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.

It's on (without government funding)!

It's on, folks! December 10 at Vector Arena - Joseph Parker fights for the WBO world heavyweight title against Andy Ruiz.

In the end, it didn't need government funding either! Although Martin Snedden, CEO of promoters Duco (as reported in the media) was bullish about whether the announcement yesterday justified the call of the Government to not fund the fight:

"That's rubbish. When we started out on this commercial route only 35 days ago we had no commercial contracts in place. We didn't know what would happen. We trusted our loyal sponsors and supporters but we were asking a lot of them... but we've hit a threshold in terms of risk assessment where we are saying that we're prepared to go for this."

Their initial threshold might well have included government funding as a buffer of sorts, but even without government funding, they've decided to make a go of it with private funding. Kudos for going for it despite the risk, but that's the nature of private enterprise - you'd be doing pretty well if your business was a sure thing.

Now that it is confirmed, expect it to cost New Zealanders to enjoy a piece of the action. Duco have already said that it won't be available to view at rock bottom prices.

Duco are a shrewd bunch of people who know their boxing and know how to run a fight night. This will likely be their biggest opportunity to make something of Joseph Parker's title ambitions in this country. If he wins, he may well seek bigger opportunities that the market in this country may be unable to support. (I won't think about if he loses - except to say that David Tua was still a popular fighter in this country after his title fight loss to Lennox Lewis and his fight with Shane Cameron was the biggest fight in this country prior to what will go down on December 10, 2016.)

As a boxing fan, I am right behind Parker in his goal to win the title. As to whether that will extend to parting with any of my scarce income ... let's wait and see.

The Parker fight takes another body shot

Just as it seemed things were becoming clearer regarding the Joseph Parker fight ... then comes news today that Auckland City's ATEED have decided against providing ratepayer funding for the fight.

According to the article, ATEED's contribution was expected to be in the hundreds of thousands of dollars.

The CEO of ATEED, Brett O'Riley said:

"While there is clear potential to generate international exposure if the fight is held in Auckland, we are unable to make a robust assessment of the potential of this event until the fight is confirmed to take place here and domestic and international television rights are secured."

It is a body blow to promoter Duco's chances of hosting the event in Auckland - especially since it appeared that it was banking on ATEED's financial support to make the fight happen.

Of the public funding possibilities, ATEED's support appeared most sensible on the surface from an economic perspective - the benefits of the fight were likely to be highly concentrated in Auckland - even with up to 50% of fight attendees hailing from outside the city (as claimed in the article). Auckland was also the most likely beneficiary of national and international broadcasts - although the value of this publicity is far from certain. Given that the length of time to promote the fight is shrinking by the day (the fight was believed to be scheduled for December 10), the ability to market and sell the fight becomes that much more difficult the closer we get to fight night.

O'Riley was also quoted as saying:

{I}it was not clear if staging the fight in Auckland would have "the desired outcomes of Auckland's Major Events Strategy" so the decision was made "not provide financial sponsorship for the fight."

It definitely looks like the fight has become a political hard sell - and without government backing it now stands as a true test of whether there is a market of sufficient size to make such an event commercially justifiable in New Zealand.

Pondering pugilistic price discrimination .... maximising the value of the world title fight

News today revealed that Joseph Parker's WBO world heavyweight title fight against Mexican opponent Andy Ruiz will take place in Auckland on December 10 at a venue to be decided. The fight will take place without central government funding in big a about-turn from last week's announcement from Parker's promoters Duco when they withdrew their application for government funding that the fight was 80% likely to head offshore.

It is not 100% privately funded, though. One of the backers of the Parker camp is the Auckland City events arm ATEED, so there are already taxpayer dollars being funneled into the fight.

Now that the fight is taking place in Auckland, the question becomes whether the fight will generate economic benefits for the city and for New Zealand. In short, the benefits are likely to be confined to Auckland city and are not likely to spill over outside the city boundaries. The extremely short-term nature of the event itself will likely mean that any impact is short and sharp - don't expect longer-term economic impacts - even if Parker happens to win the fight. We can also expect the promoters to attempt to extract as much of the local consumer benefit in the form of higher broadcast prices and ticket prices. This isn't extortion or in any way unfair - it is market forces at work. Duco is a monopolist here - and they have the ability to set the price people must pay to see the fight. Parker vs Ruiz will be the biggest and most important fight ever staged in New Zealand, and people will be willing to pay to watch it. David Tua vs Shane Cameron was a big fight in New Zealand and attracted a huge amount of interest - this fight will be even bigger.

There is an interesting option that is on the table for Duco that they have already done but now that the stakes are as high as they have ever been (for boxing promoters in New Zealand), do they have the same willingness to test the market's willingness to pay for this fight? That option is perfect price discrimination - something that Duco did for Parker's fight with Carlos Takam in May of this year. This was labelled by promoter Dean Lonergan as

"an entertaining experiment in microeconomics"

In the Takam fight, Duco auctioned off 520 general admission tickets at $1 reserve on TradeMe. The intention of this experiment was an attempt to eliminate the possibility of scalping occurring with these tickets - people buying cheap and selling at higher prices.

With interest in this fight likely to be significantly greater than what it was for the Takam fight, it will be very interesting to see if Duco try it again. If anything, they have more to gain from giving it another go - one would expect the willingness to pay for a title fight to be much greater than for a build-up fight. Yet there is always a risk that they may not make the money that they are seeking - but they are likely to sell the tickets and fill the venue. At the same time, charging a fixed price is not a sure bet either - people might decide that the price is simply too steep and there could be empty seats as a result. There is also the possibility that the price might be set too low - and scalping could occur.

That they have already tried the auction method is a credit to the promoters. Only they will know whether it paid off last time. It would be fascinating to see Duco try this again because of the potential gains the practice offers them as sellers of a sought-after commodity (which are potentially much higher with this fight). Even if it was for a small proportion of tickets, it is a way of letting the market decide what the ticket is worth.

Lonergan also mentioned that

"You'd never get the New Zealand Rugby Union doing what we're doing because they'd see it as too controversial". 

This is Duco's version of a top-tier All Blacks test - their World Cup final - will they be game enough to roll the dice once more?