Tuesday, 25 September 2012

Problems with sports stadiums in Auckland

Sam Richardson has been blogging on what to do about Auckland's stadium situation at his blog Fair Play and Forward Passes. He writes,
On the one hand, as Brian points out, the decision is easy if you subscribe to the efficiency-of-use argument. The three big stadiums in Auckland (Eden Park, North Harbour Stadium and Mt Smart Stadium) all depend on local government to a greater or lesser degree. Indeed, the issues paper released by Regional Facilities Auckland (RFA) in June (linked here) indicates that Eden Park breaks even each year and has a large debt to service of $55m post-Rugby World Cup, Mt Smart is facing an upgrade bill of some $60m and requires local government funding each year, and North Harbour Stadium is very much dependent on local government funding to stay viable. There appears to be an argument, on the surface, that there are potential efficiencies to be gained by rationalising their use (the 'collaborative strategies' option presented by RFA).
I guess my first question about this is , What does break even mean for Eden Park? What get countered in such a calculation and what doesn't? How much local government support does the park get? Or, if it was a private business, would it still be in business?

My other question comes from the EconTalk interview with Roger Noll of Stanford University. Noll noted that
[ ... ] an arena that has multiple uses, say, it's going to have a basketball team and/or a hockey team, has other potential uses, like concerts and tractor-pulls, all kinds of stuff. And so a well-managed arena can be occupied 250-300 nights a year. And they can break even.
So my question would be, If around 300 nights of use a year is the break even point, can any stadium, even a multi-use one, be used 300 times a year in Auckland?


mark said...

Eden PArk has a small Council loan and 40-45m guarantee. Their cash breakeven, means they should be able to fund debt repayment.

the report highlights $60m needed for Mt Smart - but then lists out a bunch of Eden Park projects of probably similar value. A Sandringham over bridge was previously $26m.

they also don't look into any costings eg a drop in corporate box type revenue, when only one venue. So Mt Smart will still be there, but with income shifted to Eden Park.
Also Eden Park is a govt/national stadium - what about its medium term capex? new roofs on east stand? new west stand etc etc - once Council takes this over the requests for $ will start flowing

Sam Richardson said...

The report suggests that Eden Park is barely making enough cash to over its operational expenses that debt servicing becomes an issue. I haven't seen any figures from Eden Park to confirm this, but one gets this impression from the RFA report.

Mark points out that the report suggests reallocation of spending from other facilities to Eden Park, and I wholeheartedly agree that once the local government involvement is focused on the facility, we may see further requests for facility improvements.

The lack of cost considerations is also unsettling. There has been no indication of potential costs of relocating sports from their present locations. Also, is Eden Park up to hosting events every single weekend that utilize the infrastructure developed from the Rugby World Cup? Residents may have put up with fans using he fan trail for the RWC for six weeks in 2011 given it was the RWC, but would they want it happening every weekend? Its residential location does have some natural limitations for its potential usage.

Wonderful talk with Roger Noll - a really interesting discussion - although I'm not sure the dynamics of a modern US football or baseball stadium are as applicable to NZ today. NZ is more like the US in the 1970s with multiple purpose facilities. Single purpose facilities are very dicey propositions, and they wouldn't work here. This is why proponents stress the multiple purposes that they have. This is why Eden Park is being proposed as the multi purpose answer. Take Westpac Stadium in Wellington. It is used for between 45 and 50 events each year, and it makes operational surpluses. It hosts many events, but is certainly not used for 250-300 days a year with events.

Auckland does have to consider what the effect of rationalizing sports facilities within the city will be. It may provide efficiencies, but at what cost? And will the costs outweigh the benefits?

Sam Richardson said...

Oh, and without government support, it is not at all clear whether any of the three facilities would stand on their own feet. It is usually debt servicing that cripples these facilities - and running operational deficits doesn't help this. This happens because optimistic projections of the number of events hosted rarely materialise. It is not aided that the facilities likely compete with each other for the marginal (non core) events like concerts, trade shows and the like, which are simply transfers from one stadium to another and do not therefore provide a net benefit to the city.

Paul Walker said...

Thanks to both Mark and Sam. As always I guess my problems comes down to this bit

"without government support, it is not at all clear whether any of the three facilities would stand on their own feet. It is usually debt servicing that cripples these facilities ..."

A normal business has to be able to cover its debt serving costs, if it can't its out of business. IF you can only cover your variable costs you can stay in business for a while but you need to cover fixed costs to remain in business over the long term.

And thus we are back to the old problem of when are government subsidies for these stadiums justified?

Sam Richardson said...

I am unison with you on this one, Paul. Stadiums usually cannot stand on their own feet without government assistance. As such they arent usually privately owned. This makes the arguments for assistance important and it is imperative that they are based on solid foundations. It is the role of people like you and I to critically examine these arguments. While arguments abound as to the various merits of subsidisation, I'm yet to be convinced that a stadium should be subsidised in light of the arguments developed to date. Like you, I have reservations. I'm working on putting together an extension of one of my PhD chapters which looked at one prominent New Zealand stadium that examines this very issue. I sense there will be plenty of debate still to come.

Paul Walker said...

Sam. Get working!!! I look forward to seeing the results of your research. We need a framework for thinking about the funding of stadiums to help prevent very costly mistakes being made like the one that could be made here in Christchurch.

mark said...

On the issue of public support for stadia, to me the key issues are to have proper facts and a public good rationale.

I was on Ak City Council, when we did Vector Arena as a BOOT scheme. Risk sat with owner/operator, and Council took back in 30 years.

The prcoess was robust, and well thought through. I was originally cautious - but in the end these types of venues world-wide can't cover borrowing costs.

So key (and what's not being proposed by RYA), is to isolate risk, and minimise capital - both initially and ongoing.

As to the public good element - I was persuaded that being on an international concert circuit was needed to compete with Sydney etc. It wasn't on the basis of just shuffling around discretionary spending - which is what stadia do.