Seamus and I were wrong

Back in 2012, Seamus Hogan and I were ...mildly sceptical... of proposals to build a giant convention centre in Christchurch.

Seamus wrote:

The convention centre: Eric has written on this, but I can't resist adding my voice. This is why the stadium doesn't upset me so much. The stupidity pales into insignificance compared to the silliness of building a purpose built facility from scratch that is able to host up to three conferences simultaneously. (Aside: from my limited experience with organising conferences, if you have choice over location and date, you choose somewhere where you will be the only conference operating at the time.) The conference centre should be small close to hotels and the performing arts centre so that larger affairs could spill out to those areas.

The bit I'd written on it, in a post titled "What am I missing?", was after one of our regular lunchtime chats in the econ department lunch room. So it owes a fair bit to that discussion with Seamus: 

The Press reports that the Christchurch Convention Centre was insured for $30m but that like-for-like replacement would cost $60m. Whatever external benefits come from holding conferences in town are mostly internalised by the local hotel and restaurant industry; solutions letting the convention centre build internalize those external benefits helps ensure an efficiently sized convention centre. Here's one way of doing it, conditional on Council wanting a convention centre.

1. Council buys options on a few appropriate sites around town.
2. Council gets in touch with the big hotels to tell them that Council's going to build a much smaller convention centre for $30 million, but that they want to site it so it can be linked by skywalks* to adjacent blocks if the hotels want to be linked to it. If the hospitality industry really wants a bigger convention centre, they can come back with a proposal where the hotels fund an expanded facility. But even with a smaller convention centre, they can still host big conventions by holding plenary sessions in the big convention centre facilities and having breakout sessions in the different connected hotels' conference rooms. 
3. Figure out the set of sites on which you have options that best suits the set of hotel partners. The hotels buy the options off Council for their parts of the build.
4. Exercise the options and get on with it. Make sure there's room on the site to put a few restaurants; put restaurant provision up to competitive bidding so that any rents from conventioneers get capitalized into the purchase price and help fund the place, internalizing the external benefit. 

Now I know what I was missing: the true chutzpah of Christchurch. 

Christchurch, I am in awe. 

We were totally right that the thing would be a white elephant that couldn't cover its costs. We were worried about them spending $60m on a new one; the one they got cost $475 million and lost $3.4 million last year. Its visitor numbers hare dropping too. 

But just look at this.

The ownership question is more tangled than it first appears.

An early, “in principle” version of the 2019 Global Settlement between Christchurch City Council and the Crown talked about the council being best placed to own Te Pae and provide strategic direction for the city’s venues.

But that language did not survive into the final agreement signed later that year.

So the city was cagey about being willing to take ownership while making sure that it didn't sign anything saying that it would. 

Good move that. Then:

The Te Pae clause now simply records that the convention centre would be delivered, and that “the parties may continue to engage on future ownership of Te Pae as appropriate”.

The Christchurch City Council said it had already looked hard at taking the asset on, and decided against it.

“After due diligence the council decided not to pursue ownership,” head of facilities and property Bruce Rendall said.

Infrastructure Minister Chris Bishop, one of the shareholding ministers in CID, said the Government was “open to proposals for Christchurch City Council ownership of Te Pae in the future”.

Emphasis added. I'm reminded of Bart Simpson announcing that he would resign, undefeated, from the world of video boxing. 

So. Option for the Crown at this point would be to threaten to mothball the thing rather than continue to subsidise it. I don't think they can force Council to own it. 

And Christchurch always has the option to offer to agree to take on ownership in exchange for concessions on other margins where central and local government negotiate about things. 

Even evil genius needs recognition. 

As a bit of fun, I asked my advisor to imagine it were a consultancy like Cameron Partners asked to prepare a report on the likely sale value of the thing if it were offered to market. 

As a going concern without ongoing subsidy, the Crown could expect to have to pay someone about $90 million to take it, assuming that the venue could be scrapped in 30 years for its land value. 

If instead the owner could demolish and put up something else instead (while paying break fees with the operator), the site might be worth $55 million.

Both $-90 million and $55 million are considerably less than the $352m asserted book value of the building, which is considerably less than the $475m build cost. 

A huge up-front and ongoing waste of course. But consider the evil genius here too. That's worth something. 

The conversation with my advisor is here, for those keen on that sort of thing. The opening snippet:

In straight commercial terms, Te Pae as a convention centre is not worth anything like its $360m book value to a private buyer. On realistic assumptions:

• Highest bid is likely to come from a “scrap + redevelopment” buyer, not a buyer keeping it as a convention centre.

• A plausible order‑of‑magnitude sale price for the site in that scenario is around NZ$50–70m net of demolition and contract break‑costs.

