CROWN SYDNEY RESORT PROJECT - STAGE 1 REPORT › sites › default › files › 2020-04... · Stage 1 review of unsolicited proposal “Project 2020” We are pleased to provide

Stage 1 Review of Project 2020 NSW Department of Premier and Cabinet

24 September 2012

Liability limited by a scheme approved under Professional Standards Legislation. © 2012 Deloitte Access Economics Pty Ltd

Dianne Leeson Assistant Director General NSW Premier and Cabinet GPO Box 5341 Sydney NSW 2001

24 September 2012

Dear Dianne

Stage 1 review of unsolicited proposal “Project 2020”

We are pleased to provide a report that reviews the economic aspects of the unsolicited proposal from Crown Limited and the associated Allen Consulting Group report regarding the economic benefit to NSW of a 350 bed hotel/casino development at Barangaroo – namely, the Crown Sydney Resort Project.

Our report has also highlights the key considerations to be further investigated should the project proceed to stage 2 of the unsolicited proposals process.

If you have any questions or would like further detail on any aspects of our report, please do not hesitate to contact myself on or the Project Director, Kathryn Matthews, on .

Yours sincerely,

Ric Simes Director Deloitte Access Economics Pty Ltd

Deloitte Access Economics Pty Ltd ACN: 149 633 116

Level 1, 9 Sydney Ave

Barton ACT 2600

PO Box 6334

Kingston ACT 2604

Tel: +61 2 6175 2000

Fax: +61 2 6175 2001

www.deloitte.com.au

Stage 1 Review of Project 2020

Liability limited by a scheme approved under Professional Standards Legislation. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. © 2012 Deloitte Access Economics Pty Ltd

Contents Executive Summary .................................................................................................................... i

1 Introduction .................................................................................................................... 1

2 Tourism trends ................................................................................................................ 2

3 Hotel accommodation and occupancy rates in Sydney .................................................... 4

4 CGE modelling ................................................................................................................. 5

5 Second Stage Recommendations ..................................................................................... 7

Limitation of our work ................................................................................................................. 9


i Commercial-in-Confidence

Deloitte Access Economics

This is a draft document. As it is a work in progress it may be incomplete, contain preliminary conclusions and may change. You must not

rely on, disclose or refer to it in any document. We accept no duty of care or liability to you or any third party for any loss suffered in connection with the use of this document.

Executive Summary Deloitte Access Economics has been asked to undertake an independent assessment of

the unsolicited proposal by Crown Limited, particularly the Allen Consulting Group report, regarding the economic benefit to NSW of a 350 bed, 6 star hotel and VIP only casino development at Barangaroo.

Our review of the proposal indicates that the calculated economic impact of hotel and VIP gaming facilities is reasonable and the computable general equilibrium (CGE) modelling results are similar to what would be expected based on the inputs they have provided to us.

The inputs utilised in the modelling are very high level and not fully explained. Should the proposal move to Stage 2 of the process we would recommend the inputs be supported by a greater evidence base. In particular, a more detailed analysis of the high roller international tourist market would need to be undertaken to be confident regarding the gambling revenue estimates and the net impact relative to other existing high roller facilities in NSW as well as other Australian destinations. Further the assumptions regarding the ratio of international relative to domestic visitors would need to be rigorously established to ensure that there is a net benefit to NSW not simply a reallocation of domestic consumption.

While we view the economic benefits calculated to be reasonable, this is based on an implicit assumption that, should this proposal not go ahead, no other hotel will be built on the Barangaroo site. Planning approvals provide for a hotel to be built on this site. It is reasonable to expect that, should the Crown proposal not go forward, another hotel investor would work with Lend Lease to construct a hotel at some point in the future. Consequently, in the second stage of the review process, we recommend that the analysis considers a viable counterfactual scenario to the Crown development to ensure that the net economic benefits to NSW are appropriately measured.

