Public funding for sports facilities: a velodrome version

In recent days I (rather unexpectedly, I must confess) made front page news in Whanganui with my comments about the proposal to roof the aging velodrome in the city.

This is not a new story. The velodrome was built in Whanganui in 1995 and at the time it was built there were people saying that it needed a roof to future proof it and protect it from the elements. There has been a concerted effort by a group of dedicated campaigners to push for local, regional and now central government funding for the roofing project. The reality is that the wooden velodrome track is in need of replacement - so this is now bundled into the roof project. 

When I was asked late last week to comment on the latest proposal, I was told about an economic impact study that had been commissioned to calculate the benefits of the facility. I have been unable to obtain a copy of this study, but several results from the study were published in a full page advertisement in the local Whanganui Chronicle last week. Thus my comments could not specifically address the claims made in the study. I did, however, offer some more general comments on what I was aware of.

Research into sports facility construction in New Zealand has shown that there is an absence of detectable economic outcomes in host cities that build new facilities. There is very little evidence that predictions of economic impacts prior to facility construction actually materialise post-construction. There is a perception that these figures (NZ$176 million over ten years in Whanganui, according to facility proponents) will add to the local economy - and that when put side by side with the proposed NZ$26.3 million cost of the facility, well, it's a no-brainer, right? Who'd be stupid enough to argue that the benefits are smaller than the costs?

There are more than a few reasons why the benefit/cost comparison is not as simple as it looks at first glance.

What is the area where the impact is calculated for? Regional impacts are larger than city-level impacts by virtue of the fact that regions are larger and any multiplier effects are larger than for cities. This isn't immediately obvious.

Also, economic impacts are not the same thing as benefits. Producers of goods and services sold in Whanganui to visitors to town for events need to pay their bills - and quite often this involves having to pay for imported components of what they produce. The appropriate measure to be used is value added - once all of the imported costs are paid, what fraction of total spending is a true addition to the local economy? It is much, much less than the sum total of visitor spending.  

Without verification of the study and the method used, it is difficult to comment specifically on whether the numbers are accurate and/or reasonable. But they are a projection - and they need to be discounted due to the fact that they occur over time (the simple fact is that a dollar today is always worth more than a dollar next year). Assuming they are discounted, the events used to generate these benefits need close scrutiny. Are the attendance figures realistic? Visitor spending is the key component of such studies - so how many visitors have been assumed will be attending these expected events? And how much will they be spending? These will all be approximations. 

Are the events hosted "new" events? That is, are they events that would not otherwise have been hosted in the city in the absence of a roofed facility? I noted in the prospectus that the facility has a range of configurations, one of which is for opera. The Whanganui Opera House (a specialist operatic venue with ideal acoustics) is a stone's throw from the velodrome. I realise this is but a single instance, and a roofed facility would seat more people - but is there a market locally (and wider) for large-scale opera? Are there other events that would also have been hosted by other facilities in Whanganui that the roofed velodrome would now host? This has the effect of reducing the expected benefits to the city as a whole. Again, in the absence of an economic impact study, it is hard to know exactly how large this effect is or might be.

Likewise, a roofed Whanganui velodrome could potentially attract events from other places, like those hosted in Palmerston North's Arena. If this was the case, then from a Horizons (Manawatu-Wanganui Regional Council) perspective, there would be no net benefit as it would simply be hosted in another city in the region. 

It is also claimed by proponents that the economic pay back period for the roofed velodrome would be less than two and a half years. To use an example of an older and larger facility - the 34,500 seat Wellington Regional Stadium (formerly known as Westpac Stadium and now known as Sky Stadium) was opened in 2000 and cost then NZ$122 million. It attracted a significant number of new events to the city, including the World Rugby Sevens, among other events. It was generally regarded as a successful facility - and while it has been able to maintain breaking even from a year-to-year operations point of view, it is still (after two decades) yet to pay back the original construction cost - despite a study that showed an increase in visitor spending of almost NZ$500 million in its first ten years of operation. 

There are more than a few reasons, therefore, to be somewhat skeptical of claims like those mentioned in the advertisements. 

There is also no mention of whether or not the facility will actually cost the Whanganui City or Regional Council to operate. Dunedin's facility is an example of a facility that at least initially required the Dunedin City Council to subsidise the facility in order to break even operationally. 

