Sam Warburton on the economic effects of the America's Cup

Warburton was interviewed on Radio New Zealand's Morning Report.

The Auckland venue for New Zealand's Americas Cup defence was agreed this week and will go to Auckland Council for sign off tomorrow. Yesterday, when I spoke to the Economic Development Minister David Parker about the sign off for the America's Cup village he was talking up the economic dividend the required investment of over two hundred million dollars of public money will yield. New Zealand Initiative economist Sam Warburton heard our interview yesterday and is unconvinced. He's in our Wellington studio.

Economic costs of hosting the Olympics and World Cup

In this audio economist Andrew Zimbalist, a professor of economics at Smith College and the author of Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup (Brookings Institution Press, 2015), reveals the real economic costs and benefits of hosting mega-sporting events and discusses the prospects of FIFA following the corruption scandal.

Private funding of the Parker fight

Related to my previous posting on the withdraw of public funding for the Parker fight in Auckland comes this news from the New Zealand Herald on pay-for-view prices for the event.

Pay-per-view prices for Joseph Parker's heavyweight world title fight are set to go sky high, with punters and pubs expected to cop the fallout from Auckland Council's refusal on ratepayer funding.

The Herald on Sunday understands from a well-placed source that the pay-TV price for Parker's fight against Andy Ruiz Jr next month could now be set between $70 and $100.

The first point to make here is that this is one way for the event to be paid for by those who want to see the event.

The Herald also states,

The expected pay-TV spike comes after Auckland Council's events and economic development arm, Ateed, threw in the towel on funding the fight with ratepayer money.

Now for the bit I don't get about all of this, Why does the Herald journalist think that the pay-TV price has anything to do with public funding? I mean if the profit maximising price for screening the event is around $70 to $100 without public funding then why isn't this the profit maximising price with public funding?

If market conditions are such that the promoter can charge in the $70-$100 range for the fight when there is no public funding then those same conditions mean he can charge the same even with public funding. This basically just turns the public funding into a rent for the promoter.

It's a strange old world: good sense from JAFAland.

This bit of good news comes from nzherald.co.nz.

Just as they appeared set to announce Parker would fight Andy Ruiz Jr for the WBO title in the city on December 10, Auckland council's events arm Ateed have withdrawn their support for the event, leaving it in a state of limbo.

Ateed Chief Executive Brett O'Riley confirmed last night: "Ateed will not be providing financial sponsorship to Duco to stage the Parker/Ruiz fight."

and

O'Riley said it was not clear if staging the fight in Auckland would have "the desired outcomes of Auckland's Major Events Strategy" so the decision was made "not provide financial sponsorship for the fight."

It is understood Ateed's contribution was going to be "hundreds of thousands of dollars".

Looks like the ratepayers of Auckland have dodged a rather large bullet here.

From another Herald article comes this comment from Howick councillor Dick Quax who is opposed "throwing public money at a private event",

"Did anyone go to Zaire following the rumble in the jungle between George Foreman and Muhammad Ali. I don't think so," said Quax in a reference to the perceived benefits for Auckland.

Questions have to be asked as to whether the fight is a goer without some form of public money and if it isn't is there a justification for staging it in New Zealand. If there are real economic benefits to the fight being in Auckland why can't private funding be found to keep the fight there? If the private sector are not welling to back the event then does this tell us they really don't think they can capture (now or in the future) enough of the supposed benefits to justify backing the fight? Does this, in turn, suggest that the benefits aren't there? In which case why have the fight here?

Sam Richardson weighs in on economics of Parker bout

From Morning Report this morning. A specialist in sports event economics, Dr Sam Richardson of Massey University, says the economic argument for Duco to get Major Events funding for Joseph Parker's forthcoming world heavyweight boxing fight is "not particularly strong".

See here for the interview.

Funding the fight ... low blow or a knockout?

That question is asked by Sam Richardson at his Fair Play and Forward Passes blog. His view is much like that of Eric Crampton (see previous posting).

