Transformation of Former Police Married Quarters Site on Hollywood Road into a Creative Industries Landmark

Project: 元創方 "PMQ"

Applicant: Musketeers Education and Culture Charitable Foundation Limited (Musketeers Foundation)

Joint applicants: Hong Kong Design Centre, The Hong Kong Polytechnic University and Hong Kong Design Institute, Vocational Training Council

I. Basic Information on Former Police Married Quarters Site and No. of Applications Received

• Address: No.35 Aberdeen Street, Central
• Gross Floor Area: 15,400 m²
• Site Area: 6,000 m²
• Year Built: 1951
• Grading: Grade 3
• Possible Uses: Heritage Site for Creative Industries and Related Uses
• No. of Applications entering 2nd round: 3 (the other 2 is "Quarter C" submitted by Heritage Revitalization Development Limited and "PMQ" submitted by Hong Kong Institute of Contemporary Culture)

II. Key Terms of Invitation For Proposal

• To charge nominal rent for the site to encourage a wide variety of activities which meet the three policy objectives but may not be profitable (e.g. dedicated space for start-up creative industry establishments at concessionary rents, exhibition area for display of historical relics of the former Central School, landscaped open space, etc.).
• To set up a Special Purpose Company (SPC) which possess charitable status for the sole purpose of the Project. The SPC shall keep a separate interest-bearing Hong Kong Dollar account with a bank licensed in Hong Kong solely and exclusively for processing all receipts and payments arising from the Project.
• Fixed tenancy terms of 10 years, renewable for another 5 years, to facilitate longer-term business planning for the operation of the creative industries landmark;
• Any net operating surplus arising from the operation will be shared between the operator and Government every 5 years on a 50/50 basis. Government's portion will be returned to the General Revenue Account whereas the operator will be required to re-invest his portion into the project.
• To monitor the business performance during operation phase, the successful applicant shall submit mid-year progress reports (including financial reports and cash-flow statements), annual reports (including annual audited financial statements) and final evaluation report (including the final audited accounts) to the Government. The annual reports and the final evaluation report should contain the audited accounts and the Auditor’s Reports. Failure to submit a report or submission of reports containing insufficient, incomplete or false information may result in termination of the Tenancy Agreement. Members of the Advisory Committee, staff of the PMQ Project Secretariat, Government officials from relevant bureaux, departments or organisations authorized by the Government or other parties that may be brought to the Site by the Government, may conduct visits to the Site.
• Upon dissolution of the special purpose company, any surplus funds and assets should be disposed in accordance with the Inland Revenue Ordinance.

III. Basic Information on Selected Project

General Project Description

• Play a leading role in transforming creative ideas and new thinking into products and services that bring high economic value and improvement in everyday life.
• Nurture emerging create-preneurs from Hong Kong for brand building, added-value creations, delivery of quality products and services, and connect them with the international design and business communities.
• Develop the former police married quarters into a creative cluster of prominence, a platform for cooperation and competition, and a vibrant landmark for creative works and innovation in Asia and the World.
• Foster a dynamic environment for generation and exchange of creative ideas and business opportunities for the enhancement of HK competitiveness and the well-being of society.
• Revitalise the historical site of the former Central School as an outstanding example, to promote public awareness of heritage conservation through education and community engagement, while achieving self-sustainability.
• Capital cost: About $420.0 million has been earmarked for construction of this project.
• Job creation: 280 jobs during renovation period and 130 full-time and part-time jobs upon project commissioning.
• Estimated Flow of People: Attract per year 5,000 local and international creative professionals to visit the site and attend activities; and attract per year 500,000 visits to PMQ.
• Establish PMQ as the icon for clusters of at least 50 HK aspiring top designers for multiple sectors;
• Anticipated renovation period: 1st Quarter of 2012 to 4th Quarter of 2013
• Anticipated Project Commissioning Time: 1st Quarter of 2014

IV. Reasons for Selecting the Project

Individual aspects:

Historical Value and Technical Aspects

• The applicant proposed various ways, including guided tours, seminar and workshops, for the interpretation of the history of the former Central School, and the history of Victoria City. The intention to relate and connect the site with the neighbouring Dr Sun Yat-sen Historical Trail would help promote the cultural characteristics of the district and form a strong bond with the local community.
• The applicant has shown adequate understanding of different layers of history related to the site and proposed innovative ways to interpret its history. The proposed underground interpretation area adopts a creative approach by allowing visitors to walk along a re-created corridor between the underground foundation stones of the former Central School and to appreciate the archaeological remnants. The proposal will help promote the cultural characteristics of the district and has the potential to convert the site into an iconic landmark.
• The architectural improvements such as the i-cube and the extended canopy proposed by the applicant would provide the space it needs for conducting indoor and outdoor activities and fostering a creative atmosphere for the community. "i-cube" would provide an additional 600m² of weatherproof open space underneath the elevated structure and a 600m² rooftop garden for leisure uses of the tenants and visitors.
• These proposed changes were considered justifiable for increasing the space for indoor and outdoor activities so as to enhance patronage of the site and hence the viability of its business plan. The applicant has committed to shoulder $17m of the construction cost for these proposed architectural changes in order to suit the future use.。

Creative Industries Value, Social Value and Social Enterprise Operation

• The applicant has set out a clear vision of what the PMQ will become. The site would primarily be a design cluster, and design plays a strategic role in inspiring enterprises and entrepreneurs to create value through innovation and creativity. The proposal covered the business plan, marketing strategy, tenant mix, supporting facilities, activities and programmes for nurturing start-ups and attracting patronage. On the business side, Musketeers Foundation had put up a three-stage plan which clearly outlined the steps to implement the project’s vision.
• The applicant adopted a reasonable approach in assessing the benefits of the project to the creative industries and envisaged that the project would benefit individual creative industries talents (or "create-preneurs"), small and medium sized creative enterprises, the local neighbourhood, the creative industries and the community at large. The applicant had set out measurable targets for monitoring future performance.
• The project would also target at master artists and designers from overseas with a view to facilitating international exchange and interaction.

Financial Viability

• The applicant has adopted a prudent financial projection. Based on the projected income and cash outflow at MOD price level, the project would have a surplus in Year 5 (i.e. 2018). The project would have a net present value of $22.5M. The Government's share of surplus in the 15-year period would amount to $30M.
• The principal applicant and the sponsor agreed to donate $110M as seed money. It would be used to finance the capital expenditure of $59.5M (i.e. $17M to augment Government’s capital funding for the transformation works, $19.5M for fitting out and furnishings, $23M for pre-operating staff and project-related expenses), and to act as the general working capital throughout the three stages of development of the project.
• The assumptions for income projections were considered to be very conservative as the occupancy rate was only set at 80% in Year 1 to Year 4, and 85% in Year 5 to Year 15. The applicant also proposed to offer a very long rent-free period from 4 to 6 months per contract By carrying out a sensitivity analysis on the basis of a 90% occupancy rate, the net present value of the project was $1.7M. The Government’s share of surplus in the 15-year period would amount to $48.5M.
• On expenditure estimation, the applicant had also adopted a very conservative approach, with the expenditure being grossly over-estimated. Total average annual expenditure over the 15-year period is $42.4M.
• Both the income projection and the expenditure forecast are very conservative. The success of the project will rely heavily on the applicants' capability to continuously attract tenants and visitors to PMQ. With the prudent financial projection approach adopted and the donation pledged, the project is likely to be sustainable.

Management Capability and Other Considerations

• The principal applicant, Musketeers Education and Culture Charitable Foundation Limited (Musketeers Foundation), is a charity foundation established in 2008. Although its history is short, it has been committed to the advancement of education and culture. It will provide financial and human resources and act as the strategic leader and principal coordinator under the proposal.
• The experience and track record of the applicant and its three co-applicants in the operation of creative industries are beyond doubt. The founding directors are successful businessmen in their respective fields. Two of them have been engaged in the management and daily operation of businesses in creative industries (i.e. in advertising, publishing and software and computing) for over 20 years. The three co-applicants are key players involved in design and creative industries in Hong Kong. The Hong Kong Design Centre, being a strategic partner of Innocentre, has rich experience in the promotion of creative industries in Hong Kong. The Hong Kong Polytechnic University has close links with public and private practitioners of the creative industries and actively participates in the relevant fields. The Vocational Training Council has a long history of providing education and training in design.
• The applicant will form a board of directors comprising members nominated by the principal applicant and the three co-applicants as well as appointments of renowned independent directors from relevant fields to steer and oversee the project. It will set up a management committee and an executive management team to oversee the daily management, operation and maintenance of the project.
• Advisors who are experts in various disciplines of creative industries such as advertising, architecture, art, design, digital media, film, music, performing arts, publishing, software and computing and in other aspects like heritage conservation, finance, branding communication, public relations have been drawn in to help deliver this project.
• The applicants has also obtained support from a number of strategic partners. They possess a solid clientele and have extensive networks with local practitioners in the creative industries. Their involvement would help incubate the new designers in the creative industries.