Last, but certainly not least, there's the old economist's chestnut of opportunity cost. In this case, a roofed velodrome paid for by central government is a net injection of funding to the area - but any contribution to the project by the Whanganui City Council (and/or Horizons Regional Council) will come with an opportunity cost - the next best alternative of this funding. If there are more pressing projects to fund locally, the benefits from these projects will be the opportunity cost of the velodrome project for Whanganui. Essentially it comes down to priorities - if the velodrome is the top priority, the opportunity cost will be less than the benefits associated with the project.

All this, of course, doesn't mean that stadiums should therefore never be built. One might well argue that stadiums are built irrespective of the views of economists like me, and turn out to be successes. People in host cities are often very proud of their facilities, and that's a legitimate benefit to local citizens. Ultimately it can come down to whether or not the local population believe that the price to pay for the facility is worth it. If it is, then it becomes a reality, and it is hard to refute.

If, however, one attempts to justify this decision by using the economic numbers before and after, this is a much more difficult proposition to defend. 

After all, if it was commercially viable to roof the velodrome in 1995, it would have been roofed at the time. There's a reason that these facilities are not privately owned and operated. 

Christchurch stadium debate

Time for a random blog post ...

After the publication of an opinion piece in this morning's Press (no prizes who came up with the headline), I've jotted down a few more thoughts in response to some of the other stories that have been published in recent times.

Some question whether the logic applied to stadiums (and the outcome) means that other publicly-funded facilities like infrastructure (sewerage, roading, etc), libraries, museums, churches, etc, would also fail a benefit-cost test and therefore shouldn’t be funded. I would argue that critical infrastructure projects have higher benefit to local residents than a sports facility by simple virtue of the fact that these projects are necessities – people who live without sewerage and adequate roading will know what an inconvenience it is not to have them. The value of such projects is high – and so there can be a higher cost attached to them for the projects to make economic sense. For things like museums and libraries, the same logic applies. What is the benefit of a library to a local populace? If people value the amenity, then there is a cost that is potentially commensurate with that value and it can be considered to pass the benefit-cost test if the cost is less than the benefit.

A key difference between infrastructure projects as well as amenities like libraries, museums, etc and sports facilities is that those who advocate for the importance of “cultural” amenities often don’t tie the value of the amenity to the (potential) impact resulting from spending from visitors to the city – which is a staple (and sizeable) component of advocacy documents produced routinely for sports facilities. A supermarket generates visitor spending. Does that mean supermarkets should be publicly funded?

The issue I have is not that Christchurch doesn’t need a new stadium – it is rather that public money from local, regional and central government is being poured into something that may end up costing more over time than the benefits accruing from the facility to the local population.

There is no question that Christchurch needs a sporting/events facility. The temporary facility in operation since 2011 hasn’t prevented some acts (Bruce Springsteen, for one) from coming to Christchurch. People still watch rugby at the temporary facility. Has the Christchurch economy collapsed in the absence of events that they could have hosted? No. The local population gets on with things. You can’t miss what you never had. And sport in Christchurch continues to be played – a testament to the “can do” resilience of sport.

Who should be responsible for funding the construction of a new facility, and how big should it be? The CCC has said that a $253 million facility is insufficient. So they instead advocate for a facility costing just under twice that price while knowing that there’ll be an almost $250 million shortfall – and saying that central government should pay the difference.

What is wrong with an open air “provincial stadium” that seats 17,500 people (with temporary seats added it will increase in capacity)? Surely it is likely to be better utilised locally than a facility that seats 25,000? And who says a roof is a "must have" for stadiums in this country? There’s only one roofed stadium in New Zealand – so the sample size from which to draw conclusions is pretty small. We’ve had outdoor facilities for as long as we’ve been a nation. Do we really need a “one size fits all” solution in the form of an expensive roofed facility that can “do it all”?