Sam writes

I can only really add to this discussion with a few points of my own:

• A matter of a week or so ago, Auckland was widely considered the host. Now we are told that there is only a 20-30 percent chance of the fight being staged in Auckland. What is the situation that has caused this uncertainty? This, to me, is the key question. Why is the government funding needed? Could it be that promoters in the US are proposing to spend more on attracting the fight than Duco, and are therefore being considered as a safer (read: more lucrative to the WBO) bet than hosting a title fight here? Government funding has been used the world over to try to trump others in hosting events ... with questionable returns.

• Indeed, there is little to no evidence from the independent research looking at the realised economic impacts of mega sporting events that said events will generate tangible economic impacts. The winners from such arrangements tend to be the governing sporting bodies, followed by the event organisers - with taxpayers a distant last.

• What are the benefits that New Zealanders will enjoy from hosting the fight? Benefits will accrue largely to those who watch the fight - and you can bet that it will not be anywhere in the plan for such an event to be broadcast live free-to-air. Part of what makes the fight commercially lucrative is the ability of broadcasters to charge for people to watch it. If government funding was contingent on it being broadcast free-to-air, it would undermine the commercial viability of hosting it here. So it should be a given that people will have to pay to watch the fight with or without government funding. These prices will be much more expensive than any previous fight given its title status, so one would reasonably expect the promoters to capture a much greater share of the event's benefits in the form of ticket sales and pay-per-view sales from Sky. 

• The economic benefits are (unfortunately) synonymous with economic impacts - which doesn't help the case for the fight to be publicly funded. If you look at past events funded by the Major Events Development Fund (MEDF), they've tended to be events with longer than a single day's duration - which means that their ability to attract visitors and spending is much greater than a one-day event. Any economic impacts from the event are also highly likely to be concentrated in Auckland - hence there may well be a stronger case for Auckland Council (via ATEED, one assumes) to be a major backer of the event. I understand that ATEED is already involved, but it doesn't appear to be enough to get the deal over the line. 

• There is also a matter of consistency and transparency regarding the treatment of the application for the MEDF - any (perceived or otherwise) favouritism will not go down well with people who have missed out in the application stage. One assumes that the application will include an estimate of economic impacts attributable to the event? To support these impacts, it is useful to consider what would happen in Auckland (and New Zealand) if the event did not take place. In most cases, projections of economic impact assume that the counterfactual is that there would be no spending at all in the absence of the event - an assumption that overstates the likely economic impact.

• One must also factor in the opportunity cost of public funding into such an equation. Scarce government funds could be spent elsewhere - and no doubt there are plenty of alternative uses for an as-yet unknown amount of public money that may generate greater longer-term impacts than funding a one-off event like this.

• From what we have heard (at least via the media) the good people at Duco are pointing to the feel-good factor as being an important reason why we should consider funding the fight. If so, ask yourself this - will you feel any worse than you already do if the fight was to go offshore? And if so, what is this "feel-bad" worth to you? In several studies from overseas that have attempted to quantify (among other things) the feel-good effect, intangible benefits are almost always smaller than the economic impacts and are certainly not large enough on their own or in tandem with tangible benefits to justify subsidies given to sports events, facilities or franchises. 

• And what about the precedent a favourable fast-tracked decision would set? 

The good news is that Sam is blogging again. There are many sports related questions that need good economic analysis.

You must be punch-drunk if you support public funding for a boxing match

There is much stupid talked when it comes to taxpayer funding of sporting events. But sometimes some good sense is also talked. One such example is Eric Crampton's discussion of the idea that the government should put taxpayer money put into Joseph Parker's next fight.

At his Offsetting Behaviour blog Eric offers a quick summary of what he said on Jim Mora's Panel at Radio NZ yesterday (Eric comes in at approx 2:45). He writes:

I covered a few points:

