Wednesday, 26 October 2016

Funding the fight ... low blow or a knockout?

The proposal for Government funding to be poured into Joseph Parker's world title fight has become very popular - so popular, in fact, that even I've been asked to contribute to this discussion!

There have been plenty of views from both sides of the fence - Steve Kilgallon's piece on why taxpayers should stump up to help stage the fight, Patrick Gower's views are more strongly against, while Barry Soper writes a more questioning piece.

Eric Crampton (as per usual) makes several excellent points - his whole post is worth a read! As economists, Eric and I see very much eye to eye on this issue.

I can only really add to this discussion with a few points of my own:

  • A matter of a week or so ago, Auckland was widely considered the host. Now we are told that there is only a 20-30 percent chance of the fight being staged in Auckland. What is the situation that has caused this uncertainty? This, to me, is the key question. Why is the government funding needed? Could it be that promoters in the US are proposing to spend more on attracting the fight than Duco, and are therefore being considered as a safer (read: more lucrative to the WBO) bet than hosting a title fight here? Government funding has been used the world over to try to trump others in hosting events ... with questionable returns.
  • Indeed, there is little to no evidence from the independent research looking at the realised economic impacts of mega sporting events that said events will generate tangible economic impacts. The winners from such arrangements tend to be the governing sporting bodies, followed by the event organisers - with taxpayers a distant last.
  • What are the benefits that New Zealanders will enjoy from hosting the fight? Benefits will accrue largely to those who watch the fight - and you can bet that it will not be anywhere in the plan for such an event to be broadcast live free-to-air. Part of what makes the fight commercially lucrative is the ability of broadcasters to charge for people to watch it. If government funding was contingent on it being broadcast free-to-air, it would undermine the commercial viability of hosting it here. So it should be a given that people will have to pay to watch the fight with or without government funding. These prices will be much more expensive than any previous fight given its title status, so one would reasonably expect the promoters to capture a much greater share of the event's benefits in the form of ticket sales and pay-per-view sales from Sky. 
  • The economic benefits are (unfortunately) synonymous with economic impacts - which doesn't help the case for the fight to be publicly funded. If you look at past events funded by the Major Events Development Fund (MEDF), they've tended to be events with longer than a single day's duration - which means that their ability to attract visitors and spending is much greater than a one-day event. Any economic impacts from the event are also highly likely to be concentrated in Auckland - hence there may well be a stronger case for Auckland Council (via ATEED, one assumes) to be a major backer of the event. I understand that ATEED is already involved, but it doesn't appear to be enough to get the deal over the line. 
  • There is also a matter of consistency and transparency regarding the treatment of the application for the MEDF - any (perceived or otherwise) favouritism will not go down well with people who have missed out in the application stage. One assumes that the application will include an estimate of economic impacts attributable to the event? To support these impacts, it is useful to consider what would happen in Auckland (and New Zealand) if the event did not take place. In most cases, projections of economic impact assume that the counterfactual is that there would be no spending at all in the absence of the event - an assumption that overstates the likely economic impact.
  • One must also factor in the opportunity cost of public funding into such an equation. Scarce government funds could be spent elsewhere - and no doubt there are plenty of alternative uses for an as-yet unknown amount of public money that may generate greater longer-term impacts than funding a one-off event like this.
  • From what we have heard (at least via the media) the good people at Duco are pointing to the feel-good factor as being an important reason why we should consider funding the fight. If so, ask yourself this - will you feel any worse than you already do if the fight was to go offshore? And if so, what is this "feel-bad" worth to you? In several studies from overseas that have attempted to quantify (among other things) the feel-good effect, intangible benefits are almost always smaller than the economic impacts and are certainly not large enough on their own or in tandem with tangible benefits to justify subsidies given to sports events, facilities or franchises. 
  • And what about the precedent a favourable fast-tracked decision would set? 
I'm just finishing off research into the impacts of hosting major sporting events on travel service exports in New Zealand - and preliminary results are interesting. The larger the event, the greater the likelihood of a statistically significant bump in tourism spending - but not all of them have generated positive changes to tourism spending.

I'm a boxing fan from a long way back - I remember growing up watching great fights like "Marvelous" Marvin Hagler vs Thomas "Hitman" Hearns, as well as watching heavyweight greats like Spinks, Tyson, Holyfield, Bowe, Lewis and the Klitschko brothers (among others). I'd love nothing more than to see Joseph Parker added to the list of world champion heavyweight boxers. But as for government funding of this title fight - well, let's just say that the economics of hosting the fight just don't seem to be strong enough to score a win on the cards from this judge. 

