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'.

Sportspeople behaving badly...

A New Zealand insurer is to offer corporate sponsors insurance to protect sponsorship of sports in the event of behaviour that is harmful to the sponsor's brand, according to this article from today's New Zealand Herald. From the article:

Following a host of celebrity implosions, corporate sponsors are being offered insurance against their investments going bad with disgrace, non-appearance and lack of performance.

As the sponsors of shamed cyclist Lance Armstrong abandon him in droves, insurance brokerage Apex General is offering local sporting organisations and film-makers protection for the value of their sponsorship.

It is providing cover for a range of sponsorship costs including non-appearance, death, disability and disgrace and performance bonuses.

Apex general managing director James McGhie said this was new to New Zealand for sponsors looking to protect their investments.

The company's sports cover also gives protection against things such as non-appearance causing financial loss and a dive in reputation that sees their investment's value fall.

Okay, so bad behaviour cannot be condoned from recipients of sponsorship, but the relationship is, to me, a fairly simple one - a sponsor sponsors an athlete because they perceive the sponsorship to be worth at least what it forks out by way of the sponsorship. If the athlete stuffs up, causing the sponsor to re-evaluate the worth of the deal to them, then the sponsorship ends if the sponsor perceives the deal to no longer meet its benefit-cost criteria. The waters do murky somewhat when you have long-term deals, but the relationship is fundamentally the same. The deals are full of risk for sponsors, but the incentives at play work pretty well. Choose wisely and they work for you - make a bad choice and you suffer the consequences, as is the case with any business deal gone bad. The saga of sponsors pulling out from Lance Armstrong in the wake of recent developments is a case in point.

Introduce some form of insurance into this relationship and you are fundamentally changing the game. Anyone that has studied introductory economics will be aware of the issues surrounding insurance markets, in particular asymmetric information, adverse selection and moral hazard. The moral hazard issues in this arrangement strike me as being problematic - if you are a sports team and your sponsor takes out insurance against your potential future behaviour being less than desirable, how does that alter your incentives when compared to a deal without insurance? Without insurance, it is in the best interests of the sports team to behave in a way that does not harm the sponsorship arrangement for fear that they may end up losing it. With insurance, the incentives change - teams no longer have the same incentive to preserve their end of the deal, thus the likelihood of misbehaviour increases. And what for the sponsors? Do they enter into deals with safe, trustworthy, dependable and successful teams or athletes, or do their incentives change as well? Instead of lower risk sponsorships, there is likely to be a move towards more risky deals.

Talk about opening a can of worms...

The London Olympics came in under budget. Yeah right.

This just out from the NZ Herald - the London Olympics came in under budget:

The British government says the London Olympics cost about $NZ786 million (400 million pounds) less than expected.
The final financial report for the games projects that the cost will be $17.6 billion from an original budget of $18.33 billion.
Olympics minister Hugh Robertson says, "it is a significant achievement to deliver this large and complex program on time and under budget."

It sure is a significant achievement. Especially when you are aware of this information, taken from Brad Humphrey's piece in on the economic impact of the Olympic Games in the New Palgrave Dictionary of Economics (well worth a read in general if you are at all interested in the economics of mega sporting events):

London expected its 2012 Games to cost under $4 billion, but they are now projected to cost over $19 billion (Carlin, 2007; Simon, 2006; Sports Business Daily, 2008a). As expenses have escalated for London, some of the projects have been scaled back, such as the abandonment of the planned roof over the Olympic Stadium. The stadium was originally projected to cost $406 million and will end up costing over $850 million. Further, its construction will be financed by taxpayers and the government has been unsuccessful in its effort to find a soccer or a rugby team to be the facility’s anchor tenant after the 2012 Games. This will saddle the British taxpayers with the extra burden of millions of dollars annually to keep the facility operating. It is little wonder that the London Olympics Minister Tessa Jowell stated: ‘Had we known what we know now, would we have bid for the Olympics? Almost certainly not’. (Sports Business Daily (2008b), citing a story in Daily Telegraph (2008). The Olympic Village was to be privately financed, but the plan fell through and will instead cost the taxpayers nearly $1 billion. The government hopes that the apartments will be sold after the Games and the financing will be recouped.)

So, was it 400m pounds under budget or did it completely blow all projections? You decide.

