1.011 Project Example, Sydney Opera House
P RO J E C T E VA LUA T I ON
Prepared for: 1.011 FINAL TERM PROJECT
Prepared by: MIT Students
Date: SPRING 2011
Acknowledgements: SYDNEY OPERA HOUSE, OFFICE OF THE CHIEF FINANCIAL OFFICER
PROFESSOR JOSEPH SUSSMAN (MIT DEPT. OF CIVIL ENGINEERING)
NIHIT JAIN (MIT DEPT. OF CIVIL ENGINEERING)
Image courtesy of Kevin Gi
ons on Flickr.
http:
www.flickr.com/photos/kevgi
o/ XXXXXXXXXX
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Table of Contents
BACKGROUND 3
THE STAKEHOLDERS 4
STAKEHOLDERS DURING THE INITIAL CONSTRUCTION PERIOD 5
PRESENT DAY STAKEHOLDERS 7
MAJOR ISSUES THAT AFFECTED THE PROJECT 8
COSTS AND BENEFITS 9
INITIAL ANALYSIS 9
LOTTERIES USED FOR FINANCING 9
SIGNIFICANT DECISIONS THAT AFFECTED DESIGN AND IMPLEMENTATION 11
THE FOUR SIGNIFICANT CHANGES TO THE DESIGN AFTER UTZON LEFT: 13
STATUS OF THE PROJECT 14
OUR ANALYSIS OF THE RELEVANT COSTS AND BENEFITS 15
A 15
NALYSIS
NALYSIS OF INITIAL CONSTRUCTION COSTS:
A O 19
OF PERATIONAL PERIOD (19732010):
REVENUE 20
EXPENDITURE 21
NET CASH FLOWS 22
CRITIQUE OF THE PROJECT AND PROJECT EVALUATION PROCESS 23
WAS IT A PROFITABLE VENTURE? 23
IS IT FINANCIALLY SUSTAINABLE FOR THE FUTURE? 24
HOW WE ARE ATTEMPTING TO QUANTIFY ITS VALUE TO THE PEOPLE OF NEW SOUTH WALES? 23
ADDITIONAL INFORMATION: WHAT DOES THE AUS $ 800 MILLION TOTAL REFURBISHMENT RECOMMENDED IN
010 REALLY MEAN? 242
ITIQUE OF THE PROJECT AND CONCLUSIONS FROM OUR PROJECT CR PR
FROM THIS PROJECT, AND THE MISTAKES MADE THEREIN, WE LEARN: 25
WE LEARN THE IMPORTANCE OF PLANNING WELL BEFORE IMPLEMENTING A PROJECT. COMPLETE DESIGNS WOULD HAVE
SAVED THIS PROJECT A GREAT AMOUNT OF MONEY AND TIME. 25
EVALUATION OCESS 25
COMMENTS ON THE PROJECT EVALUATION PROCESS 26
APPENDIX 27
GENERAL FORMULAS 27
EXPENDITURE FROM OPERATIONAL PERIOD 29
REVENUE FROM OPERATIONAL PERIOD 28
NET CASH FLOWS FROM OPERATIONAL PERIOD 30
BIBLIOGRAPHY 31
3
NOTE: All amounts given are in actual dollars
B
ACKGROUNDi, ,ii iii
On November 11, 1954 the honorable John Joseph Cahill, the Premier of New South
Wales at the time, convened a conference to discuss the establishment of an opera house in
New South Wales, Sydney, Australia. At the conference, Cahill expressed his desire for
“proper facilities for the expression of talent and the staging of the highest forms of
entertainment…that will be a credit to the State not only today but for hundreds of years.”
Out of the 21 possible sites of the proposed opera house, Bennelong Point, a peninsula of
2.23 hectares (240000 ft2) was chosen on May 17, 1955. The tram shed, which was located
there, was removed: a change welcomed by the Opera House Committee and the residents
of Sydney.
On Fe
uary 1, 1956, the international competition for the national opera house was
commenced. The competition, a
anged by Premier Cahill and the government of New
South Wales, provided competitors with a 25‐page booklet with black and white photos of
Bennelong Point. Detailed in the booklet were the requirements for the opera house
including a large hall for symphony concerts, large‐scale opera, ballet and dance, choral,
pageants, and mass meetings that could seat 3000‐3500 people and a small hall for
dramatic presentations, intimate opera, chamber music, concerts, recitals, and lectures that
could seat 1200. The structure also required a restaurant with a capacity of 250 and two
meeting rooms, one for 100 people and one for 200 people. The competition closed in late
1956 with 233 entries representing 28 countries, including Australia, England, Germany,
French Morocco, Iran, and Kenya.
