Guess what is in the Christchurch blueprint?

The Christchurch blueprint has been out for a day, and we've had a little time to digest its contents. Perhaps unsurprisingly, among the major components is (a) a convention centre, (b) an indoor sports facility, and (c) a covered stadium to seat 35,000. There are concerns about the reliability of a convention centre as far as the contribution it might make to a local economy (see here). Eric Crampton at Offsetting Behaviour has his thoughts on the wider plan and the convention centre idea here and thoughts on convention centres in general here. Needless to say there are very hard questions that need to be answered. Just like the role of the role of the new stadium. Evidently the Prime Minister is in favour of the new stadium, saying "... I would have thought that it is the right step to take".

I have posted earlier on the stadium issue in relation to Christchurch (here, here and here) but I think it is worthwhile to reiterate a few salient points as people contemplate the role of a stadium in the context of the wider Christchurch rebuild.

Firstly, does Christchurch need a new stadium? The sports fan in me (yes, there is one!) says yes, as they have lost the spiritual home of sport in Lancaster Park/AMI Stadium. QEII Park was built to house the 1974 Commonwealth Games and despite upgrades since then, it was likely considered economically obsolete before the earthquakes in any case. There is certainly a gap in the landscape. Any economist will tell people to consider the recent investment in the new 'temporary AMI Stadium' at Addington as a sunk cost, and that it is not relevant to the discussion of how much to invest in a new covered stadium. The presence of the temporary stadium does, however, play an important part in the role of the new stadium, as it offers the alternative to a new stadium. As such, those backing the new stadium will have to demonstrate how the new stadium provides greater benefits to the Christchurch populace than the temporary facility, perhaps for such things as location (convenience, proximity to the centre of town and hotels/motels/bars/restaurants etc), better within-facility amenities (improved sightlines, etc) as well as the presence of the roof. (Just off the top of my head, I am not aware of anyone having explicitly tested whether there has been any difference between covered and uncovered stadium construction and the legacy of these facilities. This would be an interesting topic if indeed I haven't missed an obvious piece of work.) If the benefits from these aspects and possibly others are sizeable, then one has something to compare against a possible cost to in order to determine whether the stadium is a good idea or not.

Secondly, tempered and realistic expectations of the contribution of the stadium to the recovering local economy are paramount. Past research in both New Zealand and international contexts have routinely failed to connect stadium construction and/or the presence of a sports franchise to improved economic outcomes for host cities. One might counter this point with the fact that Christchurch is in a different situation with an almost total rebuild of the city after a natural disaster, and so the results don't necessarily apply here. The difficulty with this claim is that the impact of a stadium rebuild in the context of a natural disaster is highly likely to be clouded by other construction activity occurring at the same time. In many respects, the case of a 'typical' new stadium construction is a best case scenario.

Directly connected to the previous point is that the new stadium is a replacement facility, so the best one can hope for is a return to what happened prior to the earthquakes as far as the contribution of the stadium to the Christchurch economy. Yes, a roof might well mean the new facility could have greater use, but the 'new' use will likely come at the expense of the use presently held elsewhere within Christchurch (think Westpac Arena). The same thing can be said about the new indoor sports facility and its expected usage.

Thirdly, don't expect the attraction of events to act as economic stimuli, either. Research I have conducted into the effects of hosting major internationally-oriented events (the research is being written up and is almost available as a working paper - I'll link it as a future blog post when it is available) in New Zealand has indicated that realised economic impacts are the exception, not the rule.

A sounder economic case for investment in facilities, I believe, can (and should) be made for intangible benefits of a new facility and the recognition of the importance to local citizens rather than through the hopes of attracting vast sums of money from an influx of visitors to the city, a la "build it and they will come". The benefits to local users (and non-users) are much more meaningful to local politicians as to the true worth of the facility to those that will likely end up paying for it, ratepayers. The only problem with these benefits is their intangible nature and the credibility (or lack thereof) attached to estimates of these benefits. They have been estimated in other stadium contexts in the US (see this 2005 working paper by Johnson, Mondello and Whitehead on the estimation of public good benefits in Jacksonville, Florida for the NFL's Jaguars, and this 2008 working paper by Fenn and Crooker who looked at the value of the Minnesota Vikings and a proposed new stadium - these are just two, there are plenty more!). The Christchurch case is a perfect scenario upon which to base a similar type of study (another possible future research project!).