RWC 2011: a small tourism win

This just out from stuff.co.nz - the tourism sector had a small win from the Rugby World Cup:

Despite the brief boost from the Rugby World Cup last year, total tourism spending rose just 2.4 per cent to $23.4 billion in the year to March 31, according to Statistics New Zealand figures.
The Tourism Satellite Account shows international tourism spending rose only 1.6 per cent, or by $149 million in the March year. That was slightly down on the growth of 1.8 per cent in the year to March 31, 2011, before the Rugby World Cup. 

 Before you spot the problem here, it is also noted that:

"Growth in overseas visitor arrivals of 4.4 per cent, largely driven by the 2011 Rugby World Cup, contributed to this small increase in international expenditure," satellites account manager Peter Gardiner said.
But the boost from the rugby was offset by the impact of the Christchurch earthquake early last year, which put off many foreign visitors to the South Island. 

Now, to the problem. The 2011-12 March year experienced a slowing of expenditure growth compared to the 2010-2011 March year. As quoted from the article above, any gains from RWC 2011 appear to have been offset by a reduction in tourism spending from the Christchurch earthquake. Nonetheless, it is interesting that the gain in spending was $149 million for the entire year. I'm pretty sure the Reserve Bank projected the gain in spending from the RWC at around $700 million in August 2011 (and that was with only 95,000 visitors - the event attracted 133,200 visitors). The MED determined earlier this year (February 2012) that the actual international visitor spend from the RWC was in the order of $390 million.

The $149 million mentioned above is growth from the 2010-2011 March year. Last year was a year in which not only the Christchurch earthquake featured but we also saw the continuation of the world financial crisis and recession continue to buffet overseas economies and therefore impact upon tourism in this country. This leads me to a more specific question - what would have happened in the absence of the RWC? Would we have had no growth, or even a reduction in tourism spending from the previous year? It is a question that is almost impossible to know the answer to given that the economic impacts of earthquakes are unlikely to be standard across countries, so correcting for it is nigh on impossible.

In any case, we should be asking whether the injection in spending attributable to the RWC was truly beneficial to our economy. On the surface, it appears that it may well have been (in that it appears to have translated into an increase in foreign tourism spending in this country). Did spending attributable to the RWC actually offset not only the earthquake and the financial crisis but also the possible losses of regular tourism? These are complex questions to answer, but not impossible. It is a matter of untangling the effects as best as one can. Was it worth it? Well, public opinion was in favour after the All Blacks triumphed.

As an aside: A colleague and I are looking at this general question and evaluating the realised impact of the RWC 2011 on host cities in New Zealand. Interestingly, provisional results suggest that the aggregated figure is somewhere in the ballpark of $120 million (working paper link will be posted up in a future blog post once it is ready).

Why I love sport

It is possible for economists to have a non-dismal side. I double as a sports economist and a sports fan, and often do both at the same time. I find this an ideal combination, especially when the teams I follow do well (or, as is usually the case, do badly). I follow many teams, some are more successful than others. One of the teams I will confess to supporting are the Australian National Rugby League (NRL) team the South Sydney Rabbitohs. The Rabbitohs are the most successful club in the history of the New South Wales/National Rugby League with 20 premierships from their inception in 1908. Their last premiership, however, was won in 1971. They were also cut from the NRL in late 1999 and spent two years in the wilderness before being reinstated into the League for the 2002 season. They are presently part-owned by the actor Russell Crowe, who purchased the club in 2006. This season they surprised more than a few people including myself when they captured 3rd place in the NRL premiership and enjoyed their first playoff victory since 1987 in only their second finals appearance since 1989. They were defeated by both finalists, and there is no shame in that. The fact that they exceeded expectations makes for an intriguing question when one puts on an analytical hat: How did they manage that? Did privatisation play a part? Or was it something else?

