The economics of the America's Cup - did we lose or win?

A question I'm very pleased to see Sam Richardson asking. As I'm sure most of you will have heard by now the Minister for Economic Development has been going round saying that the taxpayer money that went into the America's Cup campaign was money well spent. I wonder if he has asked any taxpayers about that?

Well now Sam Richardson of the econ department at Massey, likely the best guy in the country to do this, has given the Market Economics Limited report, written for MED,  the once over. Richardson writes,

The Government's share of the total Team NZ revenues of approximately $180m was 20 percent (it was capped at $36 million), with 66 percent coming from overseas. The report found that the total outcome of $87 million to the New Zealand economy would not have occurred without the Government's involvement.

and he continues,

I'm not going to question the final point - it isn't unreasonable to assume that the Government's contribution was pivotal to the challenge - but then, one could also argue that it wouldn't have happened without the overseas or private domestic funding either. That being said, however, there are two aspects of this report that do require challenging.

Getting down to business Richardson writes,

First, attributing the entire economic impact of a project to a 20 percent contribution is something I (and many others) have a real problem with. You could just as easily credit the economic impact figure of $87 million to the overseas funding (and you could do so with confidence, as it is 'new money' and thus more likely to be beneficial to the New Zealand economy) more than the Government's investment. Still, it is not an easy issue to resolve. It's not as easy as saying that because the Government contributed 20 percent means it should be 'credited' with 20% of the economic impact. The combination of public and private funding makes attributing the economic impact to one or the other parts problematic. A more accurate statement would be that the entire project (regardless of where the money came from) generated $87 million in impacts. After all, the tax revenues generated by Team New Zealand were between $38 and $40 million.

The second issue is the absence of opportunity costs of public funding in the report, which would help us to determine to what extent the $87 million impact be considered an economic benefit, and therefore money well spent. If there was no Team New Zealand, would nothing have happened? Of course not - life (and the economy) would have continued to tick away as per usual. $36 million of taxpayers money went into this campaign. Public funding has alternative uses, which should at the very least be considered as part of an objective analysis. If there was no Team New Zealand, what would have happened to the $36 million in taxpayer funding that was invested there? Chances are it would have gone to some other worthy recipient, for example the health sector or the education sector. In order to determine whether the $36 million spent on the America's Cup was money well spent, we need to know what $36 million would do when put to an alternative use. If the $36 million for Team New Zealand returned a higher impact than, say, paying each and every New Zealander $8 as compensation for there being no Team New Zealand, then it might have been money well spent. Determining what the appropriate alternative use for $36 million is the subject of debate - and my example above is very much tongue in cheek - but one thing is for sure: it is certainly not nothing. $87 million is the economic impact with no alternative use of public (and other) funds. Is it realistic to attribute this as a benefit?

That all costs are opportunity costs is stage one stuff, all economists know this. So not considering opportunity costs and comparing the campaign outcome with alternative uses of the money is big miss and I find myself wonder why the report did it. Or is it the only way they could put a positive spin on the campaign?

Just asking.

The ex ante and ex post benefits of events

When considering the issue of the benefits of of big events Shamubeel Eaqub writes at the TVHE blog that,

In the lead up to the RWC, we looked at a range of events. International studies of sporting events fall into two categories, those done before the event, and those done after. The studies in the lead up to events on average forecast economic boost of around 1% of GDP. The studies done after the event estimate economic boost of around 0.1% of GDP [...].

Once the initial boosterism fades, large economic benefit estimates are largely disowned and there is a greater focus on intangible benefits such as showcasing the area, long term positive association and somewhat esoteric ‘feel-good’ factor.

There is nothing wrong with events. They are fun. But the fetishist need to justify it on economic grounds is entirely unnecessary. Events provide very small, if any, tangible net economic benefit. There are many other intangible things that can be good, like speeding up the beautification of the city, or finishing off motorways in the lead up to the RWC for example. Its not that they wouldn’t have been done, but events have a habit of getting things done on a deadline.

