Friday, 14 August 2020

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. 

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