Here’s an idea. Why not build an affordable smaller outdoor facility for sport – and also build a covered arena-type facility (like Auckland’s Spark Arena) for the indoor aspects like concerts, trade shows, beer fests etc? It would probably be quite a bit cheaper to do things this way – it would almost certainly cost less than $496 million.[1] Plus, you get two facilities for less than the price of one – and facilities that are arguably better suited to their purposes than a single facility. Sport would get an intimate venue that is likely to be better utilised (from the point of view of having near-full capacities) and have more atmosphere (which is what spectators at an event often value) than a much larger (and less utilised) venue. An indoor arena would be tailored for concerts, trade shows, etc without the complexity of a larger facility with a removable turf. For those that argue that a new indoor arena is unnecessary as the Horncastle Arena already exists for that purpose, then that's fine - more money saved!

A small stadium is a stupid idea, you say – it immediately rules out All Blacks tests. But how often does an All Blacks test occur in a city? And when it does, to what extent does the local population actually benefit? (Sounds like a future research project - might keep me busy over summer!) The Crusaders and Canterbury rugby will still play there every season – which is arguably more important to Christchurch residents than an All Blacks test every two years. And the vast majority of the proposed event calendar in a new facility are locally-oriented. Surely this means that a locally-oriented facility makes sense from an operational perspective?

In the wash up, the true benefit and value of a stadium to a city is largely the value that people in a city place on having it. If an All Blacks test is something than Christchurch residents value above all else, then by all means Christchurch residents (via rates) should fund the construction of a facility to host this type of event. The benefit will justify the cost.

Should central government fund any shortfall? Only if having a Christchurch facility makes the rest of the country demonstrably better off. Is this likely to be the case? If Christchurch is competing with other cities for the same events, then the argument is likely to be no. It is akin to taking money off one city and giving it to another.

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[1] A crude back of the envelope calculation: Westpac Stadium and Spark Arena were built at twice the cost, it would come to $432 million.

Baseball in Auckland... Ball One or Strike One?

I was particularly interested to read this article in Stuff this morning that outlines interest in establishing a professional baseball franchise in Auckland. Evidently Major League Baseball are keen on helping Auckland with facilities and to set up the franchise in the Australian Baseball League (ABL).
Personally, as a keen follower of Major League Baseball in the US, I'd be very keen to see professional baseball in this country. There are a couple of issues, though, to be worked through. Firstly, a facility. From the article:

Australian Baseball League chief executive Peter Wermuth said: ''A proper baseball facility suitable for professional baseball would be a great development for the sport in New Zealand, provide an opportunity to bring ABL games to New Zealand and would be a key step towards consideration for an ABL expansion franchise in the future.
''We strongly support the initiative.'' 

A 'proper' facility would assist with the location of a possible ABL franchise. Auckland has been working through a review of sports facility usage (see a draft regional facilities review discussion paper linked here)* whereby proposals have been made for certain facilities to be used in more efficient/appropriate ways. Whether a presently utilised facility can be converted into a dedicated baseball-only facility or whether a greenfields site is required is unknown at this stage. Don't expect the "build it and they will come" approach to automatically make baseball in Auckland an economic gold mine.

 "It's crucial for our sport to take the next step to have at least one facility that we can call home," BNZ president David Ballinger said.

''Every other sport has at least one facility that they can access whenever necessary, and baseball should be no different.

If baseball has such a following, it would make sense for private interests to take the first step. The argument of "everyone else has one so I need one too" isn't something that should go down too well with local government. It certainly isn't a compelling argument for government assistance.

 ''We need a facility that we can build up over time that becomes world-class for what is considered one of the world's most popular and profitable team sports.''

Popular - you bet. So is football. Football doesn't influence decisions on major sporting facilities of this country, however, in the way that rugby or cricket does. Profitable - it sure is. I wonder why? Could things like this have anything to do with baseball's profitability in the US? What about the implications of its monopoly status? Let's be clear, also, that professional sport doesn't always bring in the big bucks and isnt alwatys good for a local economy. Just to be absolutely clear.

There's one other 'problem' with professional baseball (or profitable sports, in general), and the extent to which one would consider it a problem depends on your perspective. This is no better illustrated than the present lockout of the NHL in North America - its second in seven years. Baseball has had lockouts and strikes in the past, and at least one economist found that it wasn't the end of the world.

*UPDATE (24 Sept): The paper I intended to link was the Regional Facilities Auckland (RFA) discussion document - please find it linked here.)

