Thursday, 23 August 2012

Don't believe the hype

In preparation for an interview with Close Up that will appear on TV One some time next week, I took the liberty of drawing up an interview 'cheat sheet' with key reasons why people shouldn't get swept away in the euphoria that surrounds the announcement of a new stadium and beware of the hype. Unfortunately I didn't articulate this as well as I would have liked in the interview itself, and I feel it only helpful to note these points down in a blog post for the benefit of all concerned. It works as a nice summary of the arguments that explain what we actually observe from stadia around the world. So here goes:

Tangible economic impacts from sports facilities often fail to materialise for a variety of reasons. These include:

1. A substantial proportion of the crowds at stadiums are local rather than visitors. Some estimates I've seen in the literature suggest that it ranges from 80 to 95% of attendance being local.

1a. Spending by locals within a city on attending games is usually substituted from elsewhere within the local economy, for example, movie theatres, video rental stores, and other entertainment venues. A game merely redistributes spending rather than generates it. 

2. Spending within a city often leaks outside the local area, as not all goods and services purchased by event attendees are produced locally, so a proportion of the spending has to go out of the local economy to pay for imported goods and services. 

3. Government spending on stadiums, contrary to popular opinion, is not costless. That is, the funding has opportunity cost that must be considered. Money spent on a stadium could have been spent elsewhere in the local economy, and as such alternative activity is forgone. A benefit is only observed if the stadium activity more than outweighs the lost activity elsewhere. 

4. Stadiums are almost always underutilised. Westpac Stadium in Wellington has around 45-50 event days per year. That is around one day per week. Game days are usually a hotbed of activity, but six of the seven days there is nothing going on. Surrounding development feels this too. Are businesses located nearby dependent on stadium activity going to survive with more off days than game days? It is unlikely. 

5. Much of the projected activity that a new facility attracts comes from within the city at the expense of other facilities. Things such as conferences, conventions, trade shows, etc would by and large have been hosted elsewhere within the city at another venue. Thus we see another form of substitution in action here, which works towards reducing the overall realised impact of a new facility. 

6. A replacement facility can not realistically be expected to do a lot more than a pre existing facility. Research in the US has suggested that there is a short term honeymoon effect of up to ten years where attendances spike due to the novelty of the new facility, but beyond this the experience has been that attendance returns to pre facility levels. 

What about the intangible benefits? Surely they matter?

Relevant intangible benefits include consumer surplus that locals enjoy from attending games at the facility as well as the public good aspects. They are recognised as benefits but there are weaknesses in their ability to justify government funding. Firstly, consumer benefits are often captured to a greater or lesser degree by event organizers through ticket pricing structures - season tickets, family/adult/children, concessions, etc. It is in the organizers interest to capture as much of this as possible so as to maximize event profits. Secondly, it isn't just within the stadium that these benefits are appropriated. To watch your team elsewhere, you pay for it via Sky TV subscriptions. To read about your team you pay for it via newspapers, magazines, internet access, etc. A lot of benefits can be captured privately. Thirdly, one can argue that just about any activity or enterprise has some intangible benefits, but this doesn't mean we should subsidise every activity that generates intangibles!

The bottom line is that if tangible benefits don't materialise, the intangible benefits have to be substantial and international evidence suggests that while they aren't insignificant, they are nowhere near the size of subsidies given to build sports facilities and/or attract sports franchises. Take, for instance, the estimated willingness to pay for the London Olympics, which was measured in one study at GBP1.9b (for the UK), was estimated at GBP480m for London in a 2008 paper (see gated link here). In light of the most recent estimates of costs (US$14b). They might exist, but they aren't likely to be deal breakers.

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?

Thursday, 16 August 2012

More thoughts on stadiums in the context of natural disasters - the case of Christchurch

I've been thinking more about the implications of the Christchurch blueprint for the rebuild of the city, and specifically the role of a stadium within it, and I find a few commonalities when I read back across the 2007 paper by Victor Matheson and Robert Baade on the implications of funding professional sport in New Orleans after the devastation of Hurricane Katrina that I have linked elsewhere (see working paper version linked here).

While the arguments warning against stadium investments within much of the literature are compelling, questions can be asked as to the applicability of these arguments in the case of Christchurch and New Orleans, both of which suffered from natural disasters that have caused significant disruption to the cities. In the case of Christchurch, there has been (and remains) significant debate over the appropriateness of a stadium (and sports facilities in general) as a key component of the rebuild of the shattered city. I harken back to Matheson and Baade for instructive points which I'll elaborate on below.