An absolutely fascinating example of how to think about the question of 'how' comes in the form of another team I follow closely - the Major League Baseball Oakland Athletics (also known as the A's). Some may have heard of this team before - they are the subject of the movie and book Moneyball. Well, they have shocked the baseball world this season by doing the unthinkable again - making the playoffs despite one of the league's lowest payrolls. They did it on the back of trading two of their star starting pitchers and their All-Star closer in the offseason and securing what many believed to be no better than castoffs from the other trading partners that included a mix of rookies and journeymen. Almost everyone, myself included, gave them no chance. They were supposed to be rebuilding. They were supposed to be scrapping for the lower rungs on the league table. They didn't have what it took to challenge the Texas Rangers and the Los Angeles Angels, two powerhouses who spent up large to make runs at the playoffs. It is generally accepted that it is incredibly difficult to succeed in the major leagues if you are a small market/low payroll team. The A's knocked the Angels out of playoff contention by winning their third to last game of the season on Tuesday (NZT) and seemingly unbelievably securing the wild card position in the American League on the back of stellar pitching by a largely unproven starting rotation, a bullpen that has gone from strength to strength as the season has worn on, and a stunning clutch hitting offense that gets the runs necessary to outscore their opponents. By winning their penultimate game against the Rangers yesterday (NZT) they are now incredibly tied with the Rangers for the division lead, and a win today will give them an even more improbable division title. If you haven't read Moneyball or seen the movie, I would recommend it. The story is utterly compelling, and the analytical nature in which the success of this team who outperformed their more wealthy opponents by identifying an alternative way to build a team and do it on the cheap. Oh, and not just compete, but win consistently. There has also been a really, really interesting paper by economists Jahn Hakes and Skip Sauer on evaluating the Moneyball hypothesis in the Journal of Economic Perspectives - it's also a great read (linked here - ungated access). I dare say questions will be asked as to how they have done it again in 2012 from seemingly nowhere. Everyone said the Moneyball strategy had lost its edge when the A's dropped from sight after their last playoff appearance in 2006. Six years later, they are back in the most unlikely of circumstances. Is it Moneyball Mark II? It is questions like these that make an economic way of thinking such an interesting and challenging discipline!

As an aside, I can't help but wonder whether the crapshoot that is playoff baseball will this time shine on the A's. I hope the ride lasts.

POSTSCRIPT: The A's defeated Texas in their final regular season game of the season to win their division. Interestingly enough, while Moneyball got them to the playoffs in the early 2000's, will Moneyball Mark II get them to the World Series?

How to get ahead in the NRL - have government work for you

Yesterday was an intriguing end to the 2012 NRL season, with a grand final spectacle befitting of the season finale. (For a review of the game, read this from Phil Gould). The two teams contesting the final, the Melbourne Storm and Canterbury-Bankstown Bulldogs, were ranked 2 and 1 in the minor premiership (or the regular season as it is referred to in North American circles) respectively. Both clubs have a rather colourful recent history, as both have been found to have committed major breaches of the NRL's salary cap within the last ten years, although there is no question here of salary cap impropriety this season. The past just added to the sub-plot of the game itself.

I came across this article by regular Sydney Morning Herald columnist Roy Masters yesterday which gives an insight into how success can be obtained in the NRL.

In short, the Bulldogs signed their present coach Des Hasler from Manly-Warringah, who had just won the 2011 premiership via Hasler's coaching. Hasler is regarded as cutting-edge in his coaching, and he transformed the Bulldogs from 10th place (out of 16 teams) in 2011 to minor premiers and grand final runners-up in 2012. The 'Dogs train at their spiritual home of Belmore Sports Ground. Part of the reason for their transformation:

The $9 million Belmore facility was built with funding from three sources - the Rudd Infrastructure program, a NSW government grant and a $1 for $1 spend with the local council. The Bulldogs contributed $500,000.

That's not a bad price to pay for success. 5.6%. Says it all really. The article also highlights the role of high performance centres (or otherwise) in other clubs, including Melbourne, Gold Coast and Brisbane.

This quote in the article, from Bulldogs CEO Todd Greenberg is also rather insightful:

''When you are limited by the amount you can spend on players via a salary cap, you've got to look at other means of acquiring an edge,'' he said. ''In the case of Des, the Centre of Excellence wasn't opened when he visited. It took 12 months to build and we moved in in November. But he could see we were committed to resourcing long-term success. It also allows me to run my business model off the back of the football department. Fans want to know their club is a better than even shot of winning, plus they want to know we have done everything possible to make this happen.'

Including getting your fair share of government assistance.

Auckland stadium review

This column by Herald columnist Brian Rudman stirred me into action this afternoon with the upcoming decision on what to do with Auckland's stadium situation.