Eaqub also points us to a working paper by Sam Richardson at Massey which looks at Justification for Government Involvement in the Hosting of Sports Events: Do Projected Impacts Materialise? As to the question in the subtitle, the short answer is no. The abstract of the paper reads,

Major sporting events are said to generate substantial economic impacts to host cities. Estimates of these impacts are typically used as justification for government involvement in the staging of such events. The majority of independent academic research, however, has found that ex-ante projections of economic impacts for host cities from major sporting events rarely materialise. This paper considers the realised economic impacts of fifteen major sporting events hosted in sixteen New Zealand cities between 1997 and 2009. Realised economic impacts are found to be the exception, not the rule.

Given that the economic impacts do not live up to the hype that comes from the ex ante studies I want to ask Why not? What are the people who writes these reports doing? How can they be so wrong so often? There seems to be a systematic basis here. Are these people just producing reports to support a predetermined outcome?

Eaqub also goes down the there are no tangible benefits so lets justify spending taxpayer's money on an event by saying there are lots of intangible benefits. He says, for example, speeding up beautification of the city or finishing off motorways is an intangible benefit. But you have to ask question about the optimal timing of such projects. If a delayed finish to these projects is optimal then you don't want them finished at an earlier date. And if an early finish is optimal then there has to be much cheaper ways of getting these projects finished earlier.

Also if you want to host events on the grounds that some people will get positive utility from the "thrill" of hosting then you have to net out the negative utility that other people suffer from hosting. You must consider both sides of the ledger. It's the net-thrill that matters. And good luck with that.

A more general point, you could justify any amount of spending on anything if you allow the benefits to be some "intangibles". You can always come up with a huge amount of "intangible". Policy based on "intangibles" is policy based on nothing. And what does this say about evidence based policy. What evidence can you have for intangibles?

And what else could be done with any money spent on an event? How many hip operations could be done with that money? How many child cancer patients would receive quicker treatment if that money went to them? How many schools could be kept open with that money? Opportunity costs are real costs.

The good news from the America's Cup

Paul Lewis writing in the New Zealand Herald points, without intending to I'm sure, to the big positive that comes from Oracle winning the next race. It could save the New Zealand taxpayer millions.

Team chief executive and fundraising power source, Grant Dalton, has already hinted that he will not do another America's Cup challenge if this one fails, though such decisions are always open to review. If he goes, there are doubts that multi-millionaire benefactor Matteo de Nora will continue either.

and

Lose, and Government money becomes harder to prise out of the public coffers. This year's nail-biting Cup match has been tremendous theatre but it will make the private fundraising job that much harder. One America's Cup lost campaign allows hope to burn. Two lost campaigns raises the issues in sponsors' minds of throwing good money after bad.

If the private money goes, the taxpayer money is, hopefully, sure to follow. Lewis also notes that,

Losing after leading 8-1 in the first-to-nine series would be bad enough. But the bigger picture is even worse. Lose, and the syndicate may fall apart.

There may be no syndicate left to waste taxpayer money on.

Sam Richardson comments at the Fair Play and Forward Passes blog,

Think about this from New Zealand's perspective. We've had the theatre, and the drama, and the world's eyes are now firmly fixed on San Francisco as Oracle seeks to finish what would be nothing short of a miracle, being virtually dead and buried a week ago. Think of the advertising this is giving this country - granted, it would be nicer if we were not on the wrong end of the comeback, but it is publicity all the same, and publicity that likely would not have occurred if we had won the Cup earlier in the regatta. Now the US have something to talk about with this regatta - and it is synonymous with New Zealand. So we get this advertising benefit (which is difficult to quantify but is nonetheless part of the package). How much has this cost the taxpayer? The Government committed about NZ$40m to the TNZ challenge - and are now reaping the rewards of that investment.

But you have to ask, What exactly are these "rewards"? Are the world's eyes really fixed on San Francisco? What coverage is the cup getting overseas? Do we really have any idea of what publicity New Zealand is getting, and if it is getting some, is backing Team New Zealand really the cheapest way to get that amount of publicity? Why on just run a (cheaper) standard advertising campaign?