1. A boxing match is a commercial endeavour. If investors thought it would be more profitable here than it would be hosted elsewhere, they’d be putting in private money in anticipation of that return. 
2. Government funding to bring it here then only makes sense if:
   1. It would not have happened here unless it were funded (likely); but more critically,
   2. There is a real benefit to New Zealand in hosting the match here that would not be enjoyed were it hosted elsewhere; and, further,
   3. That this benefit, relative to the government’s outlay, is bigger than the government can get from spending the money elsewhere, or from leaving it in taxpayers’ pockets in the first place.
3. Governments love subsidising big sporting events. They talk a lot about the extra spending that tourists coming to events bring with them, but the kinds of studies backing these things up are usually pretty flawed. 
   1. First, they’ll count spending by visitors rather than profits on spending by visitors. Where there are costs involved in providing services to visitors, those need to be brought into the analysis.
   2. Second, they’ll assume that the visits would not have happened but for the event, and that the visits that do happen do not displace other visits. Both of these are often wrong. People who had always planned on visiting New Zealand and who like the event might shift the timing of a visit to coincide with the event. And other people who could only visit New Zealand during the time of the event might be put off: hotels get booked out for big events, for example, and rental caravans can be hard to find during things like the Lions’ tour. Just looking at the spike of visits during a big international event isn’t enough. You also have to account for displacement.
   3. Finally, none of this much enters into the picture for a boxing match which would draw fewer tourists in than a big sporting tour anyway.
4. Minister Joyce noted that he’d hope that the government might be paid back if the match turned a profit. If I were operating under that kind of contract, I’d be pretty sure to pay myself and staff bonuses big enough to make sure there weren’t profits, or to buy my supplies from a related company at inflated prices to make sure there weren’t profits to pay back. But maybe the companies with whom the government strikes these kinds of deals are more publicly spirited.

What we have to keep in mind is that the economics of funding sporting events, be they boxing matches, the rugby world cup, the Olympics, the America's Cup or whatever, are generally bad. The returns from such funding do not justify spending taxpayer money on such events, no matter what some ministers may claim.

Well done John Minto and Lianne Dalziel

Yes you read that right! Even Minto and Dalziel can be right sometimes.

Minto and Dalziel have come out against a new sports stadium in Christchurch. This morning The Press is reporting that

Minto questioned whether it [the stadium] was needed, while Dalziel labelled it as "waste of time".

According to The Press Jerry Brownlee has said the stadium is on hold until the city council clearly commits to funding it. Well all we need now is for all the other mayoral candidates to back Minto and Dalziel's position. The sooner the council refuses to fund the stadium the better.

As I have argued many times on this blog the economics of sports stadiums are just awful and its good to see some good sense from a couple of our mayoral candidates.

NZ as Olympic host? No!

For some very strange reason Laura McQuillan, at Stuff, discuses the idea of New Zealand hosting the Olympics. So much stupid here.

Nothing says "we're a world-class city" like hosting the Olympic Games - but could New Zealand ever do the honours?

Pulling off the world's largest sporting event - whether the Summer or Winter Games - is a lot of hard slog that brings mountains of debt, international criticism, and often not a lot of benefit.

But International Olympic Committee boss Thomas Bach reckons New Zealand has what it takes to play host.

In anticipation of that day arriving, here's a look at the New Zealand cities and councils best equipped to host the Olympics.

The most important thing in the above quote is "often not a lot of benefit" bit. The research on hosting events like the Olympics tells us the costs are much greater than the benefits.

In a recent issue of the Journal of Economic Perspectives (Vol. 30, Issue 2 Spring 2016) Robert A. Baade and Victor A. Matheson discuss Going for the Gold: The Economics of the Olympics.

The abstract reads,

In this paper, we explore the costs and benefits of hosting the Olympic Games. On the cost side, there are three major categories: general infrastructure such as transportation and housing to accommodate athletes and fans; specific sports infrastructure required for competition venues; and operational costs, including general administration as well as the opening and closing ceremony and security. Three major categories of benefits also exist: the short-run benefits of tourist spending during the Games; the long-run benefits or the "Olympic legacy" which might include improvements in infrastructure and increased trade, foreign investment, or tourism after the Games; and intangible benefits such as the "feel-good effect" or civic pride. Each of these costs and benefits will be addressed in turn, but the overwhelming conclusion is that in most cases the Olympics are a money-losing proposition for host cities; they result in positive net benefits only under very specific and unusual circumstances. Furthermore, the cost–benefit proposition is worse for cities in developing countries than for those in the industrialized world. In closing, we discuss why what looks like an increasingly poor investment decision on the part of cities still receives significant bidding interest and whether changes in the bidding process of the International Olympic Committee (IOC) will improve outcomes for potential hosts. (Emphasis added)

So no, New Zealand should never even think about doing something as stupid as trying to host the Olympics.