On the one hand, as Brian points out, the decision is easy if you subscribe to the efficiency-of-use argument. The three big stadiums in Auckland (Eden Park, North Harbour Stadium and Mt Smart Stadium) all depend on local government to a greater or lesser degree. Indeed, the issues paper released by Regional Facilities Auckland (RFA) in June (linked here) indicates that Eden Park breaks even each year and has a large debt to service of $55m post-Rugby World Cup, Mt Smart is facing an upgrade bill of some $60m and requires local government funding each year, and North Harbour Stadium is very much dependent on local government funding to stay viable. There appears to be an argument, on the surface, that there are potential efficiencies to be gained by rationalising their use (the 'collaborative strategies' option presented by RFA).

On the other hand, however, there is a sense of uncertainty as to how feasible a rationalisation plan like this is. There are questions to be answered over how such a rationalisation might affect support for certain sports within Auckland - for instance rugby league - if they have to move from Mt Smart to Eden Park. Will Eden Park residents be happy with greater utilisation of the Park? Granted, the $250m upgrade for the Rugby World Cup had a lot of people asking whether it was worth the price tag for the present utilisation of the facility. Clearly RFA thinks that the extent of investment in the infrastructure for and around Eden Park means greater utilisation is necessary. Interestingly enough, the proposal put forward by RFA suggests that Eden Park be used for 'bigger' rugby league events (that is, over 20,000 supporters). The Warriors haven't averaged more than 20,000 in attendance since 1996. The sole game played at Eden Park in the 2012 season against Manly in the opening weekend brought 37,502 through the turnstiles. The Warriors have actually played twice at Eden Park, for an average of 37,957. Two games isn't a great sample upon which to make any predictions, in any case, but the reliability of that number of spectators regularly attending Eden Park games is somewhat questionable. Under RFA's second option (specialisation of functions), Eden Park would be the major stadium with Mt Smart and North Harbour Stadium smaller-scale backups (rather as they are now). RFA also proposes Mt Smart taking on speedway (moving from Western Springs). Mt Smart and North Harbour might also be developed into high performance centres for various sports.

The issue of rationalisation of sporting facilities has been experienced in Melbourne in recent years, with many AFL clubs moving games from traditional (and often smaller capacity) suburban grounds to large inner-city facilities including the Melbourne Cricket Ground and Etihad Stadium, along with AAMI Park. NRL clubs have also raised the idea that more games be played in larger facilities like ANZ Stadium and Allianz Stadium at the expense of smaller suburban grounds. Melbourne hosts some 18 professional sports franchises in its vicinity, and does work at coordinating the use of its major facilities. Sydney, too, has seen several NRL clubs in particular move from their traditional homes to the larger ANZ Stadium, which has meant greater utilisation of the major facilities across both cities. Melbourne and Sydney have dedicated major sports precincts which are the focus of much of the major sport within each city (Melbourne, for instance, has Hisense Arena and the Rod Laver Arena in close proximity to the MCG and AAMI Park, while Sydney has its Olympic precinct at Homebush which includes the ANZ Stadium). Auckland does not have such a precinct, and as such, a continuation of ad hoc development appears likely in the absence of some coordination.

It should also be pointed out, in the case of Melbourne and Sydney, that most of the clubs that play their home games in the large sports precinct facilities still train\at their home ground, which have effectively become smaller scale suburban sport-specific high performance centres. They are not as expensive to maintain, as the onus is largely on the clubs themselves to provide the necessary infrastructure and equipment. Many of these facilities also serve as local community sporting facilities, so have an element of public good about them.

In the short term, it seems prudent for Auckland to look for ways to leverage the investment from the RWC. Sydney leveraged it's Olympic investment as part of the 2003 RWC, and continues to do so. Melbourne leverages its Olympic and Commonwealth Games investment with the AFL, the NRL, Super Rugby, the Australian Open, etc. The decision is an important one and will determine whether, in future, we see an Auckland sports precinct along the lines of Melbourne or Sydney.

Baseball in Auckland... Ball One or Strike One?

I was particularly interested to read this article in Stuff this morning that outlines interest in establishing a professional baseball franchise in Auckland. Evidently Major League Baseball are keen on helping Auckland with facilities and to set up the franchise in the Australian Baseball League (ABL).
Personally, as a keen follower of Major League Baseball in the US, I'd be very keen to see professional baseball in this country. There are a couple of issues, though, to be worked through. Firstly, a facility. From the article:

Australian Baseball League chief executive Peter Wermuth said: ''A proper baseball facility suitable for professional baseball would be a great development for the sport in New Zealand, provide an opportunity to bring ABL games to New Zealand and would be a key step towards consideration for an ABL expansion franchise in the future.
''We strongly support the initiative.'' 

