced to the public on 24 October 2006 that the former site of Hong Kong International Airport (Kai Tak Airport) would be redeveloped as an international cruise hub. The whole project included two sub projects, â€Å"Site formation† and â€Å"Cruise terminal and ancillary facilities building†. In project costing Inflation factor is applied as refer to government inflation index in 2009 (2%) and 2010 (2.7%). As the reason of project postponed, the total cost increased nearly one billion dollars compared to the original plan due to retendering and ASD government requirements. Within project costing considerations, maintenance cost in cash flow out is estimated to be roughly 221.9 Million per year from 2013. For project revenue, two main factors based on fixed rent from tenant space ($13 million for ten year tenancy) and variable rent from percentages of annual gross receipt. Minimum acceptable rate of return (MARR) was also used and accounted for from Exchange Fund to calculate present worth analysis as well as benefit and cost ratio of proposed development. Aside from economic and cost based justifications for project analysis, three main factors of social impacts are also considered in competitiveness in the cruise market, employment opportunity, as well as promoting sustainability from an environmental prospective. Overall, the demand for worldwide passenger levels are ever growing, to promote the international image of Hong Kong, the proposal of building the Kai Tak Cruise terminal is feasible when considerations come into play for combination in socio-economic factors. 1Background In analyzing the Kai Tak Cruise Terminal, we analyzed the socioeconomic implications for the development plan. The HKSAR government announced to the public on 24 October 2006 that the former site of Hong Kong International Airport (Kai Tak Airport) would be reissued for tender and to the redevelopment of reclaimed land that encompass 7.6 hectares with a general development cost estimate of roughly $8.2 billion. A brief background of the Kai Tak area is that it is the site of the former Hong Kong Kai Tak International Airport located in Kowloon side of Hong Kong. Due to the sensitivity of limited land availability and urban density characteristics in Hong Kong, many rounds of deliberation and planning review by the government was required to finally approve the decision of developing the Cruise Terminal. Ultimately, the new Cruise Terminal facility will serve as a mix use facility to not only serves Hong Kong’s resurgence as an ecotourism destination, but a place for exhibitions and alternate venues as well. 2Cost and Revenue Analysis 2.1Project Costing and Investment Since the fail of tender in 2008, the government decided to proceed with the Design, Build and Lease (DBL) approach. The initial investment includes two sub-projects: â€Å"Site formation† and â€Å"Cruise terminal & ancillary facilities building† were original estimated costing $7.2 billion based on the price in 2008. However, the construction cost in general had surged significantly in 2009 due to sharp increase of numerous materials’ cost like sand and steel reinforcement ect. Finally the cost for â€Å"Site formation† roughly estimated as $2.30 billion with inflation factor 2% applied. This part starts from 2009 and will finish in 2017. One year later, the construction of â€Å"Cruise terminal and ancillary facilities building† started and the inflation factor increase to 2.7%. The cost roughly estimated as $5.85 billion. Thus the total initial investment cost becomes $8.15 billion which is around one billion difference to the original plan due to price infraction. The cash flow out show as below: [pic] The 1st pier will be commenced to public in 2013 Q2 (2nd pier will be after 2017). Thus using 2012~13 FY as reference point and assume MARR to be 4.9 %, whereas the initial investment cost used after 2013 will also be calculated to the present value in 2013 for comparison. Therefore, the total initial investment of Cruise Terminal will be $8.1 billion. [PW(I) = 8.1 billion] (Refer to Appendix Table 1) Beyond the initial investment, the government estimates the annual recurrent expenditure arising from site formation to be $15.5 million and from cruise terminal & ancillary facilities building to be $206.4 million. Thus the total maintenance costs will be $221.9 Million per year after the terminal commences to the public. [pic] 2.2Project Revenue Direct renting revenue to the government In 2011, HKSAR launched an open tender for the tenancy. The Tender Assessment Panel considered that the Worldwide Cruise Terminals Consortium (WCT)’s tender had complied the tender requirements. And the Central Tender Board approved the acceptance of WCT’s tender with renting detail as following: WCT will pay to the government a fixed Rent of approximately $13 million for the 10-year tenancy. The Government will be also received a percentage of the gross receipt of the operator as the variable rent. The percentages of the annual gross receipt to be shared with the Government by WCT are as below: [pic] 3Evaluation of Economic Viability 3.1Minimum Attractive Rate of Return (MARR) To understand the economic viability of carrying out this project, evaluation was conducted by applying the money-time relationships and the concept of Minimum Attractive Rate of Return (MARR). Average investment return of the Exchange Fund which is managed by the Hong Kong Monetary Authority (HKMA) was chosen as the MARR in the analysis. The Exchange Fund’s primary objective is to affect the exchange value of the currency of Hong Kong. The Exchange Fund may also be used to maintain the stability and integrity of Hong Kong’s monetary and financial systems, and can be invested in any securities or other assets