In line with the above approach, a broader cost-benefit approach to the analysis could extend the economic impact approach taken by ACG. The proposal provides a relatively narrow analysis of the issues and does not consider some of its wider economic and social impacts on the community. For example, increased gambling revenue may partly result from a redirection of gamblers from other facilities such as the Star casino. There may also be positive benefits of this proposal relative to the counterfactual that need to be considered such as earlier construction of the hotel and associated benefits for the precinct and improved amenity related to the 6 star hotel relative to a 5 star hotel.

We agree with the general thrust of the tourism analysis contained in the document, in particular the weak growth in domestic and international tourism since the Olympics. We also agree with the discussion of the importance of attracting Asian tourists to meet industry growth targets. However, it is also important to put the role of the Crown complex in achieving a major impact on these trends into context. In our view the proposal will not have a significant impact on tourist trends in NSW.



1 Commercial-in-Confidence


1 Introduction Deloitte Access Economics has been asked to prepare a short report reviewing the unsolicited proposal put forward by Crown Limited to develop a 6 star, 350 bed hotel with VIP gaming facilities at Barangaroo. Crown has signed an Exclusive Dealing Agreement with Lend Lease Corporation whereby Crown and Lend Lease will work together for a period of 24 months to jointly develop the concept plan for the hotel resort.

The purpose of this report is to provide an initial assessment of the Crown proposal and the accompanying report by the Allen Consulting Group which will assist the Department in determining whether to put the proposal before Cabinet in order to move to the second stage of the assessment process. This report has also sought to highlight the key considerations to be further investigated should the project proceed to stage 2 of the unsolicited proposals process.

The proposal by Crown Limited focuses primarily on the economic impact of the construction period and subsequent gambling, hotel and tenant revenue on the NSW economy as well as the need to stimulate further tourism activity in Sydney. While this report focuses on these aspects of the proposal, it is important to note that a number of wider economic and social impacts would need to be considered before final approval is given. This underlines the need for a broader cost-benefit analysis of the proposed project.

In preparing this report we have assumed that following are true and correct:

That being granted a casino licence is central to the economic viability of the hotel

The optimal room size (350 rooms) has been chosen for the development

The value of the Memorandum of Understanding with United Voice

The value of the Memorandum of Understanding with NCIE Aboriginal Training Facility

Crown Limited’s submission in relation to responsible gambling and its expertise at managing this

The ability of Crown Limited to attract high rollers to Sydney

Crown Limited’s submission in relation to local community support for the facilities

Crown Limited’s submission in relation to the appropriateness of issuing a second casino licence

Crown’s previous experience in the delivery of similar projects elsewhere.

The report is set out as follows. Chapter 2 discusses the analysis in the report concerning the change in tourism trends over time and the likely impact of the Crown development on these. Chapter 3 discusses the analysis in the report concerning hotel shortages in Sydney and the likely impact of the Crown development on these. Chapter 4 discusses the CGE modelling results in the report and highlights areas where further clarification is needed. The final chapter considers the approach that should be considered in Stage 2 of the process.




2 Tourism trends In setting the scene for the proposed development, the Allen Consulting Group report discusses in considerable detail the performance of Australian tourism since the Sydney Olympics. In particular, they point out that international tourist arrivals have been relatively stagnant since 2001, rising by only 1.6 per cent per annum between 2001 and 2010 in contrast to the strong growth in outbound travel (7.6 per cent).

In explaining the weak growth in international tourism the report identifies a number of factors including:

weak growth in traditional inbound tourism markets such as Japan, North America and Europe;

the strength of the Australian dollar;

high labour costs compared to other Asian destinations;

geographical isolation and

competition with other lower cost overseas destinations.

The report also draws attention to the important role that the growth of the Asian middle class is likely to play in driving future inbound tourism in Australia. The report notes forecasts developed by the Tourism Forecasting Commission which indicate that 55% of expected growth in tourism numbers between 2010 and 2020 is likely to come from Asia and 42% of that from China. We agree with this broad overview of the state of the Australian tourism industry, the above reasons for its relatively weak performance in recent years and the role that Asian visitors are likely to play in meeting industry growth targets.