The climax to the ORFU saga

So a deal has been reached! The Otago Rugby Football Union (ORFU) has staved off liquidation! Just a few short weeks ago liquidation was a fait accompli, now they live to fight another day, in the finest traditions of the battling underdog overcoming the insurmountable odds that is so synonymous with sport.

But the tipping point wasnt't due to money being coughed up by a benevolent benefactor, rather it was the Forsyth Barr Stadium, the fear of losing a tenant and what it would do to facility revenues.

After a seven and a half hour meeting yesterday, the Dunedin City Council has agreed to 'forgive' a $480,000 debt from the ORFU to ensure that professional rugby remained in the city, and more importantly, guaranteed the new stadium at least one rugby tenant. But they were not exactly happy with either the ORFU, and the need to do so. This from Dunedin Mayor, Dave Cull, on the ORFU:

"I think there is pretty much universal agreement that they cocked up, and that they cocked up on a chronic basis. Pretty reprehensible really, but we have to deal with the situation as we find it."

and on reasons for the bailout:

The ORFU was bailed out because "the financial model around the so-called private sector funding component of building the stadium is dependent on revenues from the games that professional rugby play there.
"I'd have to say, before it was being built and right up until now, that was the most imprudent, risk-laden way of financing anything. It was basically pretty stupid, but we've got it, and we have to find a way of maintaining the revenue stream for that, or it falls back on the ratepayer. This deal has avoided that,'' he told Radio Sport.

While I can totally understand the frustrations, and the fact that the DCC have painted themselves into a corner, the story gets murkier yet. Why? Because of this juicy tidbit, revealed later in the article:

Cull said it had been discovered that there were no agreements in place for either the Otago ITM Cup team or the Highlanders to play at the stadium.

''Whether the ORFU went into liquidation or not, DVML was left with a very risky situation, as there were no contracts in place guaranteeing an income stream from professional rugby in our region. DVML had taken on the running of the stadium under the impression that those contracts were in place, underpinning that revenue stream.'' 

I'm sorry? I didn't just hear that. There are NO agreements in place for ANY local rugby teams/franchises to play at the new stadium? The one that is very, very dependent on future revenues from rugby to make ends meet on a regular basis? I have to scratch my head in amazement. It wasn't long ago that the ORFU admitted that they hadn't factored in the cost of playing in the new stadium into their cost projections, and now it emerges that there wasn't in fact anything actually tying them to the new stadium at all? Where is the communication here? What is going on? There really doesn't seem to be any semblance of coordination between two parties who obviously need each other to survive. If this is the state of play with rugby in the new stadium, I'd hate to know what the security of the other anticipated relationships is like.

So, when it boils down to it, the DCC (and the ratepayers who paid for the majority of the Forsyth Barr Stadium) are actually behind the eight ball to the tune of almost $500,000 when they should have been 'ahead' due to the revenues earned from rugby being played at the stadium. The other way you can look at it, I guess, is that it has just cost the DCC and ratepayers almost $500,000 to lock in a rugby presence in the new stadium. Was this cost in the budget for the new stadium? I should think not. And what of the Highlanders? They are higher profile than the ITM Cup. I can just imagine them saying: "Now, Mr Cull, you've just helped out the ORFU. How much do you want to pay us for to play at your swanky new stadium? You need us. Your figures show you'll have a very hard time without us, in fact. There is nothing stopping us from hightailing it elsewhere to other parts of the country for a better deal. Show us the money!". My goodness! Shades of the US professional sports now start to appear before my eyes, ones where franchises and cities are at war with new stadiums smack bang in the middle.

I'm sure that there will be more to this story...

Substitution effects - there's more!

It seems the Rugby World Cup has had all sorts of impacts - some good, some not so good. Sky City enjoyed a one-off surge in income due to the RWC, although Rainbow's End took a hit. I also noticed this story (Rugby fans shun cultural events) almost by accident but it is very relevant here - this counters the earlier post to some extent on Wellington's economic boost. Of course rugby fans would shun them - they're there for the rugby, after all. The question should be - by how much did the increase in rugby fans offset the loss in cutural visitors? This is the same point that Eric Crampton in Offsetting Behaviour made with the Christchurch experience of the RWC.

(BTW - thanks to Eric for a fascinating insight into his analysis of dodgy cost analyses in his talk to the School of Economics and Finance here at Massey today.)