In early January of 1957, 38‐year old Danish architect, Jørn Utzon, was announced as
the winner of the competition by Cahill at the Art Gallery of New South Wales. Utzon had
designed the opera house without first having seen the site in person and he relied on
photographs, shipping maps, and firsthand accounts. The judges chose Utzon’s design
ased on its pure originality and creativity, realizing that it would “clearly be a
4
controversial design.” However, they were still convinced of its merits to New South Wales
and Sydney. The original drawing featured Utzon’s structurally unrealizable, but
aesthetically pleasing roof design.
On July 19, 1957, the Sydney Opera House Lottery Fund was established. As it
would turn out, the lotteriesiv would pay for the majority of the initial construction cost, as
the government of New South Wales did not want to pay for the project.
With Utzon’s approval, Ove Arup and Partners was appointed as the structural
engineers for the project in 1958 and construction of the Sydney Opera House began in
1959. It was expected to take four years to complete with an estimated cost of AUS $7 M.
However, even working together with Arup, Utzon did not come up with the final spherical
design of the roof until sometime between 1961 and 1962; three to four years after
construction began.
The Sydney Opera House would be one of the first major projects designed using
computer‐aided design (CAD)v and presented major revolutionary architectural concepts
and engineering challenges. It was also one of the first major projects, which employed the
use of computers to analyze internal load effects on the members that would support the
oof structurevi.
Altogether, the Sydney Opera House took fourteen years to complete and
construction costs amounted to nearly AUS $102 M (actual dollars). Since its initial
opening in 1973, the Sydney Opera House has undergone numerous renovations and
expansions and hosted many performances.
THE STAKEHOLDERSvii
A project the magnitude of the Sydney Opera House, a public sector endeavor, had
many stakeholders. The following analysis of the stakeholders classifies them using the
Mitchell criteria, which determines and places stakeholders on the basis of whether or not
they possess any combination of the three following qualities: power, legitimacy, and
urgency. In addition to this, the stakeholders will be evaluated within two different
timeframes: during the construction of the Sydney Opera House (1959‐1973) and the
modern day era.
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Minjung Lee
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Stakeholders during the initial construction period
When the Sydney Opera House Project first started to take form in the mid 20th
century, the government of New South Wales (NSW) was given a task to create a theater,
which was intended to serve the arts. This makes the NSW government the very first
stakeholder of the project. From the Mitchell perspective, the government was probably a
definitive stakeholder, exhibiting power, legitimacy, and urgency, since they were given the
esponsibility to facilitate the creation of such a project.
Chronologically, the next stakeholders are the judging panel of the international
competition to design the future opera house. These stakeholders can be classified as
dependent, because they were appointed by the government of New South Wales to choose
a design for the opera house; however, they lacked the power to do anything further once
the design was chosen.
The main stakeholder throughout the initial construction process (1959‐1973) was
Jørn Utzon, whose design was chosen out of a total of 233 entries. Since the project lacked
a proper manager, Utzon, along with Ove Arup, the chief structural engineer working on the
project, facilitated and oversaw the construction of the project. Together, they worked for
four years before a
iving at the final design for the roof. This keen sense of architectural
vision caused some problems, as Utzon would pay more attention to the design aspect of
the structure rather than the time and cost objectives. However, because he was
essentially the project manager, nearly everything he said went through, which classifies
him as a definitive stakeholder under the Mitchell framework. Arup, who was for the most
part Utzon’s second in command, is also considered a definitive stakeholder.
This image has been removed
due to copyright restrictions.
Figure 1: Utzon working on a model of the Opera Houseviii
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Minjung Lee
6
In 1966, due to financial issues, Jørn Utzon resigned from the project before its
completion, and the government eventually hired Hall, Todd, and Littlemore. Utzon left
with some of the original blueprints of the building, so Hall, Todd, and Littlemore had to
spend time and money on additional designsix. This makes the Hall, Todd and Littlemore
definitive stakeholders, because after Utzon left, they essentially assumed the roles of
project manager.
In 1967, at the request of the Australian Broadcasting Commission (ABC), the New
South Wales government changed the proposed larger opera hall into the concert hall
ecause symphony concerts, which were managed by ABC, were predicted to be more
popular and able of drawing larger audiences than opera. Thus, the revenues to the opera
house would increase. The Australian Broadcasting Commission, at this point in time, was
a dependent stakeholder, because they had legitimate and urgent concerns for a concert
hall, but they had to rely on the NSW government to do their bidding.
