Covid-19 pandemic triggers looming financial crisis for West Kowloon Cultural District as developers avoid bidding for massive new project

Lawmakers worry that delayed Art, Commerce & Exhibitions project signals more money woes

Developers need more time to assess post-crisis recovery, impact of US-China trade war

The West Kowloon Cultural District Authority’s (WKCDA) decision to withdraw its tender for a massive commercial project in the multibillion-dollar arts hub, following a cool response from developers, signals massive deficits ahead, observers said.

Lawmakers are worried that with the Covid-19 pandemic wreaking havoc on arts and exhibition events, the authority will sink deeper in the red and keep asking for more government funding.

“The government is the most convenient ATM for it,” said Civic Party lawmaker Tanya Chan, a member of a Legislative Council committee that monitors the development of the massive West Kowloon arts hub.

Others, however, felt it made sense to delay the project given the devastation wrought on the economy by the pandemic and the uncertainty ahead, including that spawned by the ongoing trade dispute between the United States and China.

The proposed Art, Commerce and Exhibitions (ACE) development, next to the Hong Kong Palace Museum, includes an exhibition centre, a hotel and rental offices, as well as retail, dining and entertainment facilities.

The tender was called in April, with the contract expected to be awarded in the fourth quarter and the project completed by 2025-26.

But on August 6, WKCDA chief executive officer Duncan Pescod announced the tender withdrawal, saying the response from developers “had not been as positive as expected”, without indicating a relaunch date.

Lawmaker Chan said the authority had seen costs rise even as its income has been hit by its inability to rent its venues amid the pandemic.

Delaying the ACE project would “very likely” result in deepening deficits, she said, adding: “I doubt the authority can plug its funding gap, because it’s difficult for it to take out loans. It’s very likely it will seek more funds from the government.”

The ACE project, with a gross floor area of more than 135,000 square metres, was meant to be developed under a build-operate-transfer model for a period of 43 years.

The successful developers would have split the income from the project with the authority. Upon expiry of the term, the premises would be handed over to the authority.

Stewart Leung Chi-kin, a board member of the Real Estate Developers Association of Hong Kong, said some developers might have had reservations about taking on such a large project now, as it required a huge investment.

“Everyone is not sure about the impact of the US-China trade disputes,” he said.

He felt the authority’s decision to pull back was wise, as it allowed everyone to see if Hong Kong’s economy could rebound quickly from the pandemic.

Pro-establishment lawmaker Edward Lau Kwok-fan said the poor response from developers reflected the weak economic outlook, with exhibition spaces and hotels among the hardest hit by the pandemic.

A member of the Democratic Alliance for the Betterment and Progress of Hong Kong, Lau urged the authority to review its mix of commercial elements in the arts hub as well as its land use, with a view to raising income in the short term.

“We don’t want to see it facing greater financial pressure, because that will mean it may ask us for money,” he said. “I am afraid it can’t endure for two more years.”

If the authority was forced to ask the government for more funding, Lau said he would be more inclined to help it obtain a loan rather than approve a grant.

Construction work on the ambitious West Kowloon Cultural District began in 2013. Sprawled over 40 hectares, it aims to turn a prime harbourfront site into a world-class arts hub with a dozen facilities including theatres and museums.

So far, the Xiqu Centre, Art Park, Freespace and M+ Pavilion have opened, with M+ museum expected to welcome guests in 2021, followed by the Hong Kong Palace Museum in 2022.

The initial government grant for the project was HK$21.6 billion (US$2.8 billion), with critics predicting that cost overruns would see the total investment swell past HK$70 billion.

A Legco document in May showed there would be HK$10.2 billion left in the endowment by the end of the 2019-20 financial year.

The authority estimated its unaudited operating deficit before depreciation would triple from HK$299 million in 2019-20 to HK$987 million in 2020-21, then widen to HK$1.55 billion in 2022-23 as more arts and cultural facilities open.

WKCDA board chairman Henry Tang Ying-yen raised eyebrows at a Legco committee meeting in June, when he was asked if he could guarantee he would not come back and ask for more government funding.

“I will guarantee you I will come and get money” he replied with a laugh.

Cherry Tse Ling Kit-ching, permanent secretary for Home Affairs, then clarified that whether the authority would need to seek extra funding or borrow would depend on its financial adviser’s report.

She said the funding gap was expected, and once the arts hub’s commercial facilities were ready, the income generated would help.

Engineering sector lawmaker Lo Wai-kwok, a WKCDA board member, said the earlier the ACE could be completed, the earlier it could provide vital income for the arts hub.

“Arts and culture facilities can bring us some income, but looking at arts developments worldwide, it’s hard to just rely on them. So we need income from ACE to support the development,” he said, warning that delaying the project would have a negative impact.

Nightlife entertainment entrepreneur Allan Zeman, chairman of the authority’s commercial letting panel, said creating a uniqueness for the arts hub was crucial to its success, and that included introducing special shows and bringing in fresh global brands that appeal to younger people.

He felt the authority should complete all projects already in the works and review its financial situation before embarking on other projects.

“The more you build, the more you may wind up with a huge, huge loss every year,” he said.