AAPPA – Space Revisited ‘Cost of Space’ Greg Wickes

1. AAPPA – Space Revisited ‘Cost of Space’ Greg Wickes

2. Structure of Presentation • Drivers for Costing Space • Size of Australian University Property Portfolio • Analyse McKinnon Benchmarks • Backlog Maintenance and Deferred Liabilities – analysis and implications for • sector • Swinburne 1. Building blocks 2. Alternative Procurement/Capital Ownership Model • Conclusion

3. Drivers for Costing Space • Need to improve space efficiency, increase throughput and identify under-utilised space • Attract funding which reflects actual cost of occupying space and maintaining it “fit for purpose” • Provide a comparative for inclusion in business case models that examine alternative procurement and space ownership models

4. Size of Australian University Property Portfolio 2002 AAPPA Benchmark Survey Report • Melbourne CBD office, retail and residential = 9,405,145 m2 • Australian participating Universities = 8,672,745 m2* *understated. Not all Universities reported all campuses and 2 Universities did not respond at all.

5. McKinnon Benchmark 5.8 - Physical Assets Strategic Asset ManagementOutcome: 43% at Good Practice and aboveComment: As these plans develop it will be interesting to trend BM & DL and targeted expenditure, as that will determine the level of formal acceptance of the problems the system is facing.

6. McKinnon Benchmark 5.9 - Physical Assets Recurrent Maintenance FundingOutcome: 92% of Universities funding recurrent maintenance at non-optimal or worse.

7. McKinnon Benchmark 5.10- Physical Assets Facilities Maintenance BacklogOutcome: 81% of Universities at manageable or better re: BM & DL. On the face of it an acceptable result, but on my assessment a very misleading result.

8. Backlog Maintenance and Deferred Liabilities 2002 AAPPA Benchmark Survey Report • 27 Universities reported BM & DL = $1.45B • Applying the average to those Universities not reporting results in adjusted BM & DL = $1.8B • Actual situation is that is likely to be well in excess of = $2B • Swinburne case in point

9. Sector Expenditure on BM & DL 2002 AAPPA Benchmark Survey Report • 18 Universities have reported expenditure of $19.5M • Adjust that expenditure level across the remaining 18 Universities results in sector expenditure = $39M • In excess of 50 years to reduce BM & DL to zero at current expenditure rates • As 92% of Australian Universities fund recurrent maintenance at non-optimal or less, 50 years is significantly understated • Reason why McKinnon benchmark 5.10 ‘Facilities BM’ is clearly misleading, I think the situation facing Universities is anything but ‘manageable’, I suspect equally true for TAFE • Huge issue for Governments generally, across all sectors

10. Swinburne Experience 2002 AAPPA Benchmark Survey Report • Reported BM & DL = $32M, however, likely to be in the order of $50M • Current expenditure = $450,000 per annum • 100 years > zero • Recurrent maintenance expenditure is 0.9% and below non-optimal, and therefore 100 years pay-off is understated • If Swinburne allocates 100% of capital roll-in, then 13 plus years to reduce to zero (under funding issue will take it out beyond 13 years)

11. Implications for Sector Q: Should the sector be concerned about the level of BM & DL A: Yes. Why? • DEST has realised the significance of McKinnon Benchmark 5.9 ‘Facilities BM’ and require institutions to report level of backlog maintenance as part of Capital Management Plan and to identify targeted expenditure to reduce the backlog • OTTE has established FMIST Project to determine state of government funded assets and to be more directive in solutions • Compliance/statutory obligations are more visible to senior management and clients • Quality facilities are competitive edge (student feedback)

12. Operational savings have not matched capital infrastructure growth Space allocation and utilisation Capital Management Plan Effectively facilities and Services has absorbed 17% cut re: EBA and m2 increases Contracting W&W to develop a SAM – linking to Aperture Smart Metered all buildings Validation of Aperture Space database and examination of linking with Syllabus+ Refocussed CMP to focus on major refurbishment and allocating funds to BM & DL All new capital projects to be financed off-balance sheet (alternative ownership models) Implications for Swinburne 1. Building Blocks

13. Implications for Swinburne 2. Alternative Procurement/Capital Ownership Model Hawthorn Campus Development • Private Finance Initiative raising $60M+ • 434 beds of student accommodation • 10,000 m2 of retail/commercial space • University financial exposure is limited to lease 4,000 m2 of commercial office space • University alienates the land for long-term lease period • University has no equity in the development and is not underwriting any component of the development • An SPV will hold the asset for the duration of the lease period and assets revert to University ownership at expiration of lease

14. Implications for Swinburne 2. Alternative Procurement/Capital Ownership Model Hawthorn Campus Development - Rationale and Business Case • Modified RMIT case study (included allowance for Land Tax and Council Rates) resulted in a cost of space at the University’s Hawthorn campus of $264 per m2 (includes capital cost of $162 per m2) • Understated, maintenance rate is an average of buildings mainly of which have no big ticket items like lifts and air-conditioning • Difficult to business case our cost structure against commercial cost structures unless we cost what must be done rather than what we are doing, case in point is the fact that 92% of Australian universities fund recurrent maintenance at non-optimal or worse

15. Implications for Swinburne 2. Alternative Procurement/Capital Ownership Model • Following EOI process University appointed preferred financier/arranger • EOI assumptions and financial modeling was tested and a revised feasibility study demonstrated a substantial project was viable • Commercial rent will be $230 pa plus approximately $80 outgoings per annum • On the face of it, negative financial impact on the University of $46 per m2

16. Implications for Swinburne 2. Alternative Procurement/Capital Ownership Model • However, the SPV set up to manage the commercial building will expend $192,233 pa on mechanical plant and lifts (contractual obligation - SUT equivalent based on AAPPA data is $151,900 • SPV is required to set up a sinking fund to handle major refurbishments = $1.9M over 15 years (contractual obligation) • University draws in 434 students into the campus increasing residential student population to 674 • Creates extra 6,000 m2 of commercial office space that it will progressively take up (at no cost to the University until such time as it increase its lease space)

17. Conclusion • Costing space is a sensible prerequisite for: • Improving space efficiency, increasing throughput and identifying under-utilised space – its is the ‘motivator’ • Attracting funding which reflects the actual cost of occupying space and maintaining it “fit for purpose” • Providing a comparative for inclusion in business case models that examine alternative procurement and space ownership models • Spend time on getting the building blocks/fundamentals right for your institution 3 Thoughts • AAPPA Benchmarking Report could consider trending BM & DL and targeted expenditure • AAPPA as an organisation needs to consider its lobbying potential • Encourage VET FM colleagues to participate in our benchmarking report