The funding for the Sydney Opera House was done primarily through lotteries,
which had participants who were most likely poor, as we will discuss in a later part of the
project. Without the lottery contestants, there would have been insufficient funding for the
opera house. However, besides funding this endeavor, these contestants really had no
power. These stakeholders also did not exhibit legitimacy or urgency; the contestants
participated in the lotteries with their own benefits in mind. It can therefore be argued
that they did not quite have any interest in the Opera House and only sought to win the
jackpot, thus, they have none of the three qualities detailed by Mitchell so they are
classified as non‐stakeholders. However, this term could be a little misleading, because
without their funding from the lotteries, it is doubtful whether or not the Sydney Opera
House would be around today.
There was also an Opera House Committee formed in 1954, and the Sydney Opera
House Executive Committee (SOHEC) replaced this entity in 1957. The Committee was
Utzon’s main client, that is, instead of interacting with the Government of New South Wales,
Utzon only interacted with the Committee. The Committee had 3 advisory panels, one for
architectural and constructional aspects, one for traffic and one for music and dramax. It
continued to make requests of changes to the design and capacity based on requests from
the Australian Broadcasting Commission and other individuals even into 1959, when
Minjung Lee
Minjung Lee
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construction has already beganxi. It was therefore a definitive stakeholder, as it was Utzon’s
main client until 1960. At this point the government became concerned with the progress
made and decided to take control of the project directly under the Sydney Opera House Ac
oft 1960, which effectively gave the Minister of Public Works authority to supervise the
workxii.
Present day stakeholders
Today, the Sydney Opera House remains an icon to the theatrical, structural and
architectural worlds. The New South Wales government continues to be a primary
stakeholder, overseeing the operations of the opera house. The section of government that
maintains the theater is the Sydney Opera House Trust Fund, who operates the theater on
ehalf of the NSW government. Although the group was created a while ago, they continue
to help operate the Sydney Opera House.
A public attraction such as the Sydney Opera House attracts a lot of locals and
tourists every year. The main source of revenue for such a structure comes from admission
fees, concert sales, tours and other public events. This makes the public discretionary
stakeholder, because though they have no power or urgency, they exhibit legitimacy. Their
presence adds immense value to the operations of the Opera House and their absence
would in essence destroy the primary aim of this iconic building. Their concerns and
measures of satisfaction are therefore legitimate concerns of those in power.
However, if the public insists on change, for whatever reason, their salience in the
eyes of the government could quickly increase. If, for example, the public suddenly
ecomes unsatisfied with the operations of the opera house, they could form protests
group and boycott ticket sales. These actions would give the public qualities of legitimacy
and urgency, making them dependent stakeholders. They would be dependent on the
government of New South Wales to take action. It is important to note that this is only a
theoretical situation and is meant to exemplify the dynamic nature of the Mitchell
classification of stakeholders.
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MAJOR ISSUES THAT AFFECTED THE PROJECT
There were many uncertainties and risks associated with the Sydney Opera House
project. First, the design competition, though it was a good incentive, failed to evaluate
how much experience the entrants had with large‐scale design projects. Jørn Utzon’s shell‐
like structure won the competition, even though his designs were only partially completed.
His designs were well ahead of their time and even as of 1959, when the government
ordered for construction to begin, there still existed no known methods to construct the
proposed roof structurexiii. To further complicate the initial problem, the design required
that the roof spanned completely without columns, as Utzon wanted an open area with a
ceiling of structural ribsxiv.
The Sydney Opera House project had no project manager, and it was assumed that
Utzon would take the initiative for all decisions regarding design, construction, or
developmentxv. There were no project evaluation measures or officially in place, and for
that reason, goalposts and implementation methods kept on changing. Some sections of
the opera house were even built then later demolished, re‐designed and built againxvi.
One aspect that was under great debate was the design of the opera house roof. As
mentioned earlier, there was no known way to implement the original design. Therefore
Utzon revised the design, however, it still proved to be a challenging and expensive task to
actualize.
Along with the uncertainty related to the roof, there was also uncertainty about
government expectations of the project. Originally, the structure was to have two theaters;
however; government later told Utzon that they wanted four theaters, which required him
to redesign parts of the building, thus delaying construction. Due to these delays and
changes in the building blueprint, both the original cost and time estimates of AUS $7
million and four years, respectively, seemed uncertain. As the costs continued to increase,
an issue arose as to how this large‐scale project would be fundedxvii.
