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).
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. 

Thursday, 9 May 2013

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.