Sam continues,

What happens if we win it? Several things, possibly; one of which is that there are fair questions to be asked as to whether hosting an event such as the America's Cup is the goldmine people say it could be (I blogged about this earlier in the week). We also know that the Government has in the past expressed an interest in throwing more cash at a Cup defence - for what might be considered fairly obvious reasons - and New Zealand taxpayers are not averse to more dollars being committed to a future defence. The question must be asked as to whether the return on the investment in a defence is as great as the return on the investment for a challenge? If there's one thing to be said for a challenge, it is that the Government writes a cheque for a fixed amount - end of story. A defence is more likely to be accompanied by a blank cheque - much like we had for the Rugby World Cup, where the loss was expected right from the start, on top of government spending towards stadiums, infrastructure, security and the like. Right now, we're getting great intangible mileage out of a $40m taxpayer investment - would we get such mileage if we hosted the event? Is that $40m better spent elsewhere? Important questions that need answers.

I agree that a challenge, should one occur, would be cheaper than a defense given that as Sam says a defence would be, most likely, a blank cheque job. But I'm not sure what to make of the idea that

Right now, we're getting great intangible mileage out of a $40m taxpayer investment".

For $40m I think we need more than just some supposed "intangibles". This amount of money should be buying something very tangible. Also, you could justify any amount of spending on anything if you allow the benefits to be some "intangibles" .You can always come up with a huge amount of "intangible". Policy based on "intangibles" is policy based on nothing. And what does this say about evidence based policy. What evidence can you have for intangibles?

And what else could be done with any money spent on a defence/challenge? How many hip operations could be done with that money? How many child cancer patients would receive quicker treatment if that money went to them? How many schools could be kept open with that money? Opportunity costs are real costs.

Economists versus the cup 3

The first two postings on this topic are available here and here. In this third message the economist in question is Dr Sam Richardson of Massey University and, more importantly, the Fair Play and Forward Passes blog. Sam asks the question, Hosting major sporting events such as the America’s Cup – can we believe the hype? He offers a few of his thoughts on the topic.

Firstly, we have to recognise that the figures publicised whenever a major event such as the America’s Cup is announced are gross economic impacts, which are not the same thing as economic benefits. The initial economic impact figure posted for the 2013 San Francisco regatta and pre-event regattas was US$1.4b (for San Francisco – click here for the report) and was based on an estimated 15 syndicates competing for the Cup. In March of this year the figures were revised downwards to US$900m – but it is not known how many teams this figure was based on. These figures are impacts associated with the event in the absence of any alternative activity that might have occurred in the absence of the event. In isolation, they are difficult to prove or disprove. In order to determine whether the event is beneficial for a local economy, one has to compare the impact of hosting the event with the likely impact on the local economy if the event was not hosted. It does not necessarily translate that the local economy will be worse off if an event is not hosted – several studies in the scholarly literature have shown that events such as lockouts, and strikes in professional sports in the US have had no impact on host economies – that is, people find other things to spend their entertainment dollars on instead of professional sports. If US$1.4b or more (in regular tourism, for example) would have occurred in San Francisco in the absence of the America’s Cup, then the decision to host the event would be debatable if the goal is to maximise economic benefits.

In short, always keep in mind that if event A doesn't occur this doesn't mean that you lose people's spending. If A doesn't occur people will still spend their money on something.

Sam continues,

Another thing to remember is that these figures are produced by consultant reports that commonly overestimate the positive aspects (like numbers of visitors attending, the extent of their spending, etc), understate or completely omit the costs associated with the event (or, worse, include costs as part of the economic impact), and as such produce numbers that are optimistic at best and gross exaggerations at worst.

You really do need to consider both sides of the ledger - costs and benefits - when looking at the impact of an event.

The impact on tourism is a big factor in assessing the impact of a big event. We always hear about the great impact that an event will have on the number of visitors attracted to a region and on their spending.

There are many things that can affect the extent to which an event attracts visitors and their spending. There are positive and negative impacts here. Firstly, the positives. Events attract people who come specifically for the event, and they can also induce tourists to stay longer to take in the event. They can also induce locals to change their holiday plans to attend the event and spend money locally that would otherwise have been spent outside the local area. We can’t ignore the negatives, though. Events can cause visitors to put off trips to the local area – either temporarily (where the trip is displaced to another time) or permanently (known as crowding out) – due to perceptions of event-related congestion, noise, price increases, etc. These same perceptions can also induce locals to flee the area while the event is on, which adds to a possible negative impact. Questions have to be asked of the figures quoted – do they factor in all of these possibilities, and are they reasonable grounds upon which to base estimates of visitor spending?