The government initially gave no limit to available finances, and then four years
later limited the funding resulting in discouragement, frustration and eventual withdrawal
of Jørn Utzon in 1966xviii. The government later increased the funding massively, but Jørn
Utzon had already left, with some of the initial blueprints, so new designs and
9
modifications had to be put in place. A group of Australian architects led by Peter Hallxix
took over and eventually completed the project, but since Utzon took his ideas with him,
new design plans had to be created. It should be noted that because no such feat had been
attempted before, cost estimates were highly inaccurate. In the end, the building was finally
completed for AUS $102 millionxx, an amount much greater the initial estimate given AUS
$7 million.
COSTS AND BENEFITS
Initial Analysis
The foundations began mid 1959. It was initially not clear how they even achieve
the structure, as it had never been done before. They also had no precedents for
comparison; it was therefore difficult to come up with feasible estimates. The other issue
was that actual construction began before the design could be completed which led to a
great amount of waste because some parts had to built then demolished then built up
again; in addition Civil and Civic, the contractors, said that 700 drawings had been issued,
almost half had come after the expiry of the initial contract, and that there had been 695
amendments issued in the first phase of the project alone. xxi Estimates for the entire cost of
construction had risen from AUS $7.2 M in 1957 to $9.8 M in 1958 to $18 M in 1961 to $
24.5 M in 1962 to $34.8 M in 1964 and to $48.4 M in 1965.xxii By 1968 costs estimates had
isen tor AUS $85 M.xxiii
The lack of proper planning prior to the execution of this plan was partially
esponsible for the manner in which the estimates changed.
Lotteries used for financing
The Government of New South Wales would give no more than AUS £100,000 and
declared that the rest of the funding would come from public lotteriesxxiv and a public
appeal fund. The original appeal fund raised about AUS $900,000 and the rest of the $102M
that the Opera House ended up costing came from the profits of the lotteryxxv. In November
of 1957, Opera House Lottery No.1 went on sale. Tickets were £5 each ($10) with a first
prize of £100,000 ($200,000)xxvi. This lottery was revamped in 1960 with the costs of
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tickets reduced to £3 ($6) each and one‐off prizes of $200,000 introduced. The Opera
House Lotteries raised more than $105 million towards the construction of the Sydney
pera HouseO
xxvii.
This image has been removed due to
copyright restrictions.
Fig 2: Sydney Opera House original lottery ticket from ~19571958xxviii
The major benefit of using the lotteries as the major source of financing is that
unlike loans or mortgages you pay back much less than you gain from the process. It also
saved the government from spending its own revenue, and in doing so kept the
government from using funds that would have taken out of more essential public projects
such healthcare, education and infrastructure. However, was this really good for the
general public? It has been shown in America, for example in public state lotteries, that for
the most part:
The average [lottery] expenditure in dollars for households making $10,000 is about
the same as for those making $60,000. One implication of this pattern of demand is
that the tax implicit in lottery finance is regressive, in the sense that as a percentage of
income, tax payments decline as income increases.xxix
It can therefore be argued, that even in the case of the Sydney Opera House, it was
the relatively less wealthy that ended up bearing a disproportionate part of the cost of
putting this relatively luxurious and iconic structure, which they probably would not use as
much. So though this venture directly spared the government any direct expenditure, it
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may in essence not have been very beneficial for the not so wealthy who readily bought up
the lotteries to raise the AUS $ 100 million.
SIGNIFICANT DECISIONS THAT AFFECTED DESIGN AND
IMPLEMENTATION
During the design process and implementation of the building there were significant
changes to the original plans. First of all, the construction of the opera house was
underway before the designs were finalized, resulting in cost ove
uns and organizational
chaos. Because of the major uncertainty in the design, costly mistakes were made during
production. For example, huge supporting columns were built, demolished, and rebuilt for
a cost of $300,000 when the design changed from the original blueprint.xxx
Utzon was quite stu
orn and he refused to listen to the engineers’ solution for the
oof, resulting in additional delays and costs. For the first six years of the operation Utzon
worked from Europe and refused to delegate tasks. Though Utzon had
illiant
architectural skills, he was not the best managerxxxi. His main concern during this time was
the architectural aesthetics of the roof design. This resulted in bottlenecks in the
construction and caused delays. These increased delays, in turn, led to high staff
turnovers.xxxii
Because it was still not known how the roof would actually be constructed, even
years into the construction, the design blueprints kept on changing (as shown Fig. 3 below).
Michael Baume, in the Sydney Opera House Affair na
ates:
Civil and Civic, the contractors said that 700 drawings had been issued, almost half had
come after the expiry of the initial contract, and that there had been 695 amendments
issued in the first phase of the project alone. In addition, many of the items priced in the
initial estimates that cost a total of 1.1$ M were replaced with new items that cost $3.2
M.xxxiii
F
This image has been removed due to copyright restrictions.