Hamilton headache: Claudelands claims 'overly optimistic'

This just in from the New Zealand Herald... the $68m Claudelands Events Centre in Hamilton is facing a $1.5m deficit in its first year of operation (and projected deficits until 2014/5) and questions are rightly being asked after the initial projection was for a $1.1m surplus in its business case. It is a sorry state of affairs, but by no means an isolated event. Hamilton ratepayers don't have to look too far to see a similar story with the V8 supercar race a prominent example. Unfortunately the same story has been repeated all around the world - overstated measures of benefit, understated measures of cost and a projected bottom line that is much more palatable than what actually eventuates. I wonder if the $30,000 cost of the peer review currently being conducted into the issue was included in the forecast as well? The good news: it isn't going to hit ratepayers in the pocket, according to the mayor. Unfortunately, even if rates don't rise, the need to bail out a facility shortfall will certainly result in funds being re-routed from other city services - and this will hit ratepayers. Is bailing out the Events Centre the best use of these funds?
There was a particularly interesting comment in the article above attributed to Councillor Dave Macpherson:

...the council had been informed by trained professionals who were good "talkers and persuaders".
"I think it's sort of an events industry culture; seeing things through rose coloured glasses," he said.

Hmm. Did the V8 experience not ring any alarm bells? Heck, didn't the experience of the Canberra V8 supercars in the early 2000's at least raise some eyebrows? What about the volumes of research that have questioned the accuracy of claims of economic benefit, of which this paper (and also this one) make important contributions. Forget the rose coloured glasses - put some prescription lenses on, read things carefully and ask serious questions.

There is still a small glimmer of short-term hope on the horizon as the Sonny Bill Williams boxing show heads to the venue on Wednesday for his NZ title fight versus Clarence Tillman. Will Hamiltonians get in behind their boxing chief?
UPDATE: They're trying to drum up support with a bit of push and shove in the pre-fight weigh in.

Further thoughts on interview with Larry Williams

I had an interview this evening at around 6:15pm with Larry Williams on Newstalk ZB to discuss this press release that came out earlier today regarding this country's future hosting of the Rugby World Cup.

Larry raised a couple of points that I've had a chance to think more about since the interview, and I thought I'd jot them down before I forget them.

Firstly, I should clarify my belief that co-hosting a future RWC with Australia would be more commercially viable as the costs of running the tournament would be shared between the two countries and this country would be more likely to make ends meet in terms of covering operational costs. As it is, the present tournament is incurring a $39m loss and counting with additional operational costs borne by local, regional and central government.

Why would Australia want to co-host with us? They've already flown solo before (in 2003), and did pretty well, too. Indeed, we have shown that the tournament can be considered a success being hosted entirely within one country. To me, what it comes down to is the value that New Zealanders place on having the tournament. If we perceive that the benefits exceed the cost - and we need to be careful about what benefits actually constitute (see Eric Crampton's recent post in Offsetting Behavior for additional considerations that must be made as part of an objective analysis, including the crowding out effect, the net feel-good effect - otherwise known as the 'warm fuzzies' - and the diversion of public amenities) then the cost of going it alone might well be worth it.

Another consideration to the co-hosting argument should be the 'impact' on smaller cities. I think many would agree with the notion that it has actually been the smaller cities who have provided this tournament with much of its value - not necessarily from the visiting spectators attracted to these cities, but the enthusiastic embracing of the games and teams that they hosted. Smaller cities like Napier, Nelson, Palmerston North and New Plymouth got right behind their games, and this was great to see. A co-hosting arrangement is likely to result in more games going to major cities and less to smaller centres, and so some of the value of the tournament to the country is likely to be lost. I sense that this would disappoint many.

So, should we host the tournament again? We need to be objective when it comes to a future tournament, and consider the implications of hosting. Given that much of the infrastructure is in place, I'm sure we'd like to think that in maybe 16 or 20 years time it could well be New Zealand's time again. My concern is that the price tag attached to the tournament may well have escalated well beyond our means by that stage. We have shown how a country can embrace the event. It would be nice to think that the IRB might embrace some form of revenue/profit sharing to see the place many consider the spiritual home of rugby host the tournament again. This, of course, remains to be seen.

One measure of spending - and it is not $700m ...

