Events capital = big returns, right?

The New Zealand Herald today is reporting that Auckland is a more successful city than Sydney at attracting and hosting major events. Auckland Mayor Len Brown says:

"Major sporting events are big business and bring substantial economic benefits to the host region, so there is fierce competition globally to secure events."

There certainly is fierce competition all right - but not a whole lot in the way of compelling evidence that the economic impacts of events are as substantive as commonly thought. Nevertheless:

Auckland's annual budget for securing top sporting events has risen from $6 million five years ago to between $8 million and $12 million now, said Rachael Carroll, of Auckland Tourism, Events and Economic Development (Ateed).

and

Ateed's figures show that events in 2011/12 produced a net return of $28.9 million to the Auckland economy. The current funding year's events are on track to return $30 million.

I wonder what the term net return means? Is it returns to ratepayers? Is it returns to the Auckland Council? Or is it good old economic impact? I suspect the latter. There are all sorts of problems inherent within the calculation of economic impact when applied to a sporting event. In academic circles there is very little argument in favour of sports events generating substantial economic impacts. I've researched in this area in the New Zealand context (see here - note that this paper is presently under review for possible journal publication) and found that the major events are underwhelming in terms of what their realised impacts were on host cities. I'd really like to see an estimation of actual benefits (that are not economic impacts). What are the public good benefits? What are the consumption benefits? Who do they accrue to? What evidence is there to suggest that this is the best use of $12m of scarce Auckland City funds? If it is there, I'd love to see it. 

Christchurch Stadium - regenerative or redistributive?

Apologies for the long absence from the blogosphere - research to be written up, teaching to be done has meant scarce time has been redirected from this blog.

It is the issue of the Christchurch Stadium that I turn to today, and a couple of recent articles on Stuff ("Stadium concept 'would be money maker'" and "New stadium plan 'smart, bold'") that have made some rather interesting claims.

Christchurch lawyer Geoff Saunders:

"This idea came from my own frustration at going to Jade Stadium for meetings for 30 years and seeing it sitting there completely deserted apart from the groundsman cutting the grass," he said.
"I just thought that with the amount of money being spent on it there needed to be a way to use it a lot more. We want to make the stadium into a money maker rather than a white elephant." 

He said the office rent would help the stadium avoid the same fate as the Forsyth Barr Stadium in Dunedin, which lost $1.9 million in its first six months.

"Crowds are very cyclical in sports grounds. If you try to do budgets based on income from sports events, it is very challenging," he said. 

Saunders said the development would also attract office clients back to the city centre who had left for suburban offices after the earthquakes. 

He said the plan was just a concept and he had not investigated how it might be developed and funded. 

Craig said it was important to make any new stadium a lively place with offices, hotels, retail and clubs. 

"A lot of stadiums are just large objects that sit there and are only used for 30 days of the year. There is an opportunity here to make a very large chunk of the city centre that, rather than being a dead space for most of the year, is much more active," he said.

A stadium will only ever be used sparingly. That is reality. Westpac Stadium is used for between 40-50 event days per year - and it has been making operating surpluses since it has been opened. Westpac Stadium was also built with a mere 1/3 of its funding from local and regional government. It is not clear yet where exactly the funding for Christchurch's stadium plans is coming from, but it is fair to say that it will be largely funded by taxpayers - locally, regionally and nationally to some degree. As such, if my taxpayers money is going into funding a stadium, I would like to see some evidence that this amenity is going to be at least self-sustaining, and should not be detrimental to the local area. The idea that office buildings will make the stadium profitable is missing the point. If the office blocks are the profit-making parts of the venture, why not just build the office blocks? If they must be built as part of a stadium plan, we have to acknowledge that the rents earned by stadium offices will simply be transferred from other office spaces elsewhere within the city. It may well be the case that office space is at a premium in Christchurch, in which case the stadium offices may be beneficial to the city of Christchurch in that clients who were previously unable to obtain office space may now be able to do so. If, however, the offices are simply populated by clients who relocated from the suburbs, then this isn't making money (nor necessarily welfare enhancing either) at all - it is merely redistributing the rents on office space from the suburbs back into the CBD.

It is exactly the same argument as the claim that stadiums generate conference revenues too - which is only beneficial if the conferences wouldn't have been held in the city in the first place without the stadium conference spaces.*

Sure, the office rents may make the bottom line of the stadium better (if indeed things pan out as projected). But from a wider (city or regional) perspective, is it really regenerating or simply redistributing? That's the question that ratepayers need to be asking of their policymakers.

* Two years ago I attended an academic conference in Melbourne which was hosted at the iconic Melbourne Cricket Ground (it was a sports management conference, so it was a great choice of venue for a sports fan). The conference would easily have fitted into any standard sized conference venue within Melbourne, as size was not a factor. During the conference, which was hosted in members areas around the stadium, a Sheffield Shield cricket match was being played between Victoria and South Australia (I think). There would have been no more than 200 spectators in this stadium (that can host in excess of 100,000 people) on each of the three days that the conference was held. The crowd doubled during breaks between the organised sessions at the conference.