Figure 3: The Evolution of the Sydney Opera House Design. The general form went from just a freehand form,
into a parabolic, then ellipsoid form. The final shape chosen was spherical, because of the ease of construction
and ease of calculating the structural integrity.xxxiv
The final solution was then chosen from spherical sections. The spherical selections
were selected because, they were easy to construct from pre‐cast forms, and it was easier
to perform a structural analysis than in the other models. This final development is shown
in Figure 4, below.
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This image has been removed due to copyright
estrictions.
Figure 4: Utzon’s Final Solution to the roof problem; precast spherical shapesxxxv
T r significant changes to the design after Utzon lefthe fou xxxvi:
After Utzon’s resignation from the project in 1966, a group of Australian architects
led by Peter Hall took over. As mentioned above, Utzon took some of his designs with him,
forcing Hall and company to come up with new designs. During this stage of construction,
the design underwent four significant changes.
The first significant change to the design was to the cladding of the podium and the
paving. Utzon’s original intention was to use a system of prefa
icated plywood mullions.
13
14
The system that was actually constructed was made to deal with the glass, which was
ifferend t from Utzon’s design.
Second, there was a major change in the purposes of each of the planned rooms.
The major hall, which was meant to be a multipurpose opera or concert hall, became solely
a concert hall. To accommodate the operas, the minor hall, which was originally intended
for stag e productions, had to be converted to serve both operas and stage productions.
Third, two more theaters were added to the design. This overhaul of the design
completely changed the layout of the interiors. The stage machinery, which had previously
een designed and fitted inside the major hall, had to be pulled out and thrown away.
Fourth, the movement and redesign of the various rooms had significant impacts on
the acoustics of the building. Utzon had originally designed the interior with acoustics in
mind. His original designs were modeled and found to be acoustically perfect. However,
Utzon’s interior designs, including the plywood co
idor designs, as well as his seating
designs were completely scrapped by Peter Hall and company. Therefore, the cu
ent
internal organization is not optimal.
STATUS OF THE PROJECT
The building cu
ently has 5 main auditoria and nearly 1000 rooms, a reception hall,
5 rehearsal studios, 4 restaurants, 6 theatre bars, an extensive foyer, li
ary, and
administrative offices.xxxvii The building covers about 1.8 hectares (4.5 acres) of its 2.2
hectares (5.5 acre) site and has about 4.5 hectares (11 acres) of usable floor space. There
are 645 km (400 miles) of electrical cable within this complex and its energy needs are
equivalent to the needs of a town of 25,000 people. More than these impressive features
however, the Sydney Opera House became and remains a world‐class performing arts
center, and the iconic symbol of Sydney, and to some extent, Australiaxxxviii.
In 2007, UNESCO named the Sydney Opera House a World Heritage Site. Today the
institution conducts 3000 events yearly, which draw annual audiences of about 2 million.
The Sydney Opera House also provides guided tours to 200,000 each year.xxxix
OUR ANALYSIS OF THE RELEVANT COSTS AND BENEFITS
The main aims of the financial analysis were as follows:
• To attempt to figure out whether the Sydney Opera House was and cu
ently is a
profitable venture.
• To see whether it would be a self‐sustainable venture in the coming years.
• To attempt to figure out what the value of the Sydney Opera House is to the people
of New South Wales, and Australia in general; and figure out either what they pay
for having this iconic building or what they receive in payments for having this
uilding.
For details on any of these conclusions or calculation methodology, please refer to the
appendix.
Analysis of Initial Construction Costs:xl
The construction period of the Sydney Opera House lasted from about 1957‐1973.
The initial construction can be
oken down into three stages. Stage I, the construction of
the platform, lasted from 1957‐1963, with Utzon as architect. Stage II, the implementation
of the roof, lasted from 1963‐1967, again with Utzon as the main architect. It should also
e noted that Ove Arup helped Utzon come up with the final spherical design of the roof.
Stage III, the final stage of construction, which consisted of fa
icating the interior, lasted
from 1967‐1973 and was led by Peter Hall.