A 'proper' facility would assist with the location of a possible ABL franchise. Auckland has been working through a review of sports facility usage (see a draft regional facilities review discussion paper linked here)* whereby proposals have been made for certain facilities to be used in more efficient/appropriate ways. Whether a presently utilised facility can be converted into a dedicated baseball-only facility or whether a greenfields site is required is unknown at this stage. Don't expect the "build it and they will come" approach to automatically make baseball in Auckland an economic gold mine.

 "It's crucial for our sport to take the next step to have at least one facility that we can call home," BNZ president David Ballinger said.

''Every other sport has at least one facility that they can access whenever necessary, and baseball should be no different.

If baseball has such a following, it would make sense for private interests to take the first step. The argument of "everyone else has one so I need one too" isn't something that should go down too well with local government. It certainly isn't a compelling argument for government assistance.

 ''We need a facility that we can build up over time that becomes world-class for what is considered one of the world's most popular and profitable team sports.''

Popular - you bet. So is football. Football doesn't influence decisions on major sporting facilities of this country, however, in the way that rugby or cricket does. Profitable - it sure is. I wonder why? Could things like this have anything to do with baseball's profitability in the US? What about the implications of its monopoly status? Let's be clear, also, that professional sport doesn't always bring in the big bucks and isnt alwatys good for a local economy. Just to be absolutely clear.

There's one other 'problem' with professional baseball (or profitable sports, in general), and the extent to which one would consider it a problem depends on your perspective. This is no better illustrated than the present lockout of the NHL in North America - its second in seven years. Baseball has had lockouts and strikes in the past, and at least one economist found that it wasn't the end of the world.

*UPDATE (24 Sept): The paper I intended to link was the Regional Facilities Auckland (RFA) discussion document - please find it linked here.)

Addressing Gerry Brownlee's points

I appeared on Close Up last night discussing the economic merits of stadium construction. I am grateful for the opportunity to contribute to the story and to share what I believe to be important points that taxpayers need to be aware of when it comes to building sports facilities.

The Earthquake Minister (and Deputy Prime Minister), Gerry Brownlee, was interviewed after the piece. The interviewer, Mark Sainsbury, put several questions to the Minister, and I feel it proper to reply in kind to Mr Sainsbury's questions and Mr Brownlee's responses.

Firstly, I am not anti-stadiums. I never said the facility would be a white elephant nor a complete waste of money. I certainly did not say that Christchurch shouldn't build it. It is true, I am yet to be convinced that stadiums in isolation present a compelling case for government funding. I believe that a greater proportion of the costs of facilities should be funded by the private sector. After all, if there are economic gains to be had from facilities, surely those who receive those gains would be prepared to pay to ensure that at least some proportion of those gains will continue (if the government said "sorry, no more funding for stadiums")? I am not presenting an argument against stadiums, rather, I am simply pointing out what is known about the actual economic impacts of stadiums on host economies.

If I was as dismal as Mr Brownlee implied, I would have pointed to some scholarly empirical research that has shown that facilities may, in fact, have detrimental impacts on local economies.I didn't, however, as my own research hasn't found any clear evidence of detrimental impacts.

Mr Brownlee pointed out that Christchurch has "nothing... we've lost the lot". Christchurch does actually have a new $30m 'temporary' facility, funded by central government. That, to me, isn't nothing. Ask people in quake affected suburbs of Christchurch whether $30m from central government would have been useful elsewhere (for restoration of basic infrastructure, for instance) and you'd probably find most people would plump for elsewhere rather than on a stadium.

I agree. you certainly could make a similar argument for art galleries, museums, performing arts centres, theatres, libraries... the list goes on. The point is that after a disaster of this magnitude, with limited public funds (that come with opportunity costs attached), the sensible approach economically is to fund things in order of priority. If a stadium was high on the list of priorities, then fine, build a stadium! Just be aware of what a stadium investment entails.

And a 35-40 year lifespan and the upside that has "got to be pretty big"? In the US, even some brand spanking new stadiums haven't been associated with a "pretty big" upside - some have in fact been demolished after only 20-25 years.