The Olympic Games are a human rights disaster

So writes Ilya Somin at the FEE website. The Olympic Games cause a great amount of harm to many people in the host city, in particular to the poor and politically weak.

Host cities routinely lose enormous amounts of money on the games, and end up with decaying stadiums that have little or no value. Even worse, governments often forcibly displace large numbers of people from their homes and businesses in order to make room for Olympic venues. Over one million people lost their homes for the 2008 Beijing games alone. Brazil has similarly evicted large numbers of people for the currently ongoing Rio Olympics, and even more to build stadiums for the 2014 World Cup. Most of those evicted are the poor and people lacking in political power.

The Olympics have also often become propaganda showcases for authoritarian regimes, as happened with the 2008 Olympics in China, and the 2014 Winter Olympics in Sochi, Russia. In an earlier era, the the same problem arose on an even more egregious scale with the 1936 Olympics in Nazi Berlin, and the 1980 games in the Soviet Union.

But, Somin goes on to argue, none of this has to happen.

We can reform the Olympics to put an end to it. The forcible evictions are perhaps the easiest problem to fix. The International Olympic Committee and the international community more generally should insist that organizers commit to building the necessary venues without forcibly displacing residents. If a city cannot or will not do that, it should not be allowed to host the games. No sports event is worth the forcible displacement of innocent people from their homes.

We can also put an end to the economic harm caused by the Olympics by insisting on private funding, instead of government subsidies. The 1984 Los Angeles Olympics, almost the only modern games to avoid massive losses, did so by relying on almost entirely on private funds. Government subsidies for sports facilities have a strong tendency to cause more economic harm than benefit. Private investors have stronger incentives to use resources efficiently, since their own money is at stake. And if they do err, at least the taxpayers won’t be left holding the bag.

Finally, we can end the use of the games as a propaganda tool for repressive regimes by limiting host rights to liberal democracies. If the IOC again awards the games to authoritarian states, the West should boycott. The mere threat of a large-scale boycott might well disincentivize such regimes from trying to host in the first place, and prevent the IOC from awarding them the games if they do bid.

The problem I see with Somin's reforms is that they would result in the IOC getting a lots less money from the games and that is something they will fight to the bitter end to avoid. Many of the problems we see with organisations like Fifa are present in the IOC and until there is genuine reform of the IOC itself you will not see any changes to the Olympics. Until then money will talk and the poor and powerless will pay the price.

More on the economics of the Olympics

This article on the economics of the Olympics is from the Project Syndicate web page and is by Andrew Zimbalist who is Professor of Economics at Smith College and the author of Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup.

Zimbalist writes,

According to Olympic legend, hosting the Games is an economic boon for the chosen city and country. In reality, the Games are more often a boondoggle, as Rio de Janeiro is finding out.

First, consider how the games are awarded to a host city. The International Olympic Committee (IOC), an unregulated global monopoly, conducts a biannual auction whereby the world’s cities compete against one another to prove their suitability. Business executives – often from the construction industry – who stand to gain from the Games’ preparation usually lead a prospective city’s bidding process. Among other things, cities will offer lavish sporting venues, ostentatious ceremonial spaces, newly built transportation networks, luxurious accommodations for athletes, and media and broadcasting centers.

The outcome of this process is predictable: winning cities usually overbid. The cost of hosting the Summer Olympics these days runs from $15 billion to $20 billion, including venue construction and renovation, operations and security, and additional infrastructure. The total revenue for the host city from its share of international television contracts (roughly 25%, with the other 75% going to the IOC), international and domestic sponsorships, ticket sales, and memorabilia is $3.5-4.5 billion. In other words, costs comfortably exceed revenues by $10 billion or more.

Those vying for their city to host the Games often argue that any short-term deficit will turn into long-term gain, because tourism, foreign investment, and trade will grow, to say nothing of improved national morale. Again, the empirical evidence does not support this extravagant claim.

