WAVES FITNESS AND AQUATIC CENTRE REDEVELOPMENT
6.2 REVENUES AND BENEFITS
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Operator Costs
The recurrent costs for Option 1 (realistic scenario) were based on an estimated ERR of 102%, with increased visitation relative to the Base Case. The realistic scenario applies an ERR consistent with the average CERM-benchmark ERR for aquatic facilities from the same benchmark group. In this scenario, annual income exceeds annual expenditure by 2%. The basis for income estimates is detailed in subsequent sections of this report.
Assuming increased visitation, and an ERR of 102%, the Operator is projected to achieve an operating profit every year for the duration of the evaluation period, thus eliminating the need for THSC annual subsidies (and providing the opportunity for THSC to derive additional income from the Future Operator through profit-share arrangements).
As an element of the recurrent cost estimate, the Operator’s maintenance costs cap allowance is calculated as 60 cents per visit (in accordance with CERM estimates). In 2036/37 this equates to
$313,000 per annum included within the estimated expenses. However, this falls short of the estimated total annualised recurrent maintenance for the facility, assumed as 1.5% of the asset replacement value per annum. The difference is included as a cost to Council, estimated as approximately $140,000 per annum in 2036/37.
In summary, total recurrent costs for Option 1 (for THSC and the Operator combined) are estimated at
$3.8 million in 2022/23 (the first full year of operation), increasing to $4.5 million by 2036/37.
A summary of recurrent costs for the Base Case and Option 1 for the evaluation period is provided at Table 11.
Table 11: Recurrent costs by option
$m Base Case Option 1
2019/20 2.8 -
2020/21 2.9 -
2021/22 2.9 1.9
2022/23 2.9 3.8
2023/24 2.9 3.8
2024/25 2.9 3.9
2025/26 3.0 3.9
2026/27 3.0 4.0
2027/28 3.0 4.1
2028/29 3.0 4.1
2029/30 - 2033/34 15.4 21.5
2034/35 - 2038/39 15.8 22.9
Total recurrent costs 60.5 73.9
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Table 12: Benefits by option
$m Base Case Option 1
2019/20 10.2 -
2020/21 10.3 -
2021/22 10.4 6.3
2022/23 10.5 13.0
2023/24 10.6 13.3
2024/25 10.7 13.7
2025/26 10.8 14.1
2026/27 10.9 14.5
2027/28 11.0 14.9
2028/29 11.1 15.3
2029/30 - 2033/34 56.7 82.4
2034/35 - 2038/39 58.7 107.9
Total revenues and benefits 221.8 295.4
Operating Income Base Case
For the Base Case, the Operator’s income includes entrance fees, lessons, membership fees, kiosk sales, and merchandise sales.
Income projections are based on a linear increase of 20% growth in visitation across all services from 2018/19 to 2036/37, with user fees increasing with CPI. An exception to the assumed growth is the Learn-to-swim (LTS) program, as the lessons have already reached capacity based on its existing asset and therefore no increase was included in the income projection for this category.
The Base Case assumes a 20% visitation growth over the evaluation period, which is lower than the projected 40% increase in population for the catchment - reflecting the impact of the deteriorating condition on the attractiveness of the venue. Therefore, operating revenue is assumed to grow from the current $2.7 million per annum to $3.1 million per annum by 2036/37 (in real terms).
Option 1
For Option 1, operating income sources are the same, with a proportion of net profit being paid to THSC as part of a profit-share arrangement.
Income projections are based on increased visitations by category, population growth at 40%, and an ERR of 102% as a realistic assumption.
Modelling has assumed a price increase of 25% for the ‘Recreational swim entry fee’, based on comparison with published fee schedules for comparable centres. From 2021/22 (when the redevelopment is expected to be complete). The price increase was based on an assessment of fee for several similar centres which on average had entry fees 53% higher than the current WAVES fee schedule. However, to avoid any price sensitivity existing consumers, the increase was limited to a 25%
growth on top of year-on-year consumer price index (CPI) increases.