Thursday, 27 March 2014

The economics of the America's Cup - did we lose or win?

Six months ago Team New Zealand lost the America's Cup Oracle defended the America's Cup in an historic comeback. Since then, we've had a post-mortem of the event, and today we've heard from an independent report into the economic outcomes of the Government's investment into the unsuccessful Team New Zealand challenge off San Francisco. It's being regarded by the Minister for Economic Development as money well spent. Click here for the reports themselves from the MED website.
“The economic benefit from our investment in Team New Zealand is considerable. From a $36 million investment, the evaluation shows a total estimated impact of $87 million to the New Zealand economy,” Economic Development Minister Steven Joyce says.

The Government's share of the total Team NZ revenues of approximately $180m was 20 percent (it was capped at $36 million), with 66 percent coming from overseas. The report found that the total outcome of $87 million to the New Zealand economy would not have occurred without the Government's involvement.

I'm not going to question the final point - it isn't unreasonable to assume that the Government's contribution was pivotal to the challenge - but then, one could also argue that it wouldn't have happened without the overseas or private domestic funding either. That being said, however, there are two aspects of this report that do require challenging.

First, attributing the entire economic impact of a project to a 20 percent contribution is something I (and many others) have a real problem with. You could just as easily credit the economic impact figure of $87 million to the overseas funding (and you could do so with confidence, as it is 'new money' and thus more likely to be beneficial to the New Zealand economy) more than the Government's investment. Still, it is not an easy issue to resolve. It's not as easy as saying that because the Government contributed 20 percent means it should be 'credited' with 20% of the economic impact. The combination of public and private funding makes attributing the economic impact to one or the other parts problematic. A more accurate statement would be that the entire project (regardless of where the money came from) generated $87 million in impacts. After all, the tax revenues generated by Team New Zealand were between $38 and $40 million.  

The second issue is the absence of opportunity costs of public funding in the report, which would help us to determine to what extent the $87 million impact be considered an economic benefit, and therefore money well spent. If there was no Team New Zealand, would nothing have happened? Of course not - life (and the economy) would have continued to tick away as per usual. $36 million of taxpayers money went into this campaign. Public funding has alternative uses, which should at the very least be considered as part of an objective analysis. If there was no Team New Zealand, what would have happened to the $36 million in taxpayer funding that was invested there? Chances are it would have gone to some other worthy recipient, for example the health sector or the education sector. In order to determine whether the $36 million spent on the America's Cup was money well spent, we need to know what $36 million would do when put to an alternative use. If the $36 million for Team New Zealand returned a higher impact than, say, paying each and every New Zealander $8 as compensation for there being no Team New Zealand, then it might have been money well spent. Determining what the appropriate alternative use for $36 million is the subject of debate - and my example above is very much tongue in cheek - but one thing is for sure: it is certainly not nothing. 
$87 million is the economic impact with no alternative use of public (and other) funds. Is it realistic to attribute this as a benefit? I'll let you be the judge of that.

Wednesday, 25 September 2013

To challenge for or defend the America's Cup - which is better economically?

They say that a week is a long time in sports. This has never been so true as what has developed out off the coast of San Francisco this week. The Oracle Team USA syndicate have almost pulled off one of the greatest comebacks in sports history in rattling off six consecutive wins to tie the regatta and bringing the battle for the Auld Mug down to a winner-take-all race tomorrow morning (NZT).

This time last week it seemed that an Emirates Team New Zealand victory was assured and that we'd be hosting a regatta to defend the Cup in Auckland in about three year's time. Now the tack has changed considerably - this from today's New Zealand Herald: it would appear that the chances of a future New Zealand challenge for the Cup (should Oracle win the final race tomorrow) look set to take a massive hit.
Team chief executive and fundraising power source, Grant Dalton, has already hinted that he will not do another America's Cup challenge if this one fails, though such decisions are always open to review. If he goes, there are doubts that multi-millionaire benefactor Matteo de Nora will continue either.
 Lose, and Government money becomes harder to prise out of the public coffers. This year's nail-biting Cup match has been tremendous theatre but it will make the private fundraising job that much harder. One America's Cup lost campaign allows hope to burn. Two lost campaigns raises the issues in sponsors' minds of throwing good money after bad.
Think about this from New Zealand's perspective. We've had the theatre, and the drama, and the world's eyes are now firmly fixed on San Francisco as Oracle seeks to finish what would be nothing short of a miracle, being virtually dead and buried a week ago. Think of the advertising this is giving this country - granted, it would be nicer if we were not on the wrong end of the comeback, but it is publicity all the same, and publicity that likely would not have occurred if we had won the Cup earlier in the regatta. Now the US have something to talk about with this regatta - and it is synonymous with New Zealand. So we get this advertising benefit (which is difficult to quantify but is nonetheless part of the package). How much has this cost the taxpayer? The Government committed about NZ$40m to the TNZ challenge - and are now reaping the rewards of that investment.

