Monday, 13 May 2013

SkyCity revisited

Auckland is to get a large new convention centre, to be built and run by Sky City, Auckland's casino.

I chatted with Radio New Zealand's panel about the plan this afternoon.

Really, not a lot has changed from when this was first proposed a while back.

We should think of this as two separate deals.

First, the government is auctioning off some gambling concessions. SkyCity has bought the right to have an additional 230 pokie machines, 40 gaming tables, assorted other gambling concessions, and, possibly most importantly, a guarantee that if some future government reneges on the deal by banning gambling or otherwise eroding the benefits provided to SkyCity under the deal, they'll be compensated. Now suppose that we opened that whole thing up to a general auction. People would then bid for those rights; the highest bid would approximate the expected flow of profits from having the concession.

Second, the government took bids for the right to build and operate a big convention centre. The high bidder, or rather the company willing to do it at the lowest subsidy, gets to build and run the convention centre.

In this case, SkyCity has to reckon that losses (if any) from building and running a convention centre are less than the gains from the gambling concession [NBR subscription, sorry]. And it isn't crazy to think that the bundle provides added value: convention centres near casinos tend to lose less money than those not so-situated; there are reasonable complementarities between the kind of facilities attractive to conventioneers and those that are in place in casinos.

Conditional on the government wishing that there be a big fancy convention centre in Auckland, this is likely the least bad way of doing it. I haven't gone through the accounting on it in any depth, but the bottom line has to be that SkyCity reckons it can make a go of it, since they're bearing the risk if they can't operate it profitably. And it isn't crazy to think that there could be some economic benefits from increased tourist traffic if we host more conventions. But whether those benefits are larger than the amount SkyCity might otherwise have bid in an open auction for the gambling concessions, where the revenues went into the general fund rather than into a big convention centre, that's rather less clear. It's possible, but it's far from certain.

Commenters at The Panel worried about social costs of gambling associated with the expansion. A lot there depends on how Auckland proceeds with gambling regulation. The cities that existed prior to amalgamation had a mix of gambling policies, with some imposing a "sinking lid" on the total number of pokie machines allowed. If Auckland as a whole continues with that policy, then much of the concession offered to SkyCity comes at the expense of the corner pubs who will see their licences killed more quickly than they otherwise would. That's really rather bad for those pubs. Whether that increases or decreases social costs depends on your view about which is better positioned to identify and exclude problem gamblers; I'm agnostic. But I'm not agnostic about that most of the measures of gambling social cost assume away the enjoyment that gamblers get from gambling. If we're happy to assume that every dollar spent on gambling by heavy gamblers is a total loss except where it results in a win, it's pretty easy to generate large estimates of gambling's social costs.

You could even make the case that the whole deal could, on the whole, be strongly anti-gambling. Here's the case. Given the SkyCity concession AND that SkyCity has bought itself immunity from other gambling regulations, what happens to political pressure against anti-gambling regs? The immunity clause means that it's in SkyCity's interest that we have much tighter regulations against gambling in other parts of Auckland; it strengthens their position. If you think that gambling is a bad, which I don't, then this deal makes SkyCity closer to a monopoly than it was previously, and makes every future regulation on gambling a pro-SkyCity regulation. If you hate gambling, you want it provided by a monopolist so that there's less of it.

The anti-gambling folks should give their heads a shake and think about the opportunities now available to them if SkyCity can be exempted from their wildest anti-gambling fantasies. I'm glad they haven't, as I don't like monopolies and I think it's ok for people to go and enjoy a flutter at the machines or at the tables. They should consider pushing hard on sinking lids such that SkyCity winds up being the only place left with them. SkyCity will be on their side in that fight. I don't like that outcome, but that's just me.


  1. Eric -

    the other question is one of process: I understand the other bidders for the convention centre were not advised that the concurrent expansion of gambling licences was also on offer - and I think that is a problem.

  2. That's a pretty good post, Eric, but my, this is such a complicated scenario that's it's hard to keep a clear head!

    I caught your The Panel contribution and the only question I have for you on that is that although you credit the gambler with his/her benefit derived from gambling - and one can lose a gamble but still have fun in the process - you didn't mention the negative benefit to the many potentially injured by that gambler's habit: direct family, victims of theft etc. My guess is that the negative social benefits for problem gamblers far outweighs their individual positive benefits, and I don't think that would be controversial.

    However, given that the vast majority of gamblers, in fact, do not cause anywhere near so much negative benefit as to deliver a net social cost, how much weight should we give to that aspect? And how would we quantify it?

    Also, I agree it's clear that the gambling subsidizes the conventions operations. Therefore, this transaction is: a) asking gamblers alone to subsidize the conventions arm when the touted benefits are far more widespread; b) as you say, a transfer of wealth from the many local pub owners to the shareholders in Sky City.

    And the latter is an example of government returning to the days of granting privilege to the favoured few, and even worse, of strengthening a monopoly that was already founded on government granted privilege.

    Finally, I am amazed how little I hear the C-word in this debate - Competition - which is perhaps near where James Noble is heading - when the current government is so unabashedly oriented towards competition as the best business model.

    I just hope that Sky City have done their homework and don't turn up with the begging bowl in a decade or so demanding even more concessions to cover soaring losses!

  3. I really don't know enough about the process to say anything about it. But when this first came up last year, it looked pretty obvious that pokies could be part of the deal. And it was part of the deal in 2001 when they did the last one.

  4. All right. Suppose I gamble a lot and you want to say that my spending is consequently of policy relevance. Suppose that my wife spends a lot on shoes and is some kind of shoe addict. Do we ban pretty expensive shoes?

    Or think of it this way. Assortative mating model: we all partner up with the best partner we can afford given our different bundles of characteristics, positive and negative. Mrs. X gambles more than Mr X expected and it makes him sad. Mr X gained 70 kg after getting married and it makes Mrs X sad. But neither of them could do better if they went out into the re-marriage market because the effects offset. Now we come in and intervene such that Mrs X can't gamble any more. She then dumps Mr. X because she can now do better; Mr X is sad.

    I'm not sure whether I'd say that the gambling subsidises the convention operations or that they're strong complements. It could easily be the case that a pool of conventioneers makes a really great client base for a casino, so the two businesses being bundled together is worth way more than either one of them would have been separately.

  5. You have hit nail on the head of what annoys me so much about government involvement in gambling. As David Brinkely (many years ago) pointed on his US Sunday morning news show, back when gambling was considered a sin that required its being made illegal to protect gamblers and their families from themselves, competition amongst gangsters in the numbers rackets led to them paying out about 90 cents on the dollar in prizes. Now with heavily promoted government sponsored gambling (either government owned, or through selling the monopoly concession), the payout is more likely 50c in the dollar. Which model causes more social ills, one wonders.

  6. If tasty food were banned, would you liken allowing more tasty food outlets to "government shoving a plateful of goodies in front of his face"?

    There are all kinds of ways that spouses can wreck the household budget. Daytrading, stupid purchases, not buying insurance... how many of these do we need to ban or regulate to make sure that nobody can ever make a mistake?

  7. Thanks Eric, but just to be clear, I'm not an advocate of banning many activities, especially one I enjoy from time to time.

  8. It's more what's allowable as policy-relevant externality. What lets you count "spent stupid amounts of money on gambling" as socially relevant externality but not "spent stupid amounts of money on golf clubs"?