Friday, 16 March 2012

Hold-up or stupidity?

Or both? Over at his blog Fairplay and Forward Passes Sam Richardson writes on one of the all time great hospital passes, the bailout of the Otago Rugby Football Union (ORFU) in large part by the Dunedin City Council (DCC).

Sam writes,
[ ... ] 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.
Is this a classic example of hold-up? The problem is with relationship specific assets. The DCC put money into a stadium which badly needs rugby to be played there for the stadium to have any chance of being viable and now they have had to write off $480,000 of debt to ensure that rugby is played there. Looks like the ORFU has renegotiated things to capture a good share of the available quasi-rents.

But is it hold-up? After all for hold-up to occur you need a contract to renegotiate but do the ORFU and the stadium have a contract for the Otago ITM Cup team to play there? The answer may be no. Richardson continues,
[ ... ] 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?
Yes stupidity now looks like a big player in all of this.

So the DCC put a lot of ratepayer money into a stadium without having contracts in place to make sure that the only big revenue stream they have would in fact be available. Without rugby the stadium is finished, even with rugby the stadium's future isn't great, but without it the stadium is a gone burger and yet there were no contracts for any rugby at the stadium. What were people thinking?!

And what incentives does the bail out give for the Highlanders? As Sam puts it,
I can just imagine them [the Highlanders] 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!".
If you want to know why public money shouldn't be put into sports stadiums just go ask a Dunedin City ratepayer.

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