I have no doubts that Gerry Brownlee is trying his best to do the best thing for Christchurch as Earthquake Minister and as a local MP. Everyone wants to see Christchurch recover, both quickly and effectively, from what has been crippling to this wonderful city. I appreciate that bold decisions need to be made, and they are not always likely to satisfy everyone. I wish Gerry and the Christchurch City Council well in their endeavours to deliver a new Christchurch. I'll certainly be keeping an eye on things as they progress.

Stadiums and the broken window fallacy

One of my colleagues here in the School of Economics and Finance has forwarded me this link, and I have to confess that I haven't actually come across this before! I'm very pleased that I now know of it, as the broken window fallacy seems to fit the economics of stadiums very, very well.

To paraphrase (using a hypothetical example of a $250m stadium), the broken window fallacy occurs when there is destruction (in the stadium's case, physical or economic obsolescence of the facility), and the new stadium is rebuilt. The costs involved in the rebuild are considered by some as beneficial to those who are involved in the rebuild (ie. construction firms, etc). The opportunity cost of the $250m, however, means that amount cannot be spent elsewhere, and from the point of view of society, makes the idea of a rebuilt facility somewhat less appealing. The facility will be considered a bad investment if the opportunity cost is greater than the stadium investment.

What is also important to consider, too, is that the stadium investment is likely to also have impacts on those involved in the rebuild. Construction firms will consider the facility a benefit if they have spare capacity that they can utilise to build the facility. If they don't, however, then the facility will effectively crowd out other work that the firms would otherwise be doing.

As such, is the city that builds a $250m stadium actually better off? One can always glean a simplistic insight into this by examining multipliers for various activities. If a stadium has a multiplier of 1.75, let's say, then all it takes for the facility to make the local economy better off is if no other alternative investment has a multiplier greater than 1.75. If others do, however, the 'gains' are highly unlikely to materialise.

Don't believe the hype

In preparation for an interview with Close Up that will appear on TV One some time next week, I took the liberty of drawing up an interview 'cheat sheet' with key reasons why people shouldn't get swept away in the euphoria that surrounds the announcement of a new stadium and beware of the hype. Unfortunately I didn't articulate this as well as I would have liked in the interview itself, and I feel it only helpful to note these points down in a blog post for the benefit of all concerned. It works as a nice summary of the arguments that explain what we actually observe from stadia around the world. So here goes:

Tangible economic impacts from sports facilities often fail to materialise for a variety of reasons. These include:

1. A substantial proportion of the crowds at stadiums are local rather than visitors. Some estimates I've seen in the literature suggest that it ranges from 80 to 95% of attendance being local.

1a. Spending by locals within a city on attending games is usually substituted from elsewhere within the local economy, for example, movie theatres, video rental stores, and other entertainment venues. A game merely redistributes spending rather than generates it. 

2. Spending within a city often leaks outside the local area, as not all goods and services purchased by event attendees are produced locally, so a proportion of the spending has to go out of the local economy to pay for imported goods and services. 

3. Government spending on stadiums, contrary to popular opinion, is not costless. That is, the funding has opportunity cost that must be considered. Money spent on a stadium could have been spent elsewhere in the local economy, and as such alternative activity is forgone. A benefit is only observed if the stadium activity more than outweighs the lost activity elsewhere. 

4. Stadiums are almost always underutilised. Westpac Stadium in Wellington has around 45-50 event days per year. That is around one day per week. Game days are usually a hotbed of activity, but six of the seven days there is nothing going on. Surrounding development feels this too. Are businesses located nearby dependent on stadium activity going to survive with more off days than game days? It is unlikely. 

5. Much of the projected activity that a new facility attracts comes from within the city at the expense of other facilities. Things such as conferences, conventions, trade shows, etc would by and large have been hosted elsewhere within the city at another venue. Thus we see another form of substitution in action here, which works towards reducing the overall realised impact of a new facility. 

6. A replacement facility can not realistically be expected to do a lot more than a pre existing facility. Research in the US has suggested that there is a short term honeymoon effect of up to ten years where attendances spike due to the novelty of the new facility, but beyond this the experience has been that attendance returns to pre facility levels. 

What about the intangible benefits? Surely they matter?

