Monday, 16 July 2012

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.

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