What happens if we win it? Several things, possibly; one of which is that there are fair questions to be asked as to whether hosting an event such as the America's Cup is the goldmine people say it could be (I blogged about this earlier in the week). We also know that the Government has in the past expressed an interest in throwing more cash at a Cup defence - for what might be considered fairly obvious reasons - and New Zealand taxpayers are not averse to more dollars being committed to a future defence. The question must be asked as to whether the return on the investment in a defence is as great as the return on the investment for a challenge? If there's one thing to be said for a challenge, it is that the Government writes a cheque for a fixed amount - end of story. A defence is more likely to be accompanied by a blank cheque - much like we had for the Rugby World Cup, where the loss was expected right from the start, on top of government spending towards stadiums, infrastructure, security and the like. Right now, we're getting great intangible mileage out of a $40m taxpayer investment - would we get such mileage if we hosted the event? Is that $40m better spent elsewhere? Important questions that need answers.

Finally, if Oracle does complete its staggering comeback tomorrow, keep a very close eye on the Auckland and New Zealand economies in three years time, to see whether the loss of the Cup has a detrimental impact. I'd be prepared to bet that there won't be a slump or the like if the Cup is hosted elsewhere. After all, you can't miss what you never had. Life goes on. And so does the economy.

Sunday, 22 September 2013

Hosting major sporting events such as the America’s Cup – can we believe the hype?

As a general rule, in the words of Public Enemy: don't believe the hype. Hosting a major sports event is a complex situation from an economic perspective – and there’s a lot of unknown that can quickly turn conservative estimates of impact into grossly overstated figures. Here are a few thoughts as they come to mind.

Firstly, we have to recognise that the figures publicised whenever a major event such as the America’s Cup is announced are gross economic impacts, which are not the same thing as economic benefits. The initial economic impact figure posted for the 2013 San Francisco regatta and pre-event regattas was US$1.4b (for San Francisco – click here for the report) and was based on an estimated 15 syndicates competing for the Cup. In March of this year the figures were revised downwards to US$900m – but it is not known how many teams this figure was based on. These figures are impacts associated with the event in the absence of any alternative activity that might have occurred in the absence of the event. In isolation, they are difficult to prove or disprove. In order to determine whether the event is beneficial for a local economy, one has to compare the impact of hosting the event with the likely impact on the local economy if the event was not hosted. It does not necessarily translate that the local economy will be worse off if an event is not hosted – several studies in the scholarly literature have shown that events such as lockouts, and strikes in professional sports in the US have had no impact on host economies – that is, people find other things to spend their entertainment dollars on instead of professional sports.  If US$1.4b or more (in regular tourism, for example) would have occurred in San Francisco in the absence of the America’s Cup, then the decision to host the event would be debatable if the goal is to maximise economic benefits.

Another thing to remember is that these figures are produced by consultant reports that commonly overestimate the positive aspects (like numbers of visitors attending, the extent of their spending, etc), understate or completely omit the costs associated with the event (or, worse, include costs as part of the economic impact), and as such produce numbers that are optimistic at best and gross exaggerations at worst.

The calculation of economic impacts quoted in the media are almost always taken from an economic impact study, which is an input-output analysis that basically calculates the impact of an injection of spending in a local/regional/national economy as it filters through the event-related sectors of the economy. The logic of such impacts, at first glance, appear sensible, but when one examines exactly how the hosting of a major sporting event can impact upon tourism, you quickly realise that it isn’t as straightforward as it might seem.