To sum up (for this post, at least), the stadium decision should be based on sound economic rationale. Christchurch must learn from lessons learnt elsewhere, and heed the experience of others in the same boat as far as expectations are concerned. Above all, if a new stadium is justified on non-economic grounds, then let's see an analysis (or something similar) that demonstrates how the new stadium addresses these grounds. Leave the economic impact analysis out of it. If it is justified on economic grounds, let's see an analysis that answers the question of whether the stadium is a good use of scarce government (and ratepayer) funds. I eagerly await further developments.

Apples, oranges and V8's

I've been on a blogging hiatus for the past month or so - two weeks in Vietnam, followed by a conference and then two weeks of annual leave doesn't leave a lot of time for blogging. The instant I step back in to the office this morning - wham! It is all on for young and old!

The Auckland V8 saga has been dominating headlines in certain sections of the news media for the past couple of weeks or so - prompting this interesting article from Herald on Sunday's Paul Lewis. He raises some very pertinent points, worthy of a comment or two.

... [D]on't believe the ATEED-supplied figures that suggest the racing will bring an annual return of $7m a year or $35m over the five years of the deal. In a previous life, in public relations, I can remember at least two "econometric" studies which suggested great economic benefits accruing from clients' actions. At best these things are guesses, at worst a fantasy - unable to be proven or disproven.

Granted, these figures are fraught with potential shortcomings, but a 'return' means what, and to whom? I can only assume it refers to an economic impact figure that might accrue to the Auckland region, but I can't be sure, as I haven't seen any economic impact documents. Correct or otherwise, this interpretation strikes at the heart of the controversy surrounding the Auckland Council's decision to sink some $10.6m (alongside $2.2m of central government funding) into the Pukekohe racetrack to attract the V8's back to Auckland after five years in Hamilton.

The definition of this "annual return" has been the source of three critical audit reports for costly V8 Supercar races in Canberra (click here for report), Sydney (click here for report) and Hamilton (click here for news report) in recent years. The issues identified in all three reports are remarkably similar - namely overstated benefits and understated costs. This isn't exactly surprising - one only needs to consider why an economic impact analysis is commissioned to understand what is at stake.

Decisions on public funding for events like the V8's are often based on economic impact projections (the 'apples' that I am referring to in the title of this post). Economic impact projections are measures of gross impacts, and are very rarely found to materialise in the host economy (largely because costs are not considered in the calculations). Indeed, independent ex-post (after the event) econometric studies associated with a variety of events have generally found an absence of realised impacts.

The question everyone wants to know the answer, however, is this: Is this event an appropriate use of taxpayers money? To decide this, economic impact figures by themselves are inappropriate. Assuming that the economic impact figures are accurate (and that is a very strong assumption), what is needed is a comparison between the economic impact generated by the event and the impact generated by the next best alternative. The V8's generating $35m over 5 years doesn't really tell us anything about the appropriateness of that spend of $10.6m. If the next best alternative for that spending was to give every household a share of $10.6m and let them spend it themselves in any way they see fit, there would be an economic impact associated with this. Work out the difference between the two, and what do we have? A figure that is closer to a net benefit by definition and one that at least attempts to address the issue of apprioriateness of spending. Now, where do we find projections of economic impact for alternative projects? Looks like a future avenue of research.

One last comment from the Herald on Sunday article:

When the V8s last came to town, in 2004, the estimated benefit to the region was $45m or a total of $315m over seven years, according to the snake oil salesmen then. That shows the level of guesswork inherent in these things and, anyway, ATEED shoots its own proposal down by refusing to release the risk review - automatically plunging into doubt its own estimates.

Gee - an annual economic benefit of $45m! No wonder Hamilton was so keen to entice the race to their streets. Why did Pukekohe let the event go? An interesting angle to take would be to examine what happened to the local Pukekohe economy in the absence of the V8's race - did it suffer? While an annual total of $45m isn't a large sum in the context of a local economy, if it was a net gain to the local area when the race was hosted locally, one might reasonably expect the Pukekohe area economy to have suffered to some extent when the race moved to Hamilton and the subsequent years. I have the data to examine this - it has the potential to be an eye-opening exercise.