Image removed due to copyright restrictions. Original
image can be viewed here: http:
www.andreas-
praefcke.de/carthalia/world/images/aus_sydney_ope
a_9.jpg
Figure 5: Construction of the Sydney Opera Housexli
15
http:
www.andreas-praefcke.de/carthalia/world/images/aus_sydney_opera_9.jpg
http:
www.andreas-praefcke.de/carthalia/world/images/aus_sydney_opera_9.jpg
http:
www.andreas-praefcke.de/carthalia/world/images/aus_sydney_opera_9.jpg
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The costs (in actual millions) in Australian dollars for each stage, respectively, were
AUS $5.2 M, AUS $13.2 M, and AUS $80.4 M. The reason why Stage III cost that much is
ecause the architects, Hall, Todd, and Littlemore had to start some aspects of the design
from scratch. Upon his resignation in 1966, Utzon took some of the initial blueprints with
e. him, forcing Peter Hall to come up with new plans, resulting in a large increase in the pric
The following is an analysis of the present value (PV) of these costs. It is assumed
that the costs of each stage can be represented as a lump‐sum cost at the end of that stage’s
year. This analysis also neglects the effect of inflation. Using this information, it is possible
to estimate an amount that had to be paid per year (an annuity) during each stage of the
project. This can be done using the sinking fund payment equation, A = F[A/F,i,N]. In this
case the discount rate (i) is chosen to be 8%, a typical value given to projects funded by the
public sector. N varies with each stage and is found by subtracting the start year of that
period from the end year of that period. Using the lump‐sum values, the value in 2010 can
also be determined using the future value given the present value formula, F = P[F/P,i,N]. N
varies with each stage and is found by subtracting the year of the lump‐sum 2010 (the year
that the cost should be discounted to). The results are summarized in the Table 1, below.
Table 1: Construction Costs for the 3 key stages
Year Stage
Cost Actual
Million
Cost Per Year
Discounted at 8%
2010 Value of Costs
Discounted at 8%
1957 Stage 1 start 708,840.01
1958 708,840.01
1959 708,840.01
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1960 708,840.01
1961 708,840.01
1962 708,840.01
1963 Stage 1 end, Stage 2 start 5,200,000.00 2,929,354.62 193,606,463.28
1964 2,929,354.62
1965 2,929,354.62
1966 2,929,354.62
1967 Stage 2 end, Stage 3 start 13,200, XXXXXXXXXX,959,757.05 361,239,653.59
1968 10,959,757.05
1969 10,959,757.05
1970 10,959,757.05
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1971 10,959,757.05
1972 10,959,757.05
1973 Stage 3 end 80,400,000.00 1,386,548,297.03
…
2010
Present Value of
construction costs: 1,941,394,413.90
The following graph shows the annual expenditures during the construction period
of the Sydney Opera House. It should be noted that all these funds other than an initial AUS
100,000 given by the government, were obtained via public lotteries. $
Graph 1: Estimated Construction Expenditure
By looking at the table above, it is seen that the 2010 value of the construction costs
is about AUS $2 billion, which is quite a large number considering the fact that the costs in
actual million was about AUS $100 M. The conversion from Australian dollars to US dollars
is about a 1 to 1 ratio. This shows the powerful effect of figuring out future values given
past values. In retrospect, $2 billion may not be that much, considering how much the
government spends every day. In our initial assumptions, we thought that the value of
eing such an iconic structure throughout all these years would outweigh this cost.
However, our cash flows from the period of operation tell a different story.
It is important to note that this analysis was only performed for the costs of the
initial construction period. Since 1973, the Sydney Opera House has gone through several
enovations and transformations, from exterior and interior upgrades to creation of an
underground parking lot. These renovations have increased its costs and expenditure
significantly.
Analysis of Operational Period (1973‐2010):
For the period it has been in operation, we use the annual financial reports for the
exact details of the revenue and expenditure.
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Revenuexlii
The Sydney Opera House receives great volumes of money each year. For purposes
of comparison, we
ing all the revenue received since the official opening until 2010 and
discount them at 8% to
ing all the values to present value as of 2010. We use 8% because
it is a typical approximate discount rate in long‐term public service project. We classify this
as a public project because the government allocates most of the revenue to it, as we will
see in the cash flow diagrams shown below. The revenue received from operations came
from tickets sales, shows, merchandizing, catering, festivals and tours, and grants from
private donors.
Graph 2: Revenue Breakdown for Operation period (2010 AUS$)
Graph 3: Revenue Breakdown for Operation period (%)
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In the top‐most cash flow diagram, we look at volumes of money received in the
second we see what fractions came purely from the government and what came from
operations of the House. Over the years the Sydney Opera House has been open, they have
eceived a total of ~AUS $ 5.6 billion (2010 value); of that AUS $2.85 billion dollars has
een from the government.
Expenditurexliii
When we look additionally into the expenditure over the years, we note that the
expenditure was always greater than the operational revenue, and had it not been for the
government endowments, the Sydney Opera House would perpetually be in debt. The
values given for expenditure mostly arose from salaries of staff, depreciation of the
property and maintenance & repairs. This building is always in need of great amount of
epair, maintenance and renovation, and thus renovations and repair form a great part of
the expenditure.