Replacing the infrastructure for professional sports and mega-sports events can be justified if the benefits provided by the facilities exceed the costs incurred in the reconstruction. Both costs and benefits have to be measured over time since the facilities provided a stream of benefits as well generating costs associated with operations and maintenance.
The city has lost not only AMI Stadium but is also faced with replacing QEII Park. In this sense, the gap for a major facility exists, and the costs of such a facility have been out in the public domain for some time, but there is less clarity when it comes to the actual benefits of such a facility. Stadiums, in general, don't generate tangible economic benefits. There is a growing part of the literature that suggests that they do generate quantifiable intangible (public good) benefits which are every bit as important to the cost-benefit calculus as the tangible jobs created and increases in GDP. There are sound reasons why a facility in Christchurch is unlikely to generate tangible benefits, the most important of which is the ability to service influxes in visitors. Without the necessary (fully operational) infrastructure in place, Christchurch will struggle to extract full value from visitors to the city for sporting events. To this end, there is a clear dilemma surrounding the role of the stadium, and policymakers are faced with a choice - adopt the "build it and they will come" philosophy and attract visitors to the city in the hope of revitalising the city in this way, or focusing on providing the necessary infrastructure so the city attracts back the population lost and creates a market for the new facility. At the heart of this dilemma is a point that Matheson and Baade make beautifully, so I'll post it here:
Sports yields hedonic value, in other words, and the quality of life benefit it imparts is a luxury affordable in affluent communities rather than an activity that helps a community achieve affluence. Sport for the most part is properly viewed as a luxury good and not a productive resource.
Therein lies the crux of the argument, and it is here that we are likely to see the more passionate divergences of opinion. There is no doubting the importance and potential quality of life value of sports in Christchurch. The initial call of whether the investment makes sense is largely dependent on this value, I believe, and how it stacks up to the costs. This is a complex value, as one must also factor in the role of the sports environment including the new temporary stadium, as well as the impact on other facilities in the city and surrounding areas. As I have mentioned in my earlier posts on this issue, complicating matters further is the role of sports in the context of the rebuilding city's priorities. Do Christchurch policymakers see the stadium as a luxury good or a potential productive resource? 

I find the call on the stadium being left to the Christchurch City Council an intriguing one. From central government's perspective, funding a brand new stadium makes little sense as all it does is exacerbate competition between cities for the same pool of visitors. A roofed stadium in Christchurch will compete directly with Dunedin's facility, so it becomes a zero sum game when viewed from a national perpsective. From a local perspective, however, there is a view from some within the academic community that local gains are what are important, regardless of whether those gains come at the expense of other areas. It is exactly the argument used in favour of downtown stadiums - the downtown area may benefit, likely at the expense of surburban areas. The suitability of such a project, therefore, is likely to depend on your point of view. 

For me, I'd really like to see the reasons behind the inclusion of the stadium within the blueprint. Yes, there are arguments in favour of its inclusion, but some are less credible than others. Even the most credible may still fail to pass the cost-benefit test.

Monday, 13 August 2012

New Zealand's Olympic success - what's in it for us?

Well, the Olympics were again a wonderful source of entertainment and drama - they were compulsory viewing in our household. For a spectacle, you really can't beat an Olympic Games. Mind you, for US$14 billion, it had to be just that!

Not surprisingly, much of our attention now turns to the implications of the performances of New Zealand's Olympians for us here at home. They have given us much to celebrate, and I am sure that as a country, we are all very proud of their achievements. In the headlines this morning - what will the Government do as far as funding high performance sport in this country to see us do even better in 2016? The answer: No change for two years, but come election year, who knows?
Sports funding would again be looked at for the 2014 Budget when McCully said he hoped Finance Minister Bill English would be "in a generous frame of mind".
It is not like the Government is being scrooge with this. In fairness, funding was increased from NZ$40m to NZ$60m in 2010.

Mr McCully pointed out that rowing was an excellent example of targeted government spending producing medals in London. Sport New Zealand targets six sports: rowing, cycling, triathlon, sailing, swimming and track and field. It would be fair, on the surface, to say that these targets largely delivered results. The question, for me, is whether success in other areas would be even better if government funding was extended to other promising sports? There is no easy answer to this one, but plenty of opinions from influential former Olympians as can be viewed in this New Zealand Herald story, as well as at least one academic:
Canterbury University senior business lecturer Ekant Veer said the Government needed to put more money into Olympic funding and not concentrate on the top medal prospects.
"Funding only sure medallists not only sends the impression that we don’t support effort, but it also can kill a future generation of athletes who are inspired to step up and be the next gold medallist."
I absolutely agree. I only wish I knew what a sure medalist was, and how to predict one.

What perked my ears, though, was this comment:
Veer said New Zealand was a sports crazy country and a successful Olympic campaign often had huge impact on the nation’s mood.
"Which, in turn, can lead to increased productivity at work, improved relationships, increased consumer spending and all manner of behaviours that are positive for this nation."

Granted, we are a sports crazy nation. We do love our sports. Most countries would also profess to being at least as sports-mad as we are, though. I'm not aware of much in the way of evidence that supports the economic arguments mentioned above (increased productivity at work and increased consumer spending). A really interesting piece of research on the link between sporting success and happiness from Europe by Kavetsos and Szymanski that is sure to be doing the rounds at the moment (RePEc working paper link here, published version link here) finds that while hosting events produces a definite (and measurable) feelgood factor, the link between national sporting success and happiness was not significant. If evidence from Europe is anything to go by, we loved the Rugby World Cup last year for a reason, but we shouldn't expect a lot more than short-term happiness from our Olympic success that fades almost as quickly as it arrived.

The All Blacks play this weekend...