However, the report also notes that a lack of tourism infrastructure has also impeded tourism growth and implies that the proposed facility will go a significant way to redressing the weak performance of the tourism industry. While we acknowledge that a lack of tourism infrastructure could have some impact on visitor levels, we believe the role of the facility in increasing tourism numbers needs to be put into context.

First, while we agree the main drivers of reduced tourism expenditure in Australia has been the decline of traditional markets and the strength of the Australian dollar, we see the absence of tourism infrastructure as largely a second order effect. In other words, the weak growth in inbound tourists could itself be a cause of the recent decline in five star hotel developments rather than the absence of five star hotel developments leading to a decline in tourism numbers. We are not suggesting that the lack of tourist infrastructure has not at all contributed to the weak growth of international inbound tourism, but it is unlikely to have been a decisive factor, particularly as occupancy rates in Sydney have remained below 80% until 2007 (Deloitte Access Economics Tourism and Hotel Market Outlook 2012).

Second, while we appreciate the potential benefits of the project in attracting high yield Asian visitors to Sydney, the expected tourism impact needs to be viewed in terms of overall international tourism numbers or alternatively the expected tourism growth to 2020. Even assuming a relatively high occupancy rate of 90% and 1.5 people per room, the




hotel would add 172,463 visitor nights to the Sydney region. This comprises 0.3% of the 55.33 million nights currently spent by international visitors in Sydney. Given that the Visitor Economy Taskforce modelling has shown that to meet the 2020 Industry Potential international visitor numbers will need to rise by 78% by 2020, the additional tourists staying at the proposed hotel will only comprise around 0.4% of the required increase in international visitor nights to 2020 to meet the 2020 Industry Potential.

Importantly, tourists attracted to hotel are likely to be relatively high yield visitors which is noted in the report. The report points out that casino visiting tourists spend on average $4,941 per person compared to $2,628 per person for non-casino visiting tourists. Nevertheless even if the facility attracts some tourists to Sydney who stay elsewhere and attracts relatively high yielding visitors it is likely to be a relatively small contributor to meeting Sydney’s growth targets.

The economic modelling included in the report did not actually include any additional tourism expenditure other than what would be captured by gambling, hotel revenue and tenant revenue. Nevertheless, the report seemed to imply that the development would go a significant way to redressing Sydney’s weak international tourist numbers in recent years.

While the development is certainly an important first step in enhancing available tourist facilities and accommodation, its importance in attracting tourists needs to be seen in context of overall visitation and growth rates.

If the government decides that the proposal should move to Stage 2, it would be include some more detailed analysis on what the likely range of increased visitors and expenditure with a particular focus on the ratio of international relative to domestic tourists to ensure that there is not simply a reallocation of domestic tourist spending.




3 Hotel accommodation and occupancy rates in Sydney

In addition to discussing the importance of the development to reversing Sydney’s weak tourism performance, the ACG report also discusses its importance in the context of the broader shortage of hotels in Sydney, noting that occupancy rates were 86.3% in December 2011.

We agree that there is a looming shortage of hotel accommodation in Sydney and that occupancy rates are currently sitting around 86% which means that the city’s hotels will be close to full at some times of the week. The issues of high occupancy rates and the limited future supply pipeline of hotel accommodation in Sydney have been discussed in a number of recent editions of the Deloitte Access Economics Tourism and Hotel Market Outlook. The most recent forecasts from the Tourism and Hotel Market Outlook indicate trend occupancy rates in Sydney are expected to rise to 88% by March 2015.

Nevertheless, we would again note that while any increase in capacity in Sydney is certainly positive, the addition of 350 rooms needs to be seen in the context of its impact on the broader hotel market. The report by the Tourism Association of Australia cited in the Allen Consulting Group report finds that to meet the forecast growth in tourist arrivals (rather than the more optimistic industry potential) NSW will need another 2,000 rooms by 2020. The development would account for 7% of the required hotel investment over the period to 2020.