The total expenditure over the years the Sydney Opera House has been in operation
amounts to ~AUS$ 5.5 billion, a number very close to the total revenues received. In
following cash flow diagrams we compare the expenditure to the revenues, with and
without the government contributions, in an attempt to analyze whether the project would
e self‐sustainable, and the answer seems to a be a resounding “no” seeing that there is not
a single year where the operational revenue would meet the expenditure.
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Graph 4: Operational Revenue and Expenditure Breakdown without Government
Contributions (2010 AUS $)
Net Cash Flows
The net cash flows clarify the magnitude of the expenditure even further. The NPV
of the Total Summation of Net Cash Flows in 2010 value comes to AUS $100 million, which
looks somewhat dismal considering the amount of money that has been invested into this
project. We should note that this amount does not include the NPV of construction costs.
Graph 5: Net Cash Flows without Government Contributions (2010 AUS $)
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23
Graph 6: Net Cash Flows (2010 AUS $)
CRITIQUE OF THE PROJECT AND PROJECT EVALUATION PROCESS
W a profitable venture?
In this financial analysis, two periods were looked at: the construction period and
the period during which the Sydney Opera House was operated. The present values (in
2010) of the costs and benefits incu
ed during these time periods were calculated using a
discoun
as it
t rate of 8%.
During the construction period, only costs were incu
ed and the present value of
the construction cost is about AUS $2 B. From 1973 to the present day, the present value of
the costs is about AUS $5.5 B. During this same time period, benefits from operations and
government revenues have a present value of about AUS ~$5.6 B. Subtracting the benefits
from the costs results in a net cash flow of about AUS ~$100 M. It is important to note that
about AUS $2.9 B of the revenue (a little over half!) was from the government. It can then
e concluded that AUS $2.7 B was accumulated through the actual operation of the opera
house. If the cost (AUS $5.5 B) is subtracted from the operating revenues, the present value
net cash flow is AUS ‐$2.8 B, which is a large deficit. It is important to note that this does
not take into account the construction costs. Adding in the construction costs
ings the
operational cash flow even lower to about AUS ‐$4.8 B.
The results from the analysis show that from a strictly financial standpoint, the
Sydney Opera House was not a viable project at all. So why is it that the Sydney Opera
House is still standing today despite its financial flaws? This question will be addressed in
the next section.
H e are attempting to quantify its value to the people of New South Wales?
From the analysis, it shows that the Sydney Opera House is not a profitable project.
However, today it remains an apex in the world of architecture for its innovative design. It
also hosts over a thousand operas, concerts, etc. per year. Its iconic value to the citizens of
New South Wales and Australia is most likely what is keeping the structure in commission.
Its iconic value is quite hard to quantify, however, as seen above the opera house’s
ow w
24
operational activities would have not been enough to
eak even. The government of New
South Wales has contributed a present value of almost AUS $3 B to the opera house to help
keep it in function. The government might know that the Sydney Opera House is not doing
well financially; however, to the people of New South Wales it remains an important icon.
Therefore, as a rough estimate, the iconic value of the opera house to the public can be
estimated as the government’s contribution throughout the years, a value of nearly AUS $3
B.
I ancially sustainable for the future?
In the past ten years, it seems that the Sydney Opera House has at least been
contributing 50% of the revenue solely through its operations. Even though this is over
half of their revenues through their years, the ratio of operational revenue to government
evenue should be much higher. Considering the fact that in these next years, the Sydney
Opera House plans to undergo more renovations and total refu
ishment, cu
ently valued
at AUS $800 billion
s it fin
xliv, additional costs will be accrued. The opera house is already in huge
debt and this will only increase in the next decade or so. Operational revenues will
probably not increase much, so therefore government revenue must increase to help
finance these expenditures. Because the Sydney Opera House is such an icon, the
government will probably continue to fund it for a while. However, at one point the
government may realize that it cannot continue to fund the opera house, and will
eventually suspend funding. Therefore, it does not seem that the Sydney Opera House is
definitely financially sustainable for the future.
