BLOG: Shellharbour GM on City Hub concerns

There are arguments that can be fairly put relating to the City Hub. Claiming financial calamity isn't one of them.

It's only to be expected that as the council moves closer to a firm decision on the City Hub, there will be an increased level of public scrutiny of it, and especially of its financial implications in relation to debt. 

In recent weeks there have been a number of public statements made that suggest: 

• The costs of the project are increasing;

• Land sales are a risky proposition for funding new capital projects;

• The use of debt to fund the balance of the cost of the project will have grave consequences for the council and its ratepayers.

So let's look at each of these concerns.

The costs of the project are increasing

The council has been following an approach that aims to fix a price for the total construction cost of the project before it commits to accepting a construction tender. This process is called a Guaranteed Maximum Price (GMP). What this does is fix the cost of the preferred concept by the council's quantity survey consultants, and then seeks the appointment of a preferred construction tenderer to work with the council in finalising the details of the proposed tender. This benefits both parties: the council in ensuring that the GMP is not exceeded and the prospective tenderer in being able to identify savings in their final price. Obviously, $53.9M (in today's dollars) is a large sum of money. 

Ratepayers are right to be concerned that what is being promised will be delivered within budget. The process being followed by the council is designed to minimise the prospects of any material over-run of construction costs. Not only that, those costs have been allowed for in the council's Long Term Financial Plan (LTFP), a document to which the Independent Pricing and Regulatory Tribunal (IPART) paid close attention in agreeing to the council's case for the current year's Special Rate Variation. 

Land sales are a risky proposition for funding new capital projects

And they are. That's because as we all know when it comes to selling a house, while we can set a selling price, we won't know what a buyer is prepared to pay until an offer has been made and accepted. To provide certainty about the proceeds from those sales, the council is already moving to offer for sale the following properties:

• Oak Flats Railway land (sold);• Tullimbar residential land;• Former Warilla Council Chambers site;• Lamerton House and adjoining lot 3000.

The revenue from these sales will be finalised before a final commitment is made to construct the City Hub. In relation to Lamerton House, that will be part of any decision to proceed with acceptance of a construction tender, due in August this year.

In total, the amount raised is expected to be in the vicinity of $35M. Once we know the actual proceeds from those sales, we can then turn to the other sources of funding and in particular, the raising of loans. 

Yes, there is a risk, and it is one that the council is prudently managing.

The use of debt to fund the balance of the cost of the project will have grave consequences for the council and its ratepayers

Will this really be the case? The council's LTFP identifies that in addition to the $35M being budgeted from the sale of properties, it has already received in the order of $8.8M from Section 94 funds (these are levied on new property developments to help pay for the building of new community assets) leaving $10.1M to be raised by way of loans to make up the City Hub's cost of $53.9M (in today's dollars).

While that sounds like a lot (and it is), the council currently has very low levels of debt, in the order of $3M. 

That amount is usually expressed as a debt service ratio (DSR, i.e. the proportion of loan repayments to current income). The Division of Local Government’s accepted satisfactory 

benchmark for this ratio is to be less than 10 percent. The Group 4 councils' average (which includes our council) from its most recently published data in 2010/11 was 9.27 percent, with the state average being 5.45 percent. Our current DSR is currently 0.5 percent (very low), and is expected to peak at 1.7 percent (well under the benchmark set out above) in 2016/17, before falling to 1.5 percent in 2019/20.

A report to the council in October set out a number of funding scenarios. Even in the worst case (requiring a loan of $17M), the annual loan repayments amount would result in a DSR of 2.4 percent. If that was converted into a household budget with income of $50,000 per annum, it would represent annual repayments of $1200 or approximately $100 per month. What that means is that the current projected levels of debt are quite affordable compared to the average amounts of council debt in NSW.

The final decision to proceed or otherwise with the City Hub will be made based on what the council believes to be the best long term interests of the community and in particular to meet the growing needs of a growing city.

It can also be made in the knowledge that it is affordable.

Shellharbour City Council general manager Michael Willis

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