Just spotted this article from Stuff on the spending that has taken place during the Rugby World Cup. Paymark, who cover about 75% of all credit card transactions in the country, have found that spending on cards during the tournament "was up by $195 million." I don't know precisely what this phrase means, but I assume it means that spending is up by $195m on last year's figures for the same period. Of course, the first Christchurch earthquakes was during this period last year, so spending was particularly depressed at that time. It stands to reason that domestic spending was likely to rebound at some stage - perhaps the tournament and the performances of the All Blacks were a catalyst?

Of that $195m, the amount spent by tourists was $70m up on the same period last year. What, only $70m? Yes, $70m is 10% of $700m. or $700m with the decimal point moved one place to the left. Obviously it is early days, and this is by no means a complete measure of spending, but it is pretty clear that the impact of spending by overseas visitors would appear to be quite a bit less than initially projected. Of course, projected economic impacts were gross, not net, which are the figures of particular interest.

The net change in spending is where we see changes in things like the tax take (GST, etc), which are listed in the expected benefits from the tournament. Gross figures are all well and good, but they are very difficult to substantiate or refute. Literature on previous mega events pretty much says the same thing - that the realised economic impacts are highly likely to be significantly less than initial projections.

If the best case scenario eventuates, and the event costs the taxpayer $26m (that is, 2/3 of $39m), then to be economically justified, we should see additional economic benefits of at least $26m. Of course, as has been reported, the costs of the tournament to local, regional and central government are quite a bit larger than $39m. Thus we should expect to see substantial benefits to make the tournament worthwhile. Will we? Time (and research) will tell.

It is over - now let the fun begin!

Well, the tournament is now officially in the history books. The records will show that New Zealand won their second Rugby World Cup with an 8-7 victory over France in the Final. Two days later, and we are already hearing some very interesting noises regarding the 'impact' of the tournament on the host country. I link to a couple of such pieces below.

Firstly, from the President of the IOC, Jacques Rogge, in Stuff:

"Whether it would be useful for the country, only you can determine, it is not to the IOC to tell that.

"But it is a possibility. Finland organised the Olympic Games with a population of 5 million, Norway has hosted a Winter Olympic Games ... with the same population as New Zealand."

Evidently this country has shown itself to be a more than capable host. From what I have seen in the past month or so, we have done exactly that. What interests me more, however, is the next line in the story...

Rogge says a host city for an Olympics doesn't have to fund the entire tournament, like New Zealand has done for the Rugby World Cup. The IOC is providing half of the $5 billion it is costing for London to hold next year's Olympics, with that money coming from sponsorship.

Now there's an idea! This might just have made some inroads into the $39m loss the tournament has incurred. Still, some have said that this might be a pipe-dream - although if it came to fruition, we are much more likely to see this tournament on our shores again at some stage in the future.

Apparently the loss might just be big enough to stomach, according to the tournament organisers and RWC Minister, Murray McCully (and, I suspect, former RWC Minister Trevor Mallard).

I have said this before, and I will continue to say it: It is too early to tell just what the actual impact of the tournament has been. I fancy an ex-post empirical analysis of host city GDP will tell us a bit. For me, this becomes a little more likely by the end of the year, if not early 2012. Until then I will maintain the time-honoured tradition of sports economists when evaluating economic impact analysis projections - shift the decimal place one point to the left - for my prediction of the actual economic impact.

Cambridge's Cycling Centre of Excellence (Waikato/Bay of Plenty)

A fascinating look into both sides of the debate over the soon-to-be built Cycling Centre of Excellence in the Waikato has just aired on TV3, including a few thoughts from yours truly. It is well worth a look, as it encapsulates just how polarising these developments can be within communities. The Waikato Regional Council voted recently to contribute some $6m into the development of the facility. Interestingly, one of the features of the process has been the role of economic impact analysis. A study was commissioned by the Home of Cycling Trust and projected an annual $11.5m economic impact as a result of the facility. The Waikato Regional Council commissioned a further study, which projected an annual impact of $4.9m, less than 50% of the original projection.
It is also worth pointing out that the Hamilton City Council declined to contribute to the facility, preferring to leave the decision to the Regional Council. Perhaps the recent experiences with the Hamilton V8 Race have resulted in a more cautious approach to these type of investments.