Relevant intangible benefits include consumer surplus that locals enjoy from attending games at the facility as well as the public good aspects. They are recognised as benefits but there are weaknesses in their ability to justify government funding. Firstly, consumer benefits are often captured to a greater or lesser degree by event organizers through ticket pricing structures - season tickets, family/adult/children, concessions, etc. It is in the organizers interest to capture as much of this as possible so as to maximize event profits. Secondly, it isn't just within the stadium that these benefits are appropriated. To watch your team elsewhere, you pay for it via Sky TV subscriptions. To read about your team you pay for it via newspapers, magazines, internet access, etc. A lot of benefits can be captured privately. Thirdly, one can argue that just about any activity or enterprise has some intangible benefits, but this doesn't mean we should subsidise every activity that generates intangibles!

The bottom line is that if tangible benefits don't materialise, the intangible benefits have to be substantial and international evidence suggests that while they aren't insignificant, they are nowhere near the size of subsidies given to build sports facilities and/or attract sports franchises. Take, for instance, the estimated willingness to pay for the London Olympics, which was measured in one study at GBP1.9b (for the UK), was estimated at GBP480m for London in a 2008 paper (see gated link here). In light of the most recent estimates of costs (US$14b). They might exist, but they aren't likely to be deal breakers.

The departure of a key tenant: Implications for Christchurch's proposed stadium

In previous blog posts, I've been thinking about the feasibility of a new stadium in the context of Christchurch. I have mentioned that the decision on the new stadium will be influenced to a degree by the state of the sports landscape within Christchurch and, in particular, facilities.

Many of the economic arguments used to support stadium construction are tied to the presence of tenants in these facilities, which are often professional franchises. In the case of Christchurch and the proposed roofed stadium, the anchor tenant is likely to be the Crusaders Super Rugby franchise (like the Highlanders franchise is now for the Forsyth Barr Stadium in Dunedin).

I recall a court case (that was widely publicised in North America at the time) that concerned the then Seattle Sonics NBA franchise which was at the time in the throes of a move to Oklahoma City. This case was intriguing from an economist's perspective as it pitted two of the big names of our field, Brad Humphreys of the University of Alberta (who sided with the franchise) and Andrew Zimbalist of Smiths College (who sided with the city). Both economists have published in this area and are recognised experts in the actual economic benefits of sporting facilities and franchises in North American contexts.

In a nutshell, the franchise wanted to pay out the lease it had in Seattle to move to greener pastures in Oklahoma City. Humphreys testified for the franchise that the Sonics basically had no impact on the city, and if they were to leave, well, life would go on. Zimbalist, on the other hand, testified that the Sonics were likely to generate intangible benefits (link to the full testimony here). Both were questioned extensively by lawyers, with each sides claiming victory under cross-examination.

The point of this post is that often we hear arguments of tangible economic impacts being generated by franchises to support new facilities. One such argument that could come up would be that without a new facility, the Crusaders franchise might be forced to relocate to another city. If you are the city in this case, you might be concerned about possible tangible losses (i.e. losses in employment, fall in GDP, etc). The general consensus in the literature has been that this is unlikely to happen, mainly because the spending on Crusaders games would likely be redistributed to other entertainment sources within the city.

We don't often hear of the intangible benefits that are associated with franchises and facilities, though. Paul Walker speculates in Anti-Dismal on the role that intangible benefits plays when compared to a stadium cost of somewhere in the order of $500 million:

You would have to generate a lot of warm fuzzies to justify spend $500 million and if you are going to spend that amount of money is a rugby stadium the most cost effective generator of warm fuzzies. I mean just how many hip replacement could you do for $500 million or how many cancer treatments could people get for that amount? Won't these thing also generate a lot of warm fuzzies? Improved health would I'm sure increase the quality of life for many people. Or how many warm fuzzies could be generated by spending $500 million on repairing the east-side of Christchurch?

If tangible benefits and costs exist for these projects, then it is worth considering whether intangible benefits (and costs) do too. There is a small but not insignificant area of research that have examined the nature of intangible benefits and quantified them, using techniques such as demand analysis, travel cost methods and contingent valuation (all of which have been borrowed from recreational demand and natural resource economics). What is needed in the stadium context is some measure of net intangible benefits - that is, the 'warm fuzzies' from the stadium itself (which includes the retention of the franchise(s) it plays host to) less 'warm fuzzies' from the next best alternative, say repairing the east side of Christchurch. If the net warm fuzzies are positive, this suggests the project might well have some justification. What is the likelihood of this happening? A $500 million facility would be twice as expensive as the Forsyth Barr Stadium, and they've found the going tough. It would also be the largest amount ever spent on the construction of a sports facility in this country. Is the argument going to be that $500 million is going to pump some badly needed capital into the city and has to translate into some tangible benefits? Or will we see those behind the stadium blame the state of the local economy if the expected benefits don't materialise?

