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Kingston Concerned About the LVEC
Currently known as the "KROCK Centre"
Formerly the "Kingston Regional Sports and Entertainment Centre" or KRSEC
Formerly the "Large Venue Entertainment Centre" or LVEC
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Stuart Fyfe on the LVEC Business Plan

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LVEC

If you build it, they will come’ are words that should make every urban taxpayer shudder when it comes to sports stadiums.” The Economist (April 16, 2005, p. 28) in writing about the proposed New York Sports and Convention Centre. Kingston is not New York and circumstances in New York are different from Canada. However, there is the same theme of a sports franchise as the main tenant which makes the basic facility possible, that if it is not built, the team will go elsewhere, and that the indirect economic and social benefits justify the diversion of public resources from other needs.

This note is prepared based on the Business Plan Summary , what was said by City officials on April 6 and 7, and the Whig-Standard report of April 30.

LVEC – Comment by Stewart Fyfe, April 25, 2005

General

These comments are directed primarily to the financial and economic aspects of the LVEC proposal’s Business Plan. I have some questions as to the chosen location, size, consequences for the neighbourhood. These will, I hope, be addressed adequately by others in the discussions.

These comments below were prepared in part in consultation with Professor Norman Macintosh of the Queen’s Business School who has to be away.

The LVEC as conceived will add to the quality of life in Kingston, both by raising the standards of facilities in a number of areas, and providing alternatives to deficient existing facilities.

It is a large, complex and expensive project. However, the information made available is limited, public comments constrained, and the political process has been questioned.

Throughout there is a sense of haste and tight time lines.

1) It will act as an economic engine and catalyst for change (p. 2)

2) Downtown is critical because it offers the greatest economic return for the community (p. 4, Business Plan Summary).

There are two kinds of accounts involved in the financial plan. One is the economic: How much additional economic benefit will be generated? The multiplier is a measure of the indirect benefits (also referred to as spin-offs).

The other is the financial viability (the Business Plan, Tables 5-7, pages 13-15 and 17) which is the basis of determining what are the potential financial direct costs and risks to taxpayers.

Then one asks do the economic and other benefits justify the costs?

Net Operating Cash Flows (Table 5).

Why is there no operating budget?

1. Event Revenues. As no market studies have been done (Tables 6 and 7), these must be regarded as “soft” numbers.

2. Ticket surcharge. As this is to be placed in a reserve to pay for future capital expenditures and therefore cannot be included in operating revenue ($600,200 a year). Only $100,000 is shown under expenditures as a contribution to capital reserves.

Almost all the revenue items are related to attendance. The attendance figures appear to be generated based on experience with other LVECs. No market research has been undertaken.

a) The explanation given that market studies are expensive is not very convincing. Some are and some are not depending on the depth and method. Other expensive studies have been undertaken such as traffic, parking, environment and archeology costing tens of thousands of dollars.

b) In connection with the multipad complex, Capital Sports from Ottawa has stated that it has undertaken marketing studies in preparing a possible proposal.

c) There was a marketing expert on the Task Force.

d) The proposed location was preferred by the Task Force because it would attract the most customers, but no proof is offered.

Using comparables is a difficult process. Largest variables are

a) The economic state and physical character of the downtown. If the area is in economic trouble there will be lost of underused parking lots and commercial establishments in trouble. Moderate stimulus can have a relatively high return.

The best indicator of the health of Kingston’s downtown is rent level. These are gradually increasing.

b) Population for the urban area and its commuter hinterland. Most of the comparable LVECs mentioned have considerably more both in the census urban area and in the hinterland. Kingston has a thinly populated hinterland. The nearest significant urban centres are nearly an hour away.

c) Population character, i.e. how likely are the events scheduled likely to draw attendees? This is very subjective. An insight can be found in the range of alternative activities for recreation/cultural dollars. Kingston is noted for the quality and range of activities. For example, there are 22 bookstores. Guelph with a larger area population has perhaps half that. In Sarnia the main alternative to the LVEC is the Casino.

d) There is no mention of the nearest LVEC to Kingston in Cornwall. Perhaps because what one hears it is a very unhappy experience.

3. There are no comparables as to City contributions toward balancing the budget. If comparables are referred to for multipliers, capital costs and operating budgets, they can also be used for tax contributions, both capital and operating.

4. The basic information has many “soft” components. Possibly a maximum and minimum should be given.

5. Stating estimates down to the last dollar gives a false sense of security. Numbers of this magnitude and reliability should be rounded.