• As a going concern with no ongoing subsidy, the facility’s value to a private buyer is zero or negative (you’d effectively need to pay someone to take it).

• To get a positive price for Te Pae as a going concern, you’re looking at an ongoing subsidy of roughly NZ$8–10m per year over decades, assuming current trading patterns.

Queenstown - I still don't get it

Convention Centre economics are about as wonky as stadium economics. Field of Dreams stuff mostly.

So when a private outfit says that it wants to build a convention centre using its own money, you'd expect a city council to be pretty accommodating, right? They get the hallowed thing and don't have to pay.

Not if you're in Queenstown.

Loyal readers will remember this one from last year. I'd then written:

Chris Hutching over at NBR (gated) has the story.*

Alastair Porter wants to open a convention centre near the Queenstown airport, called "Remarkables Park". He wants to target smaller Australasian conventions, noting the pretty saturated market for the big international ones. He's lodged the consents to get started. Queenstown Council wishes instead to have a bigger venue downtown to anchor a retail, hotel and entertainment district.

Queenstown accountant Duncan Fea is quoted in support of the Council proposal, saying simultaneously that it will hurt the central business district because of the airport location and that, because it's at the airport, there will be logistical difficulties in getting attendees to and from downtown hotels. I'd have thought that conventioneers staying downtown and catching a shuttle would have given downtown Queenstown the best of both worlds: a centre they don't have to pay for, evening traffic from conventioneers, and no big deadspot downtown when there isn't a convention on.

I'd also have thought that Queenstown would have been a tough venue for big international conventions anyway because anybody going there needs to connect from Brisbane, Sydney, Melbourne, Christchurch, Wellington or Auckland. It's a beautiful spot, but it's a hop away only from places that already have, or are planning to have, ridiculously big convention facilities for international conferences.

I can't get how anybody's calculations would lead them to conclude you get higher net benefits for a downtown convention centre that you have to pay for than from one near the airport, whose visitors stay downtown anyway,** and that, critically, you don't have to pay for.

Does Queenstown really want to *punch* a gift-horse in the mouth?

Well, the saga continues. The NBR's Chris Hutching remains on the case.

A council meeting last week heard how the total anticipated direct cost to deliver the facility is $58.1 million including $55 million in construction cost, $1.7 million working capital, and $1.4 million in infrastructure upgrades. Rates would glean $31.4 million along with debt funding.
The balance of $26.7 million is being sought from the government and other sources including local community trusts, Otago Regional Council, and commercial sponsorship.
A central government funding proposal was provided to the Ministry of Business for consideration by the Treasury in January.
...
The developer of the Remarkables Park shopping centre has offered to build a convention centre near the airport at no cost to ratepayers. But the council wants the convention centre built near the centre of town.

So for the sake of a couple miles' distance, Council wants to spend tens of millions - presumably because a downtown centre will have greater flow-on benefits for downtown businesses. But, if I'm not wrong, it's Queenstown Council that complains, loudly, about all the costs that tourists impose on local services that the City isn't able to recoup in rates.

And is it really plausible that a conventioneer flown in to Queenstown wouldn't spend some time downtown as well?

There may be good reason for the general and widespread view that local councils suffer from severe competence issues.

Convention Centre your way to being on the map

Matt Nippert has a nice round-up on the SkyCity convention centre. He there quotes me accurately; I've pasted below the email summary I'd sent him after a phone chat.

“The deal we were sold when the SkyCity Convention deal was proposed, or at least as I understood it, was that SkyCity would provide a Convention Centre in exchange for some casino concessions. It makes sense to run a convention centre in conjunction with or near a casino as there seem to be complementarities – conventioneers often like taking advantage of casino amenities. The deal was not costless to the government because it could have sold off those casino concessions at auction instead and taken the cash – this was the opportunity cost of the arrangement. But one important cost was, I had thought, taken off the government’s hands: the risk of construction cost overruns, and the risk of ongoing operating losses if the centre turned into a white elephant.” “Under the deal as I understood it, we probably had the least bad way of getting a new convention centre. I’m not convinced that one was needed, but if the alternative were that the government were going to build and run a convention centre anyway, the SkyCity deal beat that – and especially because the government was not going to be on the hook for cost over-runs. If government is going to be on the hook for costs, the case for the deal is much weaker. It’s possible that it’s still the least bad way of getting a new convention centre, but we likely need a rather more thorough business case if the government takes on any of the risk of ongoing operational losses. A one-off contribution towards construction costs is at least limited. But if risk winds up falling on government if fewer conventions book in at the new centre than are expected, we do need a pretty robust look at how many more conventions would really come to New Zealand.”