But what about investments in infrastructure?

One area where some host cities – but not all – can actually realize long-term gains is in infrastructure spending. In Rio’s case, one could argue that the city will benefit from improvements to its international airport and downtown port. But this is not a valid reason to become a host city; it is merely a consolation prize. A billion dollars of productive infrastructure development does little to make up for the other $19 billion spent on the Games, which will not improve the city for most of its residents or regular visitors.

Consider the $2.9 billion subway line (originally budgeted at $1.6 billion) connecting the Games’ beachside event space to Barra da Tijuca, a wealthy suburb ten miles away. This new infrastructure will boost property values in Barra da Tijuca, while doing nothing to improve Rio’s horrendous street traffic. The bulk of Rio’s workers living north and west of downtown will have just as difficult a commute as ever.

Examples like this abound. The city built a new golf course on the protected wetlands of the Marapendi Natural Reserve, which will degrade the ecosystem and consume vast amounts of water – a preciously scarce resource in Rio. It also built bus lanes that run between Olympic venues, which will ease travel for IOC executives but only further congest the city’s now-narrower roadways for everyone else.

What of the human cost of the games?

Along with pointless and disruptive infrastructure, the Rio Games have exacted a human cost. To make room for the 32 sport venues, the athletes’ Olympic Village, the broadcasting and media center, the ceremonial green space, and to beautify the surrounding landscape, the Rio government has evicted more than 77,000 residents from shantytowns or favelas since 2009, the year the city was awarded the Games.

Overall what are the dangers of hosting the games for different cities? If you look at less developed cities they often don't have the necessary infrastructure and thus must spend more to meet the IOC’s transportation, communications, and hospitality requirements. For more developed cities they may already have the infrastructure, but not necessarily the land, and risk disrupting thriving industries to bring the Games to fruition. So what we see are large costs to hosting the games and benefits that, usually, just don't compensate for those costs.

Economic benefits from mega-events like the Olympics are often overstated

This title will not come as a great surprise to many people. But its still worth reminding everyone of it. Especially as we have something as stupid as the Olympics going on right now.

At the American Economic Association website Tim Hyde writes on about a paper in the recent Spring issue (vol. 30, no. 2, 2016) of the Journal of Economic Perspectives which breaks down the costs and benefits of hosting the Olympic Games and explains why some of the perceived economic blessings of the Olympics are mostly wishful thinking.

Hyde opens by saying,

In Going for the Gold: The Economics of the Olympics (PDF), authors Robert Baade and Victor Matheson consult estimates from academic, public, and media sources on the costs and benefits of hosting the Games. As with any mega-event, costs and benefits can be hard to estimate, but the general story is clear: for most modern Olympics, the costs have far outstripped the benefits.

The direct costs of hosting the Games are probably easier to estimate and tabulate. First there is the non-trivial cost of mounting a bid, which can run into the hundreds of millions of dollars for planning, marketing, and architectural renderings. During this stage, candidate cities sign on to build future amenities in an attempt to impress the International Olympic Committee (IOC) and win the Games.

This might mean committing to a signature architectural marvel to host the Opening Ceremonies or a major upgrade to public transit to accommodate the once-in-a-lifetime demand surge that will result. A minimum of 40,000 hotel rooms and additional housing for 15,000 athletes and officials is required for the Summer Olympics, so often the bids must include plans for new hotel capacity and dormitories.

The IOC will tend to favor the city that makes the most lavish offer of gleaming new facilities and infrastructure improvements, so the bidding process can give way to a “winner’s curse” effect. The city that wins tends to be the one that overestimated the value of hosting the Olympics the most, and hence the one that went furthest overboard in their bid.

Once the Olympics have been assigned, the host city must typically spend billions of dollars building transit and airport improvements, reaching the requisite hotel capacity, and constructing specialized athletic facilities like a swimming facility, a velodrome, or a larger stadium that can accommodate an Olympic track. Disentangling these costs from planned infrastructure improvements that would have happened even in the absence of the Olympics can be difficult, but the best estimates put the cost of hosting at between $5 and $15 billion for most recent events.