Absence makes the heart grow just as fond as it was before - the puck drops...

In major news for those familiar with what many consider to be the fourth North American major league sport (and Canada's premier sport), the NHL (the league) and the NHLPA (the players association) have agreed upon the framework of a new collective bargaining agreement which will end the third labour stoppage of the NHL in less than twenty years. See this link for an excellent story which features comments by two prominent sports economists, Rod Fort and Victor Matheson. The issue at hand: what effect will the labour stoppage have on the NHL in future? Will the fans not come back?
From Rod Fort:

"They will come back," said Rodney Fort, a sports economist at the University of Michigan. "And in fact, we may not even notice any difference."

Rod summarises much of the research in this area concisely in this one sentence. There may be short term impacts (playing a truncated 48 game season is bound to 'hurt' when compared with what is usually an 82 game season) but the evidence shows that attendances bounce back very shortly afterwards. I especially like Victor's quote:

"Sports really depend on getting people hooked on the drug, and the NHL has now given hockey fans three opportunities to go through detox," said Victor Matheson, a professor of economics at the College of the Holy Cross. "There's a real question about how much you can do that before you have fans say, 'You know, I have a lot of things I can do with $1,500 besides buy a season-ticket package.' "

But they keep coming back. I guess that's why sports has such longevity and is regarded by some as 'recession-proof' - perhaps absence really does make the heart grow fonder (or maybe that fans have long memories). I wonder if the relationship between labour stoppages and attendance differs between cities with perennial contenders (Detroit and Chicago, for example) when compared to less successful franchises? It would sure be interesting to analyse.

Stadium renovations and cost overruns - further recent evidence

Just a short post here - over the festive season I spotted a couple of stories via Deadspin that readers of this blog might find interesting:

Renovations of Buffalo's Orchard Park are 84% funded by the public sector, and Vancouver's BC Place stadium roof replacement ended up costing considerably more than first promised.

Furtther evidence to show that you can't always believe what you hear (or read) from stadium proponents. Oh, and it is worth keeping in mind that they should be able to pay for them without public funds. That's what economists Marc Poitras and Larry Hadley found in this 2006 research (gated JSTOR link, RePEc working paper link).

Privatising the Super Rugby franchises (well, partially)

Yesterday it was announced that there were two successful applicants for licences to operate the Hurricanes and Crusaders Super franchises next season. The Hurricanes franchise is to be run by a consortium including the Wellington Rugby Union, former Hurricanes directors and Welnix, the owners of the A-League franchise the Wellington Phoenix. The Crusaders deal is a little less clear, but is understood to involve a major figure from the West Coast mining industry. The licence for the Blues was understood to be on track for 2014, and the Chiefs had to resolve governance issues before an arrangement could be made to the satisfaction of the New Zealand Rugby Union.

Gareth Morgan of Welnix spoke to Larry Williams about the Hurricanes deal on Newstalk ZB last night - listen here (it's a good interview).

I'm left with more than a few questions surrounding this announcement, and I think an appropriate way to consider the impact of this new ownership structure is to consider the major 'players' impacted by the negotiations - the NZRU, the licencees, the provinces, the players and the fans.

From the New Zealand Herald (linked at the top):

"These new arrangements are a step forward in terms of putting Super Rugby on a stronger financial footing to ensure the game at the professional level is better placed to prosper and deliver for its fans,'' said NZRU chief executive Steve Tew.

Firstly, there is no question that the NZRU is a clear winner in this process. They get (desperately needed) injections of private funds into the Super franchises which are expensive to run, and have been a drain on the union's coffers. To understand just how they win, though, it is useful to know what the licence for operating a team entails. Also from the NZH article above:

The NZRU will retain full ownership of the franchises, the contracting process and coaching appointments.
Investors will get to select, market and manage their team as well as lobby for players outside New Zealand if that works in tandem with the sport's governing body.

The NZRU one of the partners in SANZAR rugby, the group that runs the Super Rugby tournament (the others being the South African and Australian Rugby Unions). As such, they are the recipient of the broadcast revenues that accrue to each nation. The licencees don't see any of this revenues - these revenues are used to pay the players. The NZRU therefore has the power to allocate the players to each franchise. Investors can do what they like once they get their player list, but a large portion of ownership responsibility is in fact taken away from them. It is a very different ownership structure from, say, US-based, Australian or European sports leagues. At least in the A-League, the Wellington Phoenix can employ whoever they want and sign any player they want. The NZRU retain control of which players can play in Super Rugby, what teams they play for and who coaches them. It is a very favourable set-up to the governing body, no question. It is understandable if the NZRU wishes to avoid any club/country conflict that affects many of our Pacific Island neighbours with overseas-based players contractually bound to overseas clubs that often conflict with commitments to the national team. Crisis averted. The other thing that the licencee model does for the NZRU is to wash their hands of the micro-level management that is often difficult when trying to run the game from a central level. The day-to-day running of a franchise is best done on the ground, and the rationale is that private investors will do the job of running the franchise more efficiently than the NZRU or a provincial-based board could. After all, there might even be some money in it for licencees if they do a good enough job!

