Wednesday, 30 August 2017

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.

[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.

Wednesday, 9 November 2016

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.

Saturday, 5 November 2016

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.

Thursday, 3 November 2016

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?

Wednesday, 26 October 2016

Funding the fight ... low blow or a knockout?

The proposal for Government funding to be poured into Joseph Parker's world title fight has become very popular - so popular, in fact, that even I've been asked to contribute to this discussion!

There have been plenty of views from both sides of the fence - Steve Kilgallon's piece on why taxpayers should stump up to help stage the fight, Patrick Gower's views are more strongly against, while Barry Soper writes a more questioning piece.

Eric Crampton (as per usual) makes several excellent points - his whole post is worth a read! As economists, Eric and I see very much eye to eye on this issue.

I can only really add to this discussion with a few points of my own:

  • A matter of a week or so ago, Auckland was widely considered the host. Now we are told that there is only a 20-30 percent chance of the fight being staged in Auckland. What is the situation that has caused this uncertainty? This, to me, is the key question. Why is the government funding needed? Could it be that promoters in the US are proposing to spend more on attracting the fight than Duco, and are therefore being considered as a safer (read: more lucrative to the WBO) bet than hosting a title fight here? Government funding has been used the world over to try to trump others in hosting events ... with questionable returns.
  • Indeed, there is little to no evidence from the independent research looking at the realised economic impacts of mega sporting events that said events will generate tangible economic impacts. The winners from such arrangements tend to be the governing sporting bodies, followed by the event organisers - with taxpayers a distant last.
  • What are the benefits that New Zealanders will enjoy from hosting the fight? Benefits will accrue largely to those who watch the fight - and you can bet that it will not be anywhere in the plan for such an event to be broadcast live free-to-air. Part of what makes the fight commercially lucrative is the ability of broadcasters to charge for people to watch it. If government funding was contingent on it being broadcast free-to-air, it would undermine the commercial viability of hosting it here. So it should be a given that people will have to pay to watch the fight with or without government funding. These prices will be much more expensive than any previous fight given its title status, so one would reasonably expect the promoters to capture a much greater share of the event's benefits in the form of ticket sales and pay-per-view sales from Sky. 
  • The economic benefits are (unfortunately) synonymous with economic impacts - which doesn't help the case for the fight to be publicly funded. If you look at past events funded by the Major Events Development Fund (MEDF), they've tended to be events with longer than a single day's duration - which means that their ability to attract visitors and spending is much greater than a one-day event. Any economic impacts from the event are also highly likely to be concentrated in Auckland - hence there may well be a stronger case for Auckland Council (via ATEED, one assumes) to be a major backer of the event. I understand that ATEED is already involved, but it doesn't appear to be enough to get the deal over the line. 
  • There is also a matter of consistency and transparency regarding the treatment of the application for the MEDF - any (perceived or otherwise) favouritism will not go down well with people who have missed out in the application stage. One assumes that the application will include an estimate of economic impacts attributable to the event? To support these impacts, it is useful to consider what would happen in Auckland (and New Zealand) if the event did not take place. In most cases, projections of economic impact assume that the counterfactual is that there would be no spending at all in the absence of the event - an assumption that overstates the likely economic impact.
  • One must also factor in the opportunity cost of public funding into such an equation. Scarce government funds could be spent elsewhere - and no doubt there are plenty of alternative uses for an as-yet unknown amount of public money that may generate greater longer-term impacts than funding a one-off event like this.
  • From what we have heard (at least via the media) the good people at Duco are pointing to the feel-good factor as being an important reason why we should consider funding the fight. If so, ask yourself this - will you feel any worse than you already do if the fight was to go offshore? And if so, what is this "feel-bad" worth to you? In several studies from overseas that have attempted to quantify (among other things) the feel-good effect, intangible benefits are almost always smaller than the economic impacts and are certainly not large enough on their own or in tandem with tangible benefits to justify subsidies given to sports events, facilities or franchises. 
  • And what about the precedent a favourable fast-tracked decision would set? 
I'm just finishing off research into the impacts of hosting major sporting events on travel service exports in New Zealand - and preliminary results are interesting. The larger the event, the greater the likelihood of a statistically significant bump in tourism spending - but not all of them have generated positive changes to tourism spending.

I'm a boxing fan from a long way back - I remember growing up watching great fights like "Marvelous" Marvin Hagler vs Thomas "Hitman" Hearns, as well as watching heavyweight greats like Spinks, Tyson, Holyfield, Bowe, Lewis and the Klitschko brothers (among others). I'd love nothing more than to see Joseph Parker added to the list of world champion heavyweight boxers. But as for government funding of this title fight - well, let's just say that the economics of hosting the fight just don't seem to be strong enough to score a win on the cards from this judge.