Monday, 20 August 2012

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?

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