Sam notes that estimating visitor numbers and spending is far from being an exact science. He illustrates the point with the example of the 2011 Rugby World Cup. In terms of numbers the RWC got  more visitors than expected (over 133,000 according to Statistics New Zealand), yet visitor spending was less than half ($340m) of what the Reserve Bank projected ($700m – a figure that was estimated on fewer visitors). Thus when reading about visitor numbers and spending keep in mind that there’s a lot of unknowns and the projections of impacts are very rarely (if ever) correct.

And what of the costs of hosting an event?

A report written by the Budget and Legislative Analyst for the City and County of San Francisco Board of Supervisors in November 2010 [...] determined that the hosting of the current America’s Cup regatta would result in a net cost to the city and county of US$42.1m. In other words, the revenues accruing to the city were in all likelihood more than offset by the costs to the city. This report was based on the initial $1.4b economic impact figures, and was based on the early assumptions of large numbers of syndicates competing to challenge for the Cup. Modifying this to what we have seen unfold recently, fewer syndicates meant lower event-related costs, but also meant lower revenues, so it would be fair to assume that there’d still be a substantial shortfall in the local government coffers as a result of the event. One issue that has been prevalent in San Francisco is the issue of private funding of the event. The bottom line is that the city is on the hook for any shortfall of private funding, which if eventuated would increase the cost to the city of San Francisco (i.e. the taxpayers).

Another question to ask is What can past experience teach us of the legacy of the New Zealand hosting of the America's Cup regattas in 1999/2000 and 2002/2003?

The legacy effect of events is the new buzzword in event evaluation, and is largely unknown as it occurs at some stage in the future, which is of course yet to unfold. I will have to go back to the original economic impact analyses done for the two regattas hosted in Auckland to examine the extent to which legacy played a role in these figures, but one thing in particular strikes me as ironic about the legacy of the 1999-2003 New Zealand America's Cup regattas - and it is the investment in the infrastructure associated with the event. The Viaduct Basin underwent a major transformation to host the two regattas, and Auckland now faces the prospect of developing a new location for the event, with the Viaduct reportedly out of commission for hosting syndicates in a future regatta. Some might say that the development of a new base for the event is a benefit - one which comes at a cost (likely to be borne by Auckland ratepayers) - but in actual fact is already part of a pre-existing development plan of the Auckland waterfront - one which will gain significant traction should New Zealand win the America's Cup off San Francisco in the coming days. As such, the development of a new base is a classic case of a future investment brought forward. As such, calling it a benefit associated with hosting the America's Cup is a little misleading. Then again, is it not unfair to label one legacy of the America's Cup regattas in Auckland as a cost, not a benefit, in the form of further taxpayer funding? After all, the past two unsuccessful America's Cup campaigns have received central government funding. A future defense, should things go to plan, has already reportedly drawn support from the Prime Minister towards some contribution from the public purse. This is all part of a legacy, is it not?

So New Zealand's taxpayers could be on the hook for many millions of dollars and if you live in Auckland you will also be on the hook as a ratepayer, so you get a double whammy.

What is the takeaway message from all of this? To my mind the basic point is that you should approach any report on the economic impact of the America's Cup with great scepticism and trepidation.

Economists versus the cup 2 (updated)

Previously I blogged on comments made by three economists on the economic benefits, or otherwise, of having the America's Cup defence in Auckland. Now JamesZ at the TVHE blog has also commented on the three economist's views. James tells us that The America’s Cup is not about the money. Well actually yes it is. Given the amount of money that central and local government will waste on the defence and given there is no economic justification for that spending, it really is about the money.

At one point James writes,

It’s a bit like going on holiday: it’s only a bad use of money if you don’t end up enjoying the break. The financial return is hugely negative but that’s fairly irrelevant when one’s enjoying a hike in the French Alps or lounging on the beach in Mallorca. What we really need to ask is whether the public gets sufficient enjoyment from hosting events like the America’s Cup.

