Hosting major sporting events such as the America’s Cup – can we believe the hype?

As a general rule, in the words of Public Enemy: don't believe the hype. Hosting a major sports event is a complex situation from an economic perspective – and there’s a lot of unknown that can quickly turn conservative estimates of impact into grossly overstated figures. Here are a few thoughts as they come to mind.

Firstly, we have to recognise that the figures publicised whenever a major event such as the America’s Cup is announced are gross economic impacts, which are not the same thing as economic benefits. The initial economic impact figure posted for the 2013 San Francisco regatta and pre-event regattas was US$1.4b (for San Francisco – click here for the report) and was based on an estimated 15 syndicates competing for the Cup. In March of this year the figures were revised downwards to US$900m – but it is not known how many teams this figure was based on. These figures are impacts associated with the event in the absence of any alternative activity that might have occurred in the absence of the event. In isolation, they are difficult to prove or disprove. In order to determine whether the event is beneficial for a local economy, one has to compare the impact of hosting the event with the likely impact on the local economy if the event was not hosted. It does not necessarily translate that the local economy will be worse off if an event is not hosted – several studies in the scholarly literature have shown that events such as lockouts, and strikes in professional sports in the US have had no impact on host economies – that is, people find other things to spend their entertainment dollars on instead of professional sports.  If US$1.4b or more (in regular tourism, for example) would have occurred in San Francisco in the absence of the America’s Cup, then the decision to host the event would be debatable if the goal is to maximise economic benefits.

Another thing to remember is that these figures are produced by consultant reports that commonly overestimate the positive aspects (like numbers of visitors attending, the extent of their spending, etc), understate or completely omit the costs associated with the event (or, worse, include costs as part of the economic impact), and as such produce numbers that are optimistic at best and gross exaggerations at worst.

The calculation of economic impacts quoted in the media are almost always taken from an economic impact study, which is an input-output analysis that basically calculates the impact of an injection of spending in a local/regional/national economy as it filters through the event-related sectors of the economy. The logic of such impacts, at first glance, appear sensible, but when one examines exactly how the hosting of a major sporting event can impact upon tourism, you quickly realise that it isn’t as straightforward as it might seem.

There are many things that can affect the extent to which an event attracts visitors and their spending. There are positive and negative impacts here. Firstly, the positives. Events attract people who come specifically for the event, and they can also induce tourists to stay longer to take in the event. They can also induce locals to change their holiday plans to attend the event and spend money locally that would otherwise have been spent outside the local area. We can’t ignore the negatives, though. Events can cause visitors to put off trips to the local area – either temporarily (where the trip is displaced to another time) or permanently (known as crowding out) – due to perceptions of event-related congestion, noise, price increases, etc. These same perceptions can also induce locals to flee the area while the event is on, which adds to a possible negative impact. Questions have to be asked of the figures quoted – do they factor in all of these possibilities, and are they reasonable grounds upon which to base estimates of visitor spending?

Estimating visitor spending, too, is an inexact science. A vivid illustration of this was the experience of the 2011 Rugby World Cup. The RWC got considerably more visitors than expected (over 133,000 according to Statistics New Zealand), yet visitor spending was less than half ($340m) of what the Reserve Bank projected ($700m – a figure that was estimated on fewer visitors). This example shows that there’s a lot of unknown – but what is generally known is that projections of impacts very rarely (if ever) turn out as expected.

A report written by the Budget and Legislative Analyst for the City and County of San Francisco Board of Supervisors in November 2010 – click here for the document - determined that the hosting of the current America’s Cup regatta would result in a net cost to the city and county of US$42.1m. In other words, the revenues accruing to the city were in all likelihood more than offset by the costs to the city. This report was based on the initial $1.4b economic impact figures, and was based on the early assumptions of large numbers of syndicates competing to challenge for the Cup. Modifying this to what we have seen unfold recently, fewer syndicates meant lower event-related costs, but also meant lower revenues, so it would be fair to assume that there’d still be a substantial shortfall in the local government coffers as a result of the event. One issue that has been prevalent in San Francisco is the issue of private funding of the event. The bottom line is that the city is on the hook for any shortfall of private funding, which if eventuated would increase the cost to the city of San Francisco (i.e. the taxpayers).

And another thing: what can past experience teach us of the legacy of the New Zealand hosting of the America's Cup regattas in 1999/2000 and 2002/2003? The legacy effect of events is the new buzzword in event evaluation, and is largely unknown as it occurs at some stage in the future, which is of course yet to unfold. I will have to go back to the original economic impact analyses done for the two regattas hosted in Auckland to examine the extent to which legacy played a role in these figures, but one thing in particular strikes me as ironic about the legacy of the 1999-2003 New Zealand America's Cup regattas - and it is the investment in the infrastructure associated with the event. The Viaduct Basin underwent a major transformation to host the two regattas, and Auckland now faces the prospect of developing a new location for the event, with the Viaduct reportedly out of commission for hosting syndicates in a future regatta. Some might say that the development of a new base for the event is a benefit - one which comes at a cost (likely to be borne by Auckland ratepayers) - but in actual fact is already part of a pre-existing development plan of the Auckland waterfront - one which will gain significant traction should New Zealand win the America's Cup off San Francisco in the coming days. As such, the development of a new base is a classic case of a future investment brought forward. As such, calling it a benefit associated with hosting the America's Cup is a little misleading. Then again, is it not unfair to label one legacy of the America's Cup regattas in Auckland as a cost, not a benefit, in the form of further taxpayer funding? After all, the past two unsuccessful America's Cup campaigns have received central government funding. A future defense, should things go to plan, has already reportedly drawn support from the Prime Minister towards some contribution from the public purse. This is all part of a legacy, is it not?

So what about the winners and losers from hosting events?  The nature of the event plays a big part as to who stands to benefit from its hosting. You only had to read the reports in the news media of the impacts of the 2011 Rugby World Cup on the tourism sector in the different regions of the country. Some said it was great, others said it was terrible. For the America’s Cup, it will be largely localised in Auckland, as it has been in the past. Industries directly and indirectly associated with the event (boat building, super-yachts, etc) did well the last time it was hosted in Auckland. As far as tourism-related industries are concerned, anecdotal feedback from cafes and restaurants around the 2000 America’s Cup regatta and the 2011 RWC found that if businesses located in the ‘right’ areas (i.e. Viaduct Harbour for the America’s Cup, fan zones for the RWC) then there were definitely positive impacts, whereas those located outside these areas found that they were flat or even lost business. Evidence suggests that the gains that to be had from hosting an event almost certainly come at the expense of others. The question is whether or not the gains outweigh the losses – and is a part of the big question: whether benefits of hosting events outweigh the costs.