Hyde continues by looking at the benefits of the games.

The costs are clear, but the benefits of hosting the Olympics can be substantial as well, even if they are usually overstated by overzealous city officials or self-interested boosters. Host cities receive revenue from ticketing and sponsorships, and local organizing committees receive a share of the proceeds from the sale of television broadcast rights. These benefits are easy to quantify, but don’t add up to a significant fraction of the hosting costs in most cases. Vancouver 2010 produced about $1.5 billion in direct revenues and London 2012 about $3.3 billion; in each case, far less than the costs.

The rest of the benefits are more nebulous. Proponents tout supposed benefits ranging from the economic stimulus provided by construction demand, to increased tourism during and after the games thanks to a worldwide advertising campaign, to increased foreign investment and better trade connections, to an improved sports infrastructure for future generations (this last benefit is most easily debunked). The authors argue that most of these benefits tend to be less than hoped, or only appear in specific situations.

Infrastructure improvements can provide a form of fiscal stimulus to a city with a slack labor market, but if the city’s economy is near full employment anyway in the years leading up to the Games, the extra construction jobs are more likely to come at the expense of other sectors.

Tourism, meanwhile, can be crowded out by the hustle and bustle of the Olympics themselves – Beijing and London both saw fewer international visitors during the months they were hosting the Olympics in 2008 and 2012 compared to the same months in previous years, and Utah ski resorts noticed a dip in traffic during the 2001-02 ski season that coincided with the Salt Lake City games.

A few cities have had success generating future tourism business with the Olympics, notably Barcelona in 1992 which used the games to emerge from the shadow of nearby Madrid, another major tourist destination. Likewise, the Utah ski economy saw a boost in the years after 2002. But many other host cities like Calgary (1984) and Lillehammer (1994) have seen limited increases in tourism after their games.

One study did find that countries hosting the Olympics see a 20% increase in export trade in the years after hosting, relative to similarly-situated countries, which might go a long way to justifying the economic expense of hosting the event. But the same study found similar gains for countries where cities unsuccessfully bid for the Olympics. The authors suggest that the very act of bidding for the Olympic Games suggests a government is looking to increase international connections and willing to make infrastructure investments, which can attract foreign interest.

It is also likely that the types of cities that decide to mount bids are on an economic upswing and poised for growth, and actually winning that bid might be more likely to stunt that growth rather than accelerate it

All of this does raise one interesting, and important question: if the balance of evidence is that the economic costs of hosting the Olympics far outpace the benefits, so why do cities bother to bid at all? Hyde writes,

One possibility is civic pride or the desire to affirm a city’s status as a “world city.”

But this does look like very expensive warm fuzzies. Hyde goes on to say,

These benefits are hard to translate into economic terms, but two careful studies used contingent valuation survey methods (similar to the techniques economists use to see how much people value maintaining the rainforests or keeping a species from extinction) to measure this benefit in the runup to the 2012 Olympics in London. They found that people across the United Kingdom collectively valued the opportunity to host the Olympics at about £2 billion, still well short of the cost of hosting.

Hyde concludes by noting,

This problem may end up solving itself if enough cities wise up and stop incorporating such grandiose plans into their bids. After a streak of cost overruns for Olympics during the 1970s, interest in hosting the Olympics waned and Los Angeles was the only bidder for the 1984 Games. The city used its leverage to insist on using existing facilities rather than building new ones and adopted a cost-conscious approach that maximized sponsorship and TV revenues. The result was one of the few profitable games in history – and a model that future host cities might want to emulate.

But perhaps the most interesting observation made by Hide is this one:

Mounting evidence showing that hosting the Games is a costly proposition for host cities seems to have turned voters across the world against the idea. A popular outcry derailed the Boston 2024 bid, and city officials scuttled Hamburg’s 2024 bid after losing a referendum there.

Increasingly, it seems like cities in liberal democracies are not willing to bid for the games: the competition for the 2022 Winter Olympics was reduced to two cities in autocratic regimes after four European cities dropped out. Not coincidentally, the authors note, the two recent Olympics hosted in countries with less accountable governments were major outliers in terms of cost.