To provide a broader indication of the impact of the increase in rooms, this increase in rooms was entered into the Deloitte Access Economics Tourism Accommodation Regional Demand Investment and Supply Model (TARDIS). The forecasts from this model showed that the increase in 350 rooms would be equal to a 1.6% increase in supply in Sydney CBD hotel room nights available in 2018. While such an increase would certainly help reduce the expected shortfall in hotel accommodation in Sydney, it needs to be seen in the context of the significant investment needed to reduce hotel occupancy rates.

It should also be noted that if the hotel is largely attracting high rollers who would not have come to Australia otherwise (i.e. increasing demand) then its net effect on reducing occupancy rates will be relatively small. This issue should be addressed in stage two of the assessment process.




4 CGE modelling The economic impact of the facility was modelled using the Monash Multi-Regional Forecasting (MMRF) model of the Australian economy. MMRF is a multi-regional computable general equilibrium model.

During the construction phase, the facility was assumed to spend $333.3 million a year for three years (2015-2017). In the operational phase the facility is assumed to generate annual revenue of million and pay million in gaming taxes. The facility was assumed to spend million on VIP commissions, $72 million in employee costs and $157 million in other costs.

Based on these shocks, the project is expected to increase NSW GSP by $63 million to $68 million during the construction phase, and initially by $300 million during the operational phase which grows over time to $440 million. Total employment in NSW is expected to increase by around 300 jobs in the construction phase and 1,400 jobs in the operational phase.

Construction phase

The increase in GSP during the construction period of $63 million to $68 million despite total construction expenditure of $333.3 million reflects the existence of ‘crowding out’ effects, as increased construction activity leads to resources being reallocated from other sectors of the economy and other projects being put on hold. Moreover, Table 2.1 indicates that international imports will increase by more than $40 million implying that some goods are likely to be imported from overseas during the construction phase.

These ‘crowding out’ effects similarly affect employment. Although the construction phase is expected to directly employ 650 people (and another 650 indirectly), the net employment impact is only an additional 300 or so jobs in NSW. This smaller net impact reflects the fact that the increase in demand for construction workers at the site leads to an increase in relative wages, drawing workers out of other industries. Some of the net employment impacts are likely to be due to workers from interstate migrating to NSW. The modellers have indicated that they assume employment in Australia is unchanged by the project.

We believe these numbers for the construction period to be reasonable. The degree of ‘crowding out’ effects are large and the net impact on GSP is slightly lower than would be anticipated. This presumably reflects the fact that a large amount of resources (workers and capital) are being reallocated from other sectors in the model.

In stage two of the project it would be useful if some further clarity was provided on these results. The modelling should out what assumptions were used in relation to government expenditure and capture any changes in Table 2.1. It should also include the impacts on the rest of Australia so the extent to which resources are being allocated from other states can be assessed.




Operational phase

The increase in GSP during the operational phase grows from $300 million to $440 million per year from 2017 to 2027. Given that the shock implies that revenue net of VIP commissions will be around million per annum these results are not unreasonable given that gambling (which accounts for the majority of revenue) is a relatively high value added activity.

This increase in GSP is matched by an increase in net exports of a similar magnitude. In the absence of information on how this shock is entered into the model, it is difficult to comment on this result. Presumably the increase in net exports reflects the increase in expenditure by international VIP gamblers who are assumed to account for 80% of the increase in gambling revenue of million and also presumably the majority of revenue net of commissions.

While the overall magnitude of the impact on GSP appears reasonable, the profile of the change in GSP, investment and employment over time in the results requires further explanation.

First, investment remains relatively high throughout the operating phase. Typically, in CGE modelling of hotels or similar developments such as Casinos or convention centres there is a sharp fall in investment at the end of the construction phase with investment continuing to fall towards the baseline over time. This is due to the assumption that as more capital is added to the economy the expected rate of return on capital (which drives investment) falls. In the results provided in the report, investment falls more gradually. In 2027 (the final year of the analysis), investment remains at 55% of its peak in 2017. While there will be an increase in demand in the economy during the operational phase which will raise the expected rate of return on capital slightly relative to the baseline, it is not clear why investment remains so strong in this scenario.