To say the financial return to you holiday is hugely negative is to say the financial return to all consumption is hugely negative. Of course it is, we spend the money to gain the utility from the consumption. Going on a holiday of your choosing is about utility maximisation. You are spending your money to purchase a consumption bundle of your choosing. Having the America's Cup here is more like someone telling you that you will go on holiday, whether you want to go or not, telling you where you will go, whether or not you want to go there, and telling you how long your holiday will be, no matter how long you want it to be. And to cap it all off,  they then make you pay for it! A forced holiday isn't about maximising your utility, you get the consumption bundle whether you want it or not. You suffer a hugely negative financial return with no guarantee that you get any utility from it at all. Someone else's utility is being maximised and you, as a ratepayer and/or taxpayer, get to pay for it.

James continues,

The obvious answer is ‘yes’, nations compete to host events and have done for as long as historical records exist. Hosting is incredibly prestigious and competitive, which suggests that there is no shortage of benefit from hosting. It isn't as if the legacy of hosting large events is unknown, yet cities and nations continue to bid huge sums for them despite that.

There may be benefits to hosting such events but those benefits go to a very small group who pay very, very, little of the costs of hosting. The people who make the decisions about hosting don't pay the bill. That they may well make an inefficient decision is hardly surprising given this.

James ends by saying,

So long as people know what they’re paying for the thrill, we shouldn’t worry too much about the money.

But if you want to host on the grounds that some people will get positive utility from the "thrill" of hosting then you have to net out the negative utility that other people suffer from hosting. You must consider both sides of the ledger. It's the net-thrill that matters.

Update: Brennan McDonald makes the sensible point that If We Host The America’s Cup, Kickstarter Financing Is The Only Responsible Choice

Economists versus the cup

As Team New Zealand moves ever closer to winning the America's Cup we are beginning to hear the mindless, uninformed, self serving bs about the wonders having the cup in Auckland will do for the economy. Over a half a billion dollars in financial gain to the country, we are told. Oh what joy! Or is it?

A couple of reporters at the stuff.co.nz website asked a few economists what they thought of all this talk.

Don't believe it, says Shane Vuletich of Covic, specialist in economic evaluation of tourism and major events, who warns numbers already being used are far too large.

"Politicians are usually pleased when a big number comes along and when an independent company says that, they are not in a position to doubt it," he says.

Last year's Volvo Ocean Race was wildly over-sold.

People were counting the dollars spent by everybody who went through the Viaduct village despite the fact that 98 per cent of them would have been there any way.

"You have got to demonstrate that the money is caused by the event, that it would not be present without the event. Measurement is really critical."

Some sectors of a community want to use the big numbers just so they get the event, but ratepayers and taxpayers have to pay for it.

Vuletich says the spectator visitor benefits of the America's Cup will be "reasonably modest". The bigger return will come off teams coming to compete.

"I would say take a deep breath. Don't get caught up in the old numbers, which are a gross overstatement, and let's take a fresh look and build a business case accordingly."

He says money payback would be well down on his list of cup benefits anyway. Feel-good matters more.

It could turnout to be bloody expensive "feel-good", however. The stuff article continues,

Institute of Economic Research economist Shamubeel Eaqub says the economic benefits of a cup regatta in 2017 would be based on "over-hyped studies that are proven to be absolute b........ after the fact."

Post-event evaluations often show a loss in gross domestic product from large sports events.

"There are risks money will be lost, not gained," Eaqub says.

"There are legacy benefits, of course but for Auckland it just brings forward infrastructure projects that were going to happen anyway."

and Sam Richardson, of Fair Play and Forward Passes fame, is reported as saying,

[ ... ] the San Francisco regatta under- delivered in terms of both tourist numbers and spending.

"These figures come from consultant reports that commonly overestimate the positive aspects, like visitor numbers, understate or omit the event's associated costs and as such produce numbers that are optimistic at best."

In summary, don't believe the numbers that you are sure to hear being trotted out about the economic benefits that will flow from having the cup in Auckland and especially keep in mind that there is no economic justification for government, local or central, money being put into a defence of the cup.