The economics of the Olympics: in short, not good

In the latest issue of the Journal of Economic Perspectives (Vol. 30, Issue 2 Spring 2016) Robert A. Baade and Victor A. Matheson discuss Going for the Gold: The Economics of the Olympics.

The abstract reads,

In this paper, we explore the costs and benefits of hosting the Olympic Games. On the cost side, there are three major categories: general infrastructure such as transportation and housing to accommodate athletes and fans; specific sports infrastructure required for competition venues; and operational costs, including general administration as well as the opening and closing ceremony and security. Three major categories of benefits also exist: the short-run benefits of tourist spending during the Games; the long-run benefits or the "Olympic legacy" which might include improvements in infrastructure and increased trade, foreign investment, or tourism after the Games; and intangible benefits such as the "feel-good effect" or civic pride. Each of these costs and benefits will be addressed in turn, but the overwhelming conclusion is that in most cases the Olympics are a money-losing proposition for host cities; they result in positive net benefits only under very specific and unusual circumstances. Furthermore, the cost–benefit proposition is worse for cities in developing countries than for those in the industrialized world. In closing, we discuss why what looks like an increasingly poor investment decision on the part of cities still receives significant bidding interest and whether changes in the bidding process of the International Olympic Committee (IOC) will improve outcomes for potential hosts. (Emphasis added)

I would guess that this conclusion holds true for most large sporting events, which does raise the question of why therefore do so many cities and countries do the stupid thing and host such events?

Brazil and tourism during the 2014 World Cup

Victor Matheson at the Sports Economist blog writes,

According to a statement by Aloisio Mercadante, Brazilian president Dilma Rousseff’s chief of staff, “We lost the trophy, but Brazil won the World Cup. He said that according to figures released this week by Brazil’s federal government, the World Cup was a triumph for the country’s transportation and tourism industries.

As reported by CNN, “according to government figures, 1 million foreign tourists visited Brazil during the month-long event, far exceeding its pre-Cup projection of 600,000 visitors coming to the country from abroad. About 3 million Brazilians traveled around the country during the event, just short of the expected 3.1 million.”

The devil here is in the details and whether when we get to see the details the numbers quoted hold up. One would be surprised if they did since as Matheson goes on to say,

If this is true, this would be unprecedented increase in tourism due to a mega-event. Brazil only welcomed 342,000 foreign visitors in total in June of 2012, so an increase up to 1,000,000 would be huge if the data holds up. By comparison, South Africa experienced about a 200,000 increase in international visitors during the 2010 World Cup, Germany experienced an increase of 700,000 overnight stays in 2006, and no effects on tourism could be identified for France in 2008. For the Summer Olympics in Beijing and London, overall travel to Beijing and the UK actually fell during the month of the games compared to the previous year.

Matheson also notes that while Brazilian government has been quick to announce their news, they have been much less forthcoming with the actual source data. I wonder why. Matheson then points out that the annual tourism data for Brazil is only available in a form that allows decent comparisons to past periods up to 2012 and so far the World Cup data is only available in limited press releases. Time will tell if the government's enthusiasm will last. But I'm not betting on it.

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.

Olympics don't pay

The fact that large sporting event don't pay has been mentioned on this blog, and other blogs, many times. Now British economist John Kay has joined those of us who have doubts about the economics of large sporting events with this piece on the costs of the 2012 London Olympics.

Kay writes that the principal relevant facts are these:

The first detailed specification of what was needed for London to host the games was drawn up in 2002 by Arup. The report by the engineering and planning consultancy put the cost at £1.8bn, much of it to be privately financed. An extended assessment was then commissioned by the Department of Culture, Media and Sport from PwC. The financial consultancy’s 2003 report estimated the total cost at £3.1bn, requiring a public subsidy of £1.3bn. The balance would be recovered from the private sector and from asset sales after the games. According to PwC’s risk assessment, the probability that the taxpayer would need to provide as much as £2bn was less than 5 per cent.

and

The budget had by 2007 increased to about £6.5bn. At Treasury insistence, a contingency allowance, mostly unspecific, of £2.8bn – more than the total original projected cost – was added. The costs of land acquisition and of the Olympic Village were mostly excluded in the belief that they would be recovered from property sales after the event.