More thoughts on stadiums in the context of natural disasters - the case of Christchurch

I've been thinking more about the implications of the Christchurch blueprint for the rebuild of the city, and specifically the role of a stadium within it, and I find a few commonalities when I read back across the 2007 paper by Victor Matheson and Robert Baade on the implications of funding professional sport in New Orleans after the devastation of Hurricane Katrina that I have linked elsewhere (see working paper version linked here).

While the arguments warning against stadium investments within much of the literature are compelling, questions can be asked as to the applicability of these arguments in the case of Christchurch and New Orleans, both of which suffered from natural disasters that have caused significant disruption to the cities. In the case of Christchurch, there has been (and remains) significant debate over the appropriateness of a stadium (and sports facilities in general) as a key component of the rebuild of the shattered city. I harken back to Matheson and Baade for instructive points which I'll elaborate on below.

Replacing the infrastructure for professional sports and mega-sports events can be justified if the benefits provided by the facilities exceed the costs incurred in the reconstruction. Both costs and benefits have to be measured over time since the facilities provided a stream of benefits as well generating costs associated with operations and maintenance.

The city has lost not only AMI Stadium but is also faced with replacing QEII Park. In this sense, the gap for a major facility exists, and the costs of such a facility have been out in the public domain for some time, but there is less clarity when it comes to the actual benefits of such a facility. Stadiums, in general, don't generate tangible economic benefits. There is a growing part of the literature that suggests that they do generate quantifiable intangible (public good) benefits which are every bit as important to the cost-benefit calculus as the tangible jobs created and increases in GDP. There are sound reasons why a facility in Christchurch is unlikely to generate tangible benefits, the most important of which is the ability to service influxes in visitors. Without the necessary (fully operational) infrastructure in place, Christchurch will struggle to extract full value from visitors to the city for sporting events. To this end, there is a clear dilemma surrounding the role of the stadium, and policymakers are faced with a choice - adopt the "build it and they will come" philosophy and attract visitors to the city in the hope of revitalising the city in this way, or focusing on providing the necessary infrastructure so the city attracts back the population lost and creates a market for the new facility. At the heart of this dilemma is a point that Matheson and Baade make beautifully, so I'll post it here:

Sports yields hedonic value, in other words, and the quality of life benefit it imparts is a luxury affordable in affluent communities rather than an activity that helps a community achieve affluence. Sport for the most part is properly viewed as a luxury good and not a productive resource.

Therein lies the crux of the argument, and it is here that we are likely to see the more passionate divergences of opinion. There is no doubting the importance and potential quality of life value of sports in Christchurch. The initial call of whether the investment makes sense is largely dependent on this value, I believe, and how it stacks up to the costs. This is a complex value, as one must also factor in the role of the sports environment including the new temporary stadium, as well as the impact on other facilities in the city and surrounding areas. As I have mentioned in my earlier posts on this issue, complicating matters further is the role of sports in the context of the rebuilding city's priorities. Do Christchurch policymakers see the stadium as a luxury good or a potential productive resource? 

I find the call on the stadium being left to the Christchurch City Council an intriguing one. From central government's perspective, funding a brand new stadium makes little sense as all it does is exacerbate competition between cities for the same pool of visitors. A roofed stadium in Christchurch will compete directly with Dunedin's facility, so it becomes a zero sum game when viewed from a national perpsective. From a local perspective, however, there is a view from some within the academic community that local gains are what are important, regardless of whether those gains come at the expense of other areas. It is exactly the argument used in favour of downtown stadiums - the downtown area may benefit, likely at the expense of surburban areas. The suitability of such a project, therefore, is likely to depend on your point of view. 

For me, I'd really like to see the reasons behind the inclusion of the stadium within the blueprint. Yes, there are arguments in favour of its inclusion, but some are less credible than others. Even the most credible may still fail to pass the cost-benefit test.