Additional Information: What does the AUS $ 800 million Total Refu
ishment
ecommended in 2010 really mean?
he table below compares it to cu
ent maintenance costs from the past decade. T
Table 2: Maintenance Costs for 20002010
Year Expenditure In
Actual Dollars
(AUS $)
Expenditure in 2010
dollars using 8%
(AUS $)
Expenditure in 2010
dollars using 5%
(AUS $)
Expenditure in 2010
dollars using 2.5%
(AUS $)
25
2000 15,467,000 33,392,093 25,194,113 19,799,068
2001 13,493,000 26,972,569 20,932,072 16,850,908
2002 15,310,000 28,337,742 22,619,843 18,653,748
2003 15,109,000 25,894,171 21,259,880 17,959,853
2004 16,420,000 26,056,476 22,004,370 19,042,166
2005 16,987,000 24,959,476 21,680,195 19,219,231
2006 18,344,000 24,956,809 22,297,247 20,248,344
2007 14,821,000 18,670,192 17,157,160 15,960,596
2008 15,968,000 18,625,075 17,604,720 16,776,380
2009 17,849,000 19,276,920 18,741,450 18,295,225
2010 17,939,000 17,939,000 17,939,000 17,939,000
Seeing that they need to add about $800 million to the maintenance budget to keep
it in operation; if for example the maintenance was prioritized such that only about AUS
$40 million was used every year for the next ten years, this would mean that the Sydney
Opera House would need to on average triple expenditure on maintenance to handle both
the regular annual maintenance works and ca
y out the required renovation. For this to
emain a feasible option, we would need to consider other options for funding: Would the
government be willing to finance this? Would the people of New South Wales find this a
worthy venture to invest in for the next ten year? Based on cu
ent operational revenue,
would this be considered a profitable venture by private financiers? Cu
ently, the future
seems bleak for many of these options seeing that its operational revenue already does not
meet the annual expenditure.
Critique of the Project and Conclusions from Our Project
From th
Evaluation Process
is project, and the mistakes made therein, we learn:
We learn the importance of planning well before implementing a project. Complete
designs would have saved this project a great amount of money and time.
We learn that it is important to consult with other experts when embarking on an
unprecedented venture. The initial cost estimates and structural sketches had been given
with out structural expertise, this also led to many iterations of the design, and could have
een avoided to some extent.
26
The choice material and final design greatly influence final maintenance costs. In the
case of the Sydney Opera House, the final design and material choice has led to high
aintem nance costs over the years due to its very delicate form.
The project has shown the importance of implementing a good project management
strategy, especially when implementing a large‐scale unprecedented plan. Utzon was
known to be a
illiant architect but very poor manager. Seeking a project manager would
have been of great benefit to this process.
It also shows as the importance of having government backing. Government support
and approval of this plan enabled it to have large access to public funds created via a public
lottery, and this ensured that the finances were always catered for during the construction
period. In the operating life, the government has also continued to keep the Opera House
float. a
Comments on the Project Evaluation Process
The financial analysis given in this report is by no means 100% accurate. Several
assumptions were made throughout the financial analysis to simply the process. First of
all, we only know for sure the exchange rate of the AUS $ to the US $ in 2010, it is therefore
slightly difficult to get a feel for what the Actual 1972 Australian Dollars means in 1972 US$
as we do not have exchange rate data to span the length of the project. We therefore
ing
all AUS $ to 2010 value and then compare these values to USD. We do note that this is an
approximation and that there are many economic nuances that this simplification does not
address.
In addtion, when discounting the cash flows back to the present day, a discount rate
of 8% is assumed throughout, as this the discount rate assigned to most public sector
projects.xlv The discount rate can easily change from year to year, especially during the
various construction stages of the project. Also, it has been assumed that the construction
costs for the three stages are paid as a lump sum at the end of each stage, which can then be
modeled as an annuity. In reality, the costs probably varied from year to year. There may
also be a little variation between the actual cash flows from 1973‐2010 and what is shown
above. Although the official financial reports of the Sydney Opera House were obtained,
27
there was a lot of financial data that it was difficult to sift through what was actually
elevant for the financial analysis.
However, had these simplifications and assumptions not been made, it would have
een very difficult to ca
y out a financial analysis. There are too many different variables
and dynamic elements that would have to be accounted for to perform a flawless analysis.
Despite these circumstances, the authors feel that they have captured the essence of a
thorough financial analysis of the Sydney Opera House.
APPENDIX
General Formulas
It is possible to estimate an amount that had to be paid per year (an annuity) during each
tage of the project. This can be done using the sinking fund payment equation: s
A = F[A/F,i,N] = F*[i/((1+i)N‐1)]
N is the amount of years the annuity has to be paid to meet a certain future value F given a
ertain discount rate, i. c
Given a past cash flow, it is possible to discount it to the future using the following
quation: e
F = P[F/P, i, N] = P*(1+i%)N
28
N varies by year and is found by subtracting the year of the past value from 2010 (the year
that the cash flow should be discounted to). The discount rate (i) is taken to be 8% as
mentioned above.
R
evenue From Operational Period
YEAR
Revenue
from
Operations
(Actual
Millions)
Revenue
from
Operations
(2010