But what, you may ask, of the claims that the games “within budget”?

The basis of the claim that the games came in “within budget” seems to be that a small part – currently £300m-£400m – of that £2.8bn contingency remains unspent. That was achieved, however, by excluding a number of additional unbudgeted expenditures from the calculation, as the National Audit Office has highlighted. There is likely to be little, if any, net recovery of the further costs of land and housing, which were due to be recouped from property sales.

The costs were grossly and persistently underestimated, and the financial contributions anticipated from private sources overestimated by very large amounts. Every year, to the present day, the expected cost rose and the likely revenues diminished. The cost of the games to public funds has proved to be about 10 times the original estimate.

Kay continues,

There is a halo effect; the sporting success of the Olympics fosters the mistaken belief that they were an economic success. Papers recently produced by government on the “economic benefits” must be an embarrassment to the many good people of the Government Economic Service, conflating incommensurable monetary amounts and confusing costs with benefits. At the same time, a curious puritanism requires politicians to pretend activities intended to make us feel good about ourselves are justified by their contribution to “the economy”. The Olympiad was a good party, which cost the British population about £200 per head.

Kay then makes the important point that false accounts of the past prevent us learning lessons for the future, of which, he argues, there are many.

The Olympics remind us that enthusiasts typically understate costs and overstate benefits. Consultants win work by pleasing clients, and they rarely please clients by pouring cold water on their pet schemes. We should waste no more public money on risk simulations such as those in the PwC report; the outcome in this case was one of these supposedly statistically impossible events that seem nevertheless to occur on a daily basis. Establishing an allowance for “optimism bias” is realistic, but offers little incentive to make careful projections in the first place. Money put in a budget for general contingencies is not money you are likely to see again.

Just when will governments, and taxpayers, learn that big sporting events, be it the Olympics or the rugby world cup or the America's cup, don't make economic sense. And thus taxpayer money spent on them is taxpayer money wasted.

Economic impact of the rugby world cup

I have commented on work by Sam Richardson on the economic impact of the rugby world cup before: here, here and here. Richardson is now blogging at Fair Play and Forward Passes and is writing more on benefits of the world cup. Back in September Richardson noted,

And while we are on the economic impact figure, there is a wealth of research that has shown that large sporting events rarely generate anywhere near the economic impact that is promised. Even if the economic impact of $411m actually materialises (I'd say it is unlikely, but let's say it did), it would add no more than 0.2% to the nation's Gross Domestic Project. That is not a misprint. It is a very, very small impact. Surprising, really, that it gets the coverage it has received thus far.

and more recently he writes on the spending that has taken place during the RWC,

Paymark, who cover about 75% of all credit card transactions in the country, have found that spending on cards during the tournament "was up by $195 million." I don't know precisely what this phrase means, but I assume it means that spending is up by $195m on last year's figures for the same period. Of course, the first Christchurch earthquakes was during this period last year, so spending was particularly depressed at that time. It stands to reason that domestic spending was likely to rebound at some stage - perhaps the tournament and the performances of the All Blacks were a catalyst?

Of that $195m, the amount spent by tourists was $70m up on the same period last year. What, only $70m? Yes, $70m is 10% of $700m. or $700m with the decimal point moved one place to the left. Obviously it is early days, and this is by no means a complete measure of spending, but it is pretty clear that the impact of spending by overseas visitors would appear to be quite a bit less than initially projected. Of course, projected economic impacts were gross, not net, which are the figures of particular interest.

Richardson is not the only economist who has doubts about the economic impact of the RWC. Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research, also isn't too excited about its economic impact,

A leading economist has labelled the Rugby World Cup's effect on economic growth a "red herring", dismissing expectations that there will be a widespread boost as "hopium".

And while tourists will increase spending, business was being displaced from the main centres, and he argues that New Zealanders were spending less overall

The effect would be "minuscule", he said . "From a GDP point of view it should be marginally positive, but we're talking 0.1 per cent – margin-of-error stuff."