When this all started, the business case for the convention centre really didn't matter. SkyCity was taking on all the upside and downside risk, so if they were overly optimistic about how many net new conventions would come to town as consequence of the new convention centre, government didn't need to care as SkyCity would take the losses. If the deal now is that the government will cover losses, then somebody needs to be taking a hard look at the business case and weigh it up thoroughly, accounting also for any diversion in custom from existing convention centres.

Government's already shelling out close to $300 million for a convention centre in Christchurch. Queenstown's getting one or two. Wellington too. I wonder how we'd rank on an international league table of "convention centre spaces per capita".

Nippert writes:

Sue Sullivan, head of industry body Conventions and Incentives New Zealand, which has been lobbying for an international convention centre for more than a decade, was unwilling to argue the project was now value for taxpayer money.

She said a convention centre had considerable spin-offs, pointing to studies which showed international convention centre visitors were big local spenders. "We see it as an opportunity for new business, significant business. It puts New Zealand on the map," she said.

Yes, on the map.

Convention Centre follies

The Sky City convention centre deal, as I'd understood it last year and the year before, was about the least bad way of getting a convention centre if you're determined that the government should be in the "facilitating convention centres" business.

Sky's offer was to provide a new convention centre attached to a casino. I wrote last year:

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.

As I'd understood things, Sky was to be on the hook for cost increases:

On the plus side, it's unlikely this arrangement yields another Claudelands. SkyCity's on the hook for costs. They've reasonable incentive to keep things running properly: the Centre would complement their existing operations. The more conventioneers, the more potential customers at the nearby casino.

...Bottom line: I do not believe the "broader benefits" case for building convention centres. Nothing stops hotels near a proposed centre from getting into sponsorship arrangements where they pay for listings in standard convention centre marketing materials to help fund the centre; I find it more likely that the benefits are too small to make it worthwhile than that public goods problems, easily resolved by assurance contract, stop things. But if we're going to have a new convention centre, this might be the least bad way of limiting fiscal risks. That's not a strong endorsement, because I don't particularly like the potential regulatory takings from the local pubs currently hosting pokies if the new machines are part of the sinking lid policy, and because there's a whiff of cronyism to the whole thing. But honestly, who else would be able to pull off the casino-convention centre combination in Auckland?

If it turns out that the government is on the hook for cost inflation, then much of the point of the whole deal is lost. Matthew Hooton's been livid about this on Twitter. He's not wrong.

A government committed to using PPP arrangements also has to be ready to play hardball with contractors who lowball initial cost estimates lest they encourage stupidity in each and every future contract.

Every nice thing I said about this deal is retracted if government is on the hook for cost-overruns or operating expenditures.

Convention Centre Certainty

One bit of uncertainty around the rebuild has now been resolved: the Convention Centre precinct is going ahead. The private sector partners were announced on Friday along with a few more details on funding. 

Georgina Stylianou from The Press called me Friday asking for comment; I emailed her this after a chat.

“It’s pretty hard to tell whether the Convention Center Precinct offers value for money on the information currently available. While we know the Crown is contributing $284 million, we don’t know what portion of that is dedicated to the central convention hall and what portion is targeted at enhancing the rest of the precinct.”
 “I get nervous about business cases based on estimated flow-on benefits from large numbers of high-spending conventioneers as these things have a tendency to be overestimated. While those kinds of benefits were mentioned recently in support of the project, I don’t believe we’ve here yet seen any kind of business case at all. The Crown is contributing about $800 per person in Christchurch towards this precinct, or about $2200 per household. I hope that more of the details will be released soon so that we can judge whether we’re likely to get that much value from it. It would be nice to know, for example, in the case that the facility draws fewer conventions than hoped, whether any losses fall on the private sector partners, the City, or the Crown.”

I also noted that the $500m total cost isn't that far out of line with the speculative number that came out in NZ Property Investor a couple of years ago.

Until more details are released, it's going to be pretty hard to tell what's all going on there. Does the $500m in total include the hotels' investments in new facilities around the Centre? How much of the Crown contribution is for the Convention Centre Building, and how much is for the surrounding land? Does this mean that the Town Hall is now superfluous and that any insurance money from it could be put towards roads and other works?

Convention Centre Madness

Convention Centre Economics is about as bad as Stadium Economics. It just gets less airtime because people are more interested in sports.

The best you can usually hope for is that there might be some private matching funding and that the site is developed so that it isn't an urban deadzone whenever a convention isn't on. If you can manage to get a private sector outfit willing to fund it, it's usually because of sidepayments on other margins, like casino concessions.

So what