Monday, 16 April 2012

Sky City - convention centre deal

I was asked earlier today for my comment on the Sky City deal with the Government to allow Sky City to operate up to 500 more cashless pokie machines in return for Sky City building a $350m, 3500 seat national convention centre in downtown Auckland. A portion of my e-mail comments were read out on air (not something I was expecting) but essentially focused on the purported $85m annual increase in tourism expenditure that the new national convention centre would bring to the local economy. Now, casinos and convention centres are not exactly my area of expertise, but they share more than a few similarities with stadiums, an area I am familar with, and some of the warnings that come on the labels of a new stadium are just as applicable to a convention centre. Eric Crampton was on Jim Mora's Afternoon programme this afternoon and made some good points that neither ruled out nor supported the proposal, but he noted that two instances where convention centres were successful in the mid 1990s were in New Orleans and Las Vegas, where the centres were in close proximity to casinos. The potential complementary nature of the facilities suggest that it might well be a successful operation in New Zealand.

Of course, a successful operation doesn't necessarily translate into a flow-on effect into the local economy. Increased profits don't necessarily flow through to the rest of the economy in the manner usually associated with government projects. The usual caveats surrounding projections of spending and their use for justifying the project apply here - caution must be applied with any projections, which tend to be optimistic in nature; impacts do not equal realised benefits to local economy, and so on. It is worthwhile noting that although the cost of the project is borne entirely by Sky City (in which case cost overruns don't hit the pockets of local ratepayers), the incentive to move on the project is still given in economic impact terms - $85m increased annual tourism spend, 1000 jobs during construction and 800 new jobs when the doors open. All of these can be questioned.

According to this December 2011 story from the New Zealand Herald, international visitor receipts in Auckland were $2b. This would mean that an increase of $85m would be around 4.25% of visitor receipts, which while not large, is not insignificant either. As for jobs, it is highly likely that the 1000 jobs in construction will be sustained during this period rather than created - other work will be moved to accommodate the new centre. This is an opportunity cost that should be considered. The 800 new jobs - this will be very much dependent on whether the new centre generates new business or merely reallocates existing convention business from elsewhere within Auckland. I have no doubt that a new facility would bring in some new business - whether it is enough to justify the cost, that is another matter entirely.

Keeping up with the Jones'

A belated post this one (teaching commitments have enveloped much of my spare time of late) but one I feel warrants some comment in light of an interesting discussion on Radio New Zealand's Afternoon Show with Jim Mora, and featuring Canterbury's Eric Crampton on the Crusaders attempts at moral suasion by throwing their weight behind a proposal for a new, covered, stadium to replace the condemned AMI Stadium/Lancaster Park.(Eric has provided the link to the audio in this post on Offsetting Behaviour).

A few things that I noted from this story included:

Firstly, kudos to the Christchurch City Council for remembering the relevance (or otherwise) of sunk costs in projects like these. Yes, there is a brand, spanking, new 'temporary' stadium out at Rugby League Park in Addington (latest cost $30m and counting). The Council has always pledged to revisit the AMI Stadium situation and has come up with five options, ranging in scale from repairing one stand and replacing another for $50m (to take 4.5 years) to a new, covered, 35,000 seat stadium for $145m (taking 5.5 years).

One of the reasons given by Crusaders halfback Andy Ellis and CEO Hamish Riach is Dunedin's new Forsyth Barr Stadium and how it is setting the standard. I've heard this argument before, and it is particularly prevalent in North America in particular. It is called 'keeping up with the Jones'" and it is systemic. Basically, I build a new stadium, then you'll want to build one that is even better. In the United States, this practice has led to a general shortening of the life of sports facilities, as now they are becoming "economically obsolete" if they do not contain the latest facility developments (these tend to include luxury/corporate boxes, improved sightlines, etc). In this case the roof is the latest development. Interestingly enough, one of the seminal papers in this area, written by Robert Baade and Richard Dye in 1990, noted some pecularities with respect to domed, or covered, stadiums in the US. The cost per seat (in 1989 US dollars) ranged from $4,890 for the Louisiana Superdome to $1,390 for the Metrodome in Minneapolis. If these numbers were any indication, the cost of a new Christchurch 'superdome' could be as low as $80.8m (1989 NZ dollars converted from USD at Jan 1990 exchange rate) and as high as $283.9m. If we adjust these numbers to 2011 dollars, we get $134.7m for the Metrodome and $473.2m for the Superdome. It doesn't appear that the proposed figures of the Christchurch covered stadium are beyond the realms of possibility, although neither the Metrodome nor the Superdome were as small as is presently being proposed for Christchurch. I can't help but wonder how it will be as cheap as suggested in the article - especially given that the Vector Arena in Auckland, which holds 1/3 of the capacity of what the Crusaders are touting, cost $80m, and the Forsyth Barr Stadium cost is expected to come in excess of $200m. I don't think the CCC will want a 'budget' roofed stadium, so these costs have to be viewed with considerable caution.

I agree entirely with Eric in his interview that the stadium in Christchurch must be based on a sound business case (including realistic projections of attendance - which should factor in the honeymoon effect of the new facility before falling off to pre-quake levels) and will hopefully add value to the Christchurch economy. Assuming that Christchurch ratepayers are on the hook for it, of course. Any arguments that a covered facility will bring in more trade shows, conventions and the like, must take into account the impact it will have on currently operating convention venues like the Westpac Arena, among others. Because it impacts on ratepayers, these effects must be considered as part of the overall package. It is all very well arguing that a roofed stadium will host x events - but if a large proportion of these x events were already hosted within the city then one needs to be very, very careful of the impact measures that are produced as a result.

Oh, and let's not forget, it doesn't have to be the ratepayers holding the can for this. The NZRU made a little profit from the 2011 RWC, some of which has been granted to Otago rugby to bail out their financial problems. Ideally there should be a meeting of the minds, and a public-private partnership could be the way to go. Roof on... or roof off?