Think next of the licencees - show me the money? Where is it coming from? And where are the wider incentives to invest in the franchises? As mentioned above, licencees will select, market and manage their team. That is, they'll do the best that they can with who they are given by the NZRU (who pay the players, after all). They are in the best position to eliminate inefficiencies in the day-to-day running of the franchise - they'll have a clear incentive to run a pretty tight ship. The Hurricanes are considered to be the most financially viable franchise in New Zealand, and it isn't hard to see why - above-average crowds at the Westpac Stadium go a long way towards making ends meet. They are also a well-run franchise - there's a small matter of a lack of hardware, though. If you are an investor in the Hurricanes, the licence allows you to market the team, keep gate revenues (while presumably paying stadium rentals too) and generate deals for sponsorship (including a sponsors logo on the front of the jersey). Gareth Morgan in the interview above talks about player academies as another source of opportunity for licencees. It's an interesting prospect - what incentives do the licencees have to develop talent (e.g. put together and run a development squad) that they have to pay for but run the very real risk of losing those players if the NZRU decides to add them to the contracted players pool? There would have to be some arrangement in place for teams to be able to have first rights to developed talent should they make the grade. Otherwise, player development is a very risky prospect. The other thing Gareth mentions in his interview, and it is also mentioned here, is altruism - that the licence is being purchased to keep the franchise in the city/region. That's admirable, and if I had loads of money to throw around, I'd be rather keen on altruistic projects too. There's another factor at play here, though, in the case of the Hurricanes, and that is the now close relationship with the Phoenix. Given that the Welnix group now have ownership stakes in both franchises, it gives them greater bargaining power with the Westpac Stadium, and also the city and regional council. (Gareth doesn't want to stop with these two franchises, though - he wants more!) This is, in several respects, a clever decision by the Hurricanes licence holders. This has to be tempered, however, with the reality that the market in New Zealand cities are small ones, and becoming increasingly competitive markets at that. The more control of sporting alternatives that you have locally, the more you stand to gain under the NZRU licence arrangement. The big question for me is how long licence holders will be happy to simply receive players rather than selecting their own. I see it like this: you invest in a business but you have to use a consultant as a condition of the investment. How happy are you when you find out that the consultant is in fact in the same position with all of your competitors? Seems a bit odd, doesn't it? That's why sports leagues were famously described as 'peculiar' by a founding sports economist in 1964.

This brings me to the provinces. Yes, provinces are struggling - we've seen this on several occasions in recent times. If your Super franchise is a money drain, you'd be jumping at the news that some other poor unfortunate soul will take them off your hands for you. If your Super franchise gives you valuable dividends that often mean the difference between finishing the financial year in the black or red, then you'd be thinking twice as to whether this new ownership deal is a good thing or not. The dividends arent likely to have been large in recent years, but they'd still be welcomed in Hurricanes country by the smaller unions that make up their catchment area.

And what about the players? What does the new ownership structure mean for them? Well, in my view, they are the biggest losers (in terms of the alternative). Nothing changes - they are presently contracted by the NZRU, and they will still be contracted by the NZRU under licence arrangements. If the licencees were able to pay for players, well, the ballpark would be markedly different - imagine free agency. Imagine a less-free structure by which players could be paid a central contract by the NZRU but franchises who really want/need them would pay extra to get them. Free agency has its critics, but it has fundamentally changed the landscape of sports that have adopted it. Licencees would have a greater incentive under free agency or something similar to identify and develop talent - not only within these shores but also overseas. Giving licencees the power to pay players would quite likely make players winners in this deal. As it is, that's one of the least likely things to happen.

Last, but by no means the least, are the fans - what does this mean for them? Well, I've alluded to a couple of things that would make fans a little nervous (greater franchise power in the Wellington area, for a start, along with more centralised key decision-making influenced by broadcast deals), but on the surface it would appear that there has been (and will be) very little change. In many respects it will be business as usual.

For this economist, I am left wondering where this step might lead to. It is a first step to many possibilities. Exciting ones, too, if done right. There just has to be a little more loosening of the reins.

UPDATE: I was curious, so I did a brief analysis of the franchises in the four US major league sports in 2011 by examining revenues and expenses to see how many would 'survive' under a system like what is proposed for the Super franchises. It is only crude, but it is rather insightful. I used Rod Fort's Sports Business Data site (an unparalleled resource) and did a quick calculation of the difference between gate revenues and expenses less player costs. I didn't have the exact breakdown of revenues beyond gate and total revenues, so I just used gate revenues. The NHL had 15 of its 30 teams that broke even or better using this model. They aren't even playing this year. Major League Baseball would have 10 of its 30 teams breaking even or better. Only four of the 30 NBA franchises would break even or better, and none (yes, zero) of the NFL franchises would meet their costs. If anything, this highlights that sport is a risky business to succeed in, with a pretty low probability (29/122 = 23.8% in 2011) of 'success'.