These assumptions result in an income projection of $3.6 million per annum in 2022/23, increasing to
$4.6 million per annum by 2036/37.
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Health and Wellbeing Benefits
The dollar value of health benefits are determined by estimating the burden of illness caused by insufficient physical activity, measured in Disability Adjusted Life Years (DALYs) and quantified using the Royal Life Saving Society – Australia’s (RLSSA) preferred 2016 value of a Statistical Life Year (VSLY) of $198,0007. The VSLY is a valuation of a year of perfect health. In its 2017 report, the Royal Life Saving Society8 estimated that the average pool visit generates benefits of $26.39 in improved health outcomes and consequent reductions in health spending and absenteeism.
Base Case
The expected percentage of growth in visitation for the Base Case will not fully reflect the growth in population due to the poor state of the facility. The calculation of heath benefit was limited to the projected Base Case visitations and generates an estimated $8.7 million in economic benefits for the community by 2036/37.
Option 1
As per Base Case modelling using the Royal Life Saving Society 2017 report on the economic benefits of Australia’s Public Aquatic Facilities, an estimated $26.39 benefit per visit was multiplied by the expected visitation level to determine the annualised health benefit as a result of the newly developed Waves Centre. This equates to $9.3 million in economic benefits for the community by 2022/23 and
$13.8 million by 2036/37.
Consumer Surplus
A consumer surplus represents the economic value to the consumer if the price of entry is lower than what they would be willing to pay. It is computed using the difference between the willingness-to-pay (WTP) price to actual price paid and this provides an additional economic benefit which otherwise would not be realised.
Base Case
A consumer surplus was not estimated for the Base Case as the facilities are past their economic useful life and it is assumed that consumers would be unlikely to be willing to pay a higher entry price if the Centre is not upgraded.
Option 1
Desktop research on comparable newer centres indicates patron WTP, as an average between Hornsby, Hurstville, Randwick and other comparable aquatic facilities, is 53% higher than the current price charged by Waves, and 28% higher than the proposed new price structure once the facility is complete. The consumer surplus represents the economic value to the consumer if the price of entry is lower than what they would be willing to pay. For Option 1, a consumer surplus was estimated as an additional economic benefit based on the difference between the WTP to actual price paid. The consumer surplus is indicative of the economic value to consumers using a price proxy model.
The rationale for selecting Hurstville as a comparable location is that, although it has a lower Socio- Economic Index for Area (SEIFA)9 than that of Baulkham Hills, the Hurstville Aquatic Centre’s prices are on average 39% higher than that of Waves. Randwick was selected based on a comparable SEIFA and the availability of information. Other selected Centres were considered within proximity and comparable to the new Centre.
7 Commonwealth Office of Best Practice Regulation. Best Practice Regulation Guidance Note: Value of Statistical Life. (2014) and Abelson P. Establishing a Monetary Value for Lives Saved. Canberra: Office of Best Practice Regulations (OBPR) 2008.
8 Barnsley, P. Peden, A. Scarr, J. (2017) Economic Benefits of Australia’s Public Aquatic Facilities, Royal Life Saving Society – Australia, Sydney.
9 The SEIFA measures an area’s relative level of socio-economic disadvantage based on a range of ABS Census characteristics such as low income, low educational attainment, high unemployment, and jobs in relatively unskilled occupations.
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The estimated value to consumers in the community is over $70,000 in the first full year of operation, and nearly $90,000 per annum by 2036/37.
Residual Value Base Case
As the asset is well past its useful life, and any maintenance would be insufficient to generate a residual, it is assumed that there is no remaining value in year 20 of the appraisal that needs to be included in the Base Case. While there is a land value associated with the site, it will be the same for Option 1 and hence will not differentiate between the options. Therefore, any land value is excluded from the analysis.
Option 1
Total capital expenditure ($30m) for the first 2.5 years minus total depreciation (calculated at 2.5% of total capital expenditure) averaged over 18-year period. The residual amount of $16.8m remains in year 2038/39.