to achieve investment return. According to the HKMA, the average return of the Fund was 3.5% over the last three years, 3.2% over the last five years, 4.9% over the last 10 years and 5.6% since 1994. In our analysis, the 10-year average investment return, which is 4.9%, was selected to be the MARR. The annual return of the Fund from 1994 to 2011 is shown in Appendix Table 2 shows the 2011 investment return and the average investment returns of the Fund over a number of different time horizons. The Kai Tak Cruise Terminal Project According to the HKSAR government, the total capital investment required for the project is HKD 8156 million and the estimated annual recurrent expenditure is HKD 221.9 million. The annual income will come from a fixed rent for the 10-year operation as well as a variable rent with the percentage of the operator’s gross receipts. The maximum percentage will be 34% when the gross receipts are greater than HKD 90 million. 3.2Evaluation of the Project by Present Worth method (PW) In our analysis, we first applied the Present Worth (PW) method, which is commonly used for evaluating private financed projects. Our aim is to find out the operator’s annual gross receipt required so that the project can be considered to be economically justified if public benefits are not included in the calculation. By using the PW method, all cash flows and outflows are discounted to the present point in time at the determined MARR (4.9%). The PW is required to be greater or equal to zero if a project is to be considered as economically justified. In our calculation, the evaluation period is 10 years and assuming that the annual recurrent expenditure is a fixed contract amount. To estimate the operating revenue of the Kai Tak Cruise Terminal, reference to the operating revenue of Port Everglades in United State was made. Port Everglades is one of the three busiest cruise ports in the world. In 2010, its operating revenue from cruise sector was about USD 45.7 million (HKD 356.5 million). From the result of the calculation, the present value (2013-2014) is –HKD 8846 million (PW < 0) (refer to Table 3), which also means that the project is not economically justified when the public benefits are not included. The information used for the calculation and the cash flow are shown in Appendix Table 3. In addition, our analysis showed that the operator’s first annual gross receipts need to be HKD 3193 million (nearly nine-fold more than Port Everglades’) and then have 4% annual increase for PW to be greater than zero. Achieving this level of income is extremely difficult if not impossible. Table 3: Present equivalent of cash flow In next section, Benefit – Cost Ratio method, which is commonly used for evaluating public projects by considering public benefits, is applied in the analysis. 3.3B/C Ratio Overall economic benefit to Hong Kong Surely the government does not focus on the renting income but the overall economic benefit to Hong Kong. The project leads the development of the Cruise Economy which adds additional value to tourism, retail & dinning, travel trade and hotel etc. Based on the estimation from Tourism commission for latest cruise passengers’ expenditure data and multiplier effect, the cruise industry will bring following economic benefits to Hong Kong under different scenarios: The â€Å"low growth scenario† assumes growth brought by regional cruise operators developing cruise services with Hong Kong as homeport. The â€Å"high growth scenario† assumes growth brought by international cruise operators developing cruise services with Hong Kong as a homeport and port-of-call. We have calculated the B/C ratio for different scenarios as below with following assumptions 1) Interest rate is 4.9%; 2) The government only gets $13 million rent; 3) The Cruise Terminal continuous to operation till following year Therefore, even under low growth scenario, both conventional and modified B/C ratio greater than 1 after the Cruise Terminal continuous to operation over ten years, this project is worth to proceed. 4Social Impacts 4.1Higher competitiveness in cruise markets Compared to Shanghai and Singapore where the cruise terminals have been further developed, Hong Kong’s cruise market would be highly constrained if maintained at the original level. Because Hong Kong will require an additional berth between 2009 and 2015, and one to two berths beyond 2015 to sustain its development as a regional cruise hub in Asia Pacific region. 4.2Increase of employment chances Cruise vessels homeport at Hong Kong will create job opportunities in related industries including hotel, catering, shipping management, shipping supplies and insurance. It may support some 6900 to 10900 employment opportunities in 2020. 4.3Environmental impacts The terminal had obtained Platinum rating in BEAM Plus Project Assessment in 2012, which means a high level achievement in three Green aspects (energy saving, quality of indoor environment, and environmental impacts to neighbors) 5Conclusion From studies of worldwide passenger demand levels, it is estimated that there is a steady increase from 13.9 million to roughly 23.8 – 31.5 million by 2020. Although, this is a world estimate and Hong Kong is only small spectrum of the world, there is seemingly enough evidence from cruise terminal consultancy for Asia region to instill a predictable growth for Hong Kong. Overall, the project does not show promise economically with recurrent expenditures with operational revenues. It should be noted that the facility does not imply with an overall picture depicted in the B/C ratio. Therefore, to promote Hong Kong’s international image and standstill in the international sector, the Kai Tak Cruise Terminal is a viable option for Hong Kong’s bright future.