In stage 2 of the project the assumptions used to model investment need to be more clearly outlined. Moreover, how the shock associated with the increase in gambling expenditure was entered into model need to be clearly defined- for example did the modellers use a productivity shock or some other sort of mechanism to derive their results?

Secondly, there is persistent growth in GSP in the model during the operational phase so that GSP increases from $300 million to $440 million. From Table 2.1 this appears to be largely driven by increases in consumption which rises from $50 million to $179 million during the operational phase. If the profile of revenue during the operational phase is relatively unchanged it is surprising to see such as marked increase in consumption and GSP- by contrast net employment numbers are relatively steady. In stage 2 of the project it would be useful if the modellers explicitly outlined why this is occurring in the model.




5 Second Stage Recommendations The following points summarise our recommendations around the approach to be taken should the Government decide to proceed to the second stage of the unsolicited proposal process.

Establish a viable and appropriate counterfactual

The analysis in the proposal is based on an implicit assumption that, should this proposal not go ahead, no other hotel will be built on the Barangaroo site. This assumption would need to be rigorously assessed should the proposal progress to the second stage of the process.

Planning approvals provide for a hotel to be built on this site. It is reasonable to expect that, should the Crown proposal not go forward, another hotel investor would work with Lend Lease to construct a hotel at some point in the future.

Moreover, the arguments provided in the proposal around the lack of hotel infrastructure in Sydney point to the importance of using an appropriate counterfactual on which to base the measurement of net economic benefits of the proposal to NSW.

The counterfactual should be structured carefully. A potential alternative scenario would be a 350 bed 5 star hotel with no gambling facilities (perhaps built 2 years later after the end of the exclusive agreement with Lend Lease). The resulting relative analysis would reflect the incremental value of a 6 star hotel and the casino licence to NSW. In essence the main difference between this proposal and the alternative scenario is the increase in gambling revenue and marginal hotel revenue which the Crown project would bring relative to another comparable hotel.

The likelihood and the viability of this counterfactual will need to be independently tested in the market in the second stage. We acknowledge that a hotel may be less commercially successful without VIP gambling facilities (although the hotel could potentially include other sources of revenue such as residential or office space). However, this assumption would need to be fully tested (preferably with supporting financial modelling) in stage 2 of the project to ensure an appropriate base case has been adopted.

A broader cost-benefit approach to the analysis

The proposal provides a relatively narrow analysis of the issues and does not consider some of its wider economic and social impacts on the community. For example, increased gambling revenue may partly result from a redirection of gamblers from other facilities such as the Star casino and hence not provide the stated increase in gambling revenues.

There may also be positive benefits of this proposal relative to the counterfactual that need to be considered. For example, perhaps earlier construction of the Crown hotel relative to the alternative could result in associated benefits for the precinct related to earlier activation and improved amenity resulting from the 6 star hotel relative to a 5 star hotel. There may be enhanced environmental features in the 6 star hotel that support the overall sustainability of the site. For this reason it would be reasonable to conduct a broader cost-benefit analysis of the project to incorporate all the likely costs and benefits. The CGE modelling would sit within this framework.




Detailed analysis of the high roller tourist market

The proposal relies on a broad analysis of the tourist market and the second stage should establish more specific evidence of the ability of the development to attract additional international high rollers to Australia and to Sydney specifically.

Limitation of our work

General use restriction

This report is prepared solely for the internal use of the Department of Premier and Cabinet.

This report is not intended to and should not be used or relied upon by anyone else and we

accept no duty of care to any other person or entity. The report has been prepared for the

purpose of evaluating the unsolicited proposal by Crown Limited. You should not refer to or use our name or the advice for any other purpose.

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CROWN SYDNEY RESORT PROJECT - STAGE 1 REPORT › sites › default › files › 2020-04... · Stage 1 review of unsolicited proposal “Project 2020” We are pleased to provide