There are many things that can affect the extent to which an event attracts visitors and their spending. There are positive and negative impacts here. Firstly, the positives. Events attract people who come specifically for the event, and they can also induce tourists to stay longer to take in the event. They can also induce locals to change their holiday plans to attend the event and spend money locally that would otherwise have been spent outside the local area. We can’t ignore the negatives, though. Events can cause visitors to put off trips to the local area – either temporarily (where the trip is displaced to another time) or permanently (known as crowding out) – due to perceptions of event-related congestion, noise, price increases, etc. These same perceptions can also induce locals to flee the area while the event is on, which adds to a possible negative impact. Questions have to be asked of the figures quoted – do they factor in all of these possibilities, and are they reasonable grounds upon which to base estimates of visitor spending?

Estimating visitor spending, too, is an inexact science. A vivid illustration of this was the experience of the 2011 Rugby World Cup. The RWC got considerably more visitors than expected (over 133,000 according to Statistics New Zealand), yet visitor spending was less than half ($340m) of what the Reserve Bank projected ($700m – a figure that was estimated on fewer visitors). This example shows that there’s a lot of unknown – but what is generally known is that projections of impacts very rarely (if ever) turn out as expected.

A report written by the Budget and Legislative Analyst for the City and County of San Francisco Board of Supervisors in November 2010 – click here for the document - determined that the hosting of the current America’s Cup regatta would result in a net cost to the city and county of US$42.1m. In other words, the revenues accruing to the city were in all likelihood more than offset by the costs to the city. This report was based on the initial $1.4b economic impact figures, and was based on the early assumptions of large numbers of syndicates competing to challenge for the Cup. Modifying this to what we have seen unfold recently, fewer syndicates meant lower event-related costs, but also meant lower revenues, so it would be fair to assume that there’d still be a substantial shortfall in the local government coffers as a result of the event. One issue that has been prevalent in San Francisco is the issue of private funding of the event. The bottom line is that the city is on the hook for any shortfall of private funding, which if eventuated would increase the cost to the city of San Francisco (i.e. the taxpayers).

And another thing: what can past experience teach us of the legacy of the New Zealand hosting of the America's Cup regattas in 1999/2000 and 2002/2003? The legacy effect of events is the new buzzword in event evaluation, and is largely unknown as it occurs at some stage in the future, which is of course yet to unfold. I will have to go back to the original economic impact analyses done for the two regattas hosted in Auckland to examine the extent to which legacy played a role in these figures, but one thing in particular strikes me as ironic about the legacy of the 1999-2003 New Zealand America's Cup regattas - and it is the investment in the infrastructure associated with the event. The Viaduct Basin underwent a major transformation to host the two regattas, and Auckland now faces the prospect of developing a new location for the event, with the Viaduct reportedly out of commission for hosting syndicates in a future regatta. Some might say that the development of a new base for the event is a benefit - one which comes at a cost (likely to be borne by Auckland ratepayers) - but in actual fact is already part of a pre-existing development plan of the Auckland waterfront - one which will gain significant traction should New Zealand win the America's Cup off San Francisco in the coming days. As such, the development of a new base is a classic case of a future investment brought forward. As such, calling it a benefit associated with hosting the America's Cup is a little misleading. Then again, is it not unfair to label one legacy of the America's Cup regattas in Auckland as a cost, not a benefit, in the form of further taxpayer funding? After all, the past two unsuccessful America's Cup campaigns have received central government funding. A future defense, should things go to plan, has already reportedly drawn support from the Prime Minister towards some contribution from the public purse. This is all part of a legacy, is it not?

So what about the winners and losers from hosting events?  The nature of the event plays a big part as to who stands to benefit from its hosting. You only had to read the reports in the news media of the impacts of the 2011 Rugby World Cup on the tourism sector in the different regions of the country. Some said it was great, others said it was terrible. For the America’s Cup, it will be largely localised in Auckland, as it has been in the past. Industries directly and indirectly associated with the event (boat building, super-yachts, etc) did well the last time it was hosted in Auckland. As far as tourism-related industries are concerned, anecdotal feedback from cafes and restaurants around the 2000 America’s Cup regatta and the 2011 RWC found that if businesses located in the ‘right’ areas (i.e. Viaduct Harbour for the America’s Cup, fan zones for the RWC) then there were definitely positive impacts, whereas those located outside these areas found that they were flat or even lost business. Evidence suggests that the gains that to be had from hosting an event almost certainly come at the expense of others. The question is whether or not the gains outweigh the losses – and is a part of the big question: whether benefits of hosting events outweigh the costs.

Tuesday, 14 May 2013

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).
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.