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A full financial history of the QVM investment

04 May 2017

By Stephen Mayne

As we await Planning Minister Wynne’s decision on Queen Victoria Market (QVM) planning controls, it is worth revisiting the full financial history of the City of Melbourne’s biggest ever investment.

It is important to note that, over the past 20 years, the council has milked the market of more than $100 million in cash.

Few people realise that QVM has been the most profitable market in the world for its owner. And, until a couple of years ago, the annual return of about $5 million was not specifically disclosed.

This was because QVM itself was not releasing audited financial statements and the vast majority of council’s return was derived from so-called “licence payments” by traders, which were billed as a cost in the QVM accounts and still aren’t itemised in the City of Melbourne budget or accounts.

Calling it “rent from traders” and allowing the QVM corporate entity to book the income and then pay a $5 million dividend to council would be more transparent.

Anyway, having milked more than $100 million out of a declining market since 1996, it was clearly time for the City of Melbourne to invest, but where did this figure of “up to $250 million” come from?

As chair of the Finance and Governance Committee for four years until October last year, the first time I heard it was in the press reports accompanying the joint announcement of a major overhaul by Lord Mayor Robert Doyle and then Premier Dennis Napthine in October 2013.

This was a good deal for council because the State Government effectively gifted the land on the southern boundary, which council should be able to sell for more than $50 million once it has satisfied the key condition of constructing Franklin St.

The Lord Mayor successfully persuaded then assistant treasurer Gordon Rich-Phillips to go with the land deal, even though Treasury hated it. However, it also meant there was no turning back, especially given a $10 million penalty payment if the deal isn’t completed.

The language in the Doyle-Napthine announcement also included a 10-year investment time frame but the Lord Mayor’s idea at the time was to “under-promise and over-deliver”. In other words, invest significantly less than $250 million and get the job done in less than 10 years.

I was worried that we were all talking about doing a once-in-a-century investment but weren’t actually doing much to ensure it would be responsibly financed, so a motion was put to the council in April 2014, establishing the “QVM Renewal Fund”.

There wasn’t support for putting all licence fees directly into the fund because this would substantially reduced the claimed “budget surplus” that council announces each year.

Despite the resolution, nothing much happened with the QVM Renewal Fund for more than a year. It was nowhere to be seen when we councillors agreed in September 2014 to pay $76 million for the Munro site.

Buying Munro should have left the QVM Renewal Fund with a negative balance of about $70 million. It also meant there was no turning back and the gross expenditure would probably exceed $250 million.

However, when buying Munro, the plan was to partially recoup the investment by quickly flicking part of the site to a high rise developer. At the time, there was talk of three towers and 1800 apartments. With a 20 metre height limit, council took a lot of risk on Munro and the permissive former Minister Matthew Guy was replaced by Labor’s Dick Wynne just a few weeks after the purchase.

Eight months after the change of government, council remained optimistic as can be seen in its 10-year financial plan adopted as part of the 2015-16 budget. Page 38 assumes a cash receipt of $56 million to arrive in the 2016-17 financial year.

Alas, reality dawned on council over the next 12 months and, rather than receiving $56 million from the partial sale of Munro, after an exhaustive competitive tender process councillors voted to do a joint venture with developer PDG which would see a further $50 million council investment on Munro, potentially rising to $80 million if Dick Wynne didn’t sign off on a proposed 600-apartment, single residential tower.

The multi-storey car park will allow a magnificent, flexible event space on the existing car park, plus more than $30 million of community facilities featuring everything from an art space to a large child care facility.

But it will also stretch the “up to $250 million”, which will now rely on netting $60 million-plus from at least three associated land sales, including a couple of child care sites and the southern development parcel.

We are yet to see a comprehensive, multi-year budget for the QVM renewal, partly because the enormous complexities and sensitivities make it hard to be precise.

One question not resolved is the sort of return council is looking for.

When all is said and done, an annual return of $7-8 million would be appropriate and can hopefully be achieved without jacking up daily licence fees but instead by adopting the “market of markets” approach with greater utilisation of the space across seven days.

It remains to be seen just how much the council is proposing to spend. In gross terms, it will certainly be more than $300 million.

And it would be nice to get some more details in the upcoming budget.

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