6. In addition to borrowing $16,000,000, it is proposed to draw $3,000,000 from development charges and $3,300,000 from the Municipal Capital Reserve Fund. This is the equivalent of $225,000 and $275,000 a year. This is public money for which there are alternative uses. They should be included as part of gross expenses, and then the possibility of applying them included in calculations as to net cost.

7. P. 2 – Ticket surcharge

The whole $600,000 should be shown under Facility Expenses as a transfer to a major future capital reserve. Otherwise, it is in effect an increase in ticket prices and the statement of holding seat prices at the same level is not true.

8. Cost of City Lands

There is no cost shown for the City owned land (open space and waterfront walk which is to be used on the site). This money could be used to acquire other public open space (The Task Force stated there would be no reduction in public parks – Clark). Otherwise this is a hidden subsidy of taxpayers’ money.

9. Contingencies

There is no provision for property acquisition or a possible Ontario Municipal Board hearing (of which a letter of intent has already been received). The explanation given for not doing so was that property acquisition is an unknown cost and disclosing a possible cost could affect negotiations. Capital contingency costs apparently would be funded by a charge on City capital reserves and there are additional operating and capital costs. Saying they are to be charged to the Capital Reserve Fund when they are known is financially hiding the issue.

Municipal Board hearings require the assembly of considerable information, hiring counsel and expert witnesses and staff time. They can be quite expensive.

Multipliers

“Soft information” as opposed to hard or firm, refers to dependability or uncertainty. Information on the economic benefits is even softer than the financial.

The Economic Benefits are soft information.

1) Sales ($9,000,000) are totals estimated as generated by the LVEC. Only the increase generated can be taken into account.

2) Tourism is part of the multiplier, not in addition. It is not clear how they are included in the calculation.

Also tourism is preponderantly in the summer months when the LVEC will have fewer events.

3) Multipliers are stated to range from 1 to 5 (p. 6). These figures appear to be derived from other centres and there is no evidence of how they were arrived at, or how comparable to Kingston the places are. Multipliers can also be negative (Cornwall, I believe, is such a case).

How much such subsidy is defensible? No figures have been produced for tax dollar costs of other facilities, although this is public information and could be compiled by City staff.

4) It would be useful to state the multipliers for the other LVECs used for comparison.

5) Negative impacts are not stated.

a) Loss of employment from the Marina and Metal Works is not mentioned (52 jobs and $70,000 of taxes a year).

b) Loss of economic activity which relocates to the LVEC, e.g. weddings and some events, from other Kingston sites, or if not in the LVEC would occur elsewhere.

c) Following the logic of multipliers, the existing Memorial Centre must have some economic benefits, even if much less than the LVEC. These will be largely lost with fewer attendees.

d) Negative consequences for the Memorial Centre from attendees. Transfer of events, of decreased revenue.

6) Commercial spin-offs are stronger for some sectors than others. Trade shows and entertainment events are more likely to generate overnight stays which benefit hotels and restaurants.

7) In making comparison with other places, the population in Kingston’s hinterland is relatively low, lying as it does between the Frontenac Axis and the Lake Ontario and the St. Lawrence River.

8) Kingston has a considerable diversity and quality in its recreation and cultural facilities, which are alternatives to the LVEC activities. This makes comparisons difficult.

9) A large part of the population of Kingston is students. Most of them are only likely to attend the centre between mid-September to late November and mid January to mid March. On average they do not have much discretionary cash.

Business Plans

Expenses: Table 7

It is not evident how the net cost comparison is made. Private operators have some advantages and some disadvantages.

a) they pay higher property, G.S.T. and P.S.T., and income taxes than public bodies.

b) there needs to be profit (return on equity and allowance for risk)

c) they have higher borrowing costs because they have a lower credit rating than the City.

Design-Build

Design-build is a process which has advantages, where time is important, or for relatively simple projects. It is different from the usual process for public buildings where the first step is to select an architect. Once plans are prepared, tenders are called for building contractors. The architect acts for the building owner in supervising construction. A project manager is often hired as well.

With design-build the contractor is a partner with the designer as well as being an agent of the owner. Also to save time, decisions are not made in two distinct blocks, rather than on a continuous basis.

It requires a much stronger and more expensive project supervision as well as being a much less transparent and accountable process.

On the west side of Sir John A. Macdonald Boulevard between Loyalist Collegiate and MacArthur Hall at least five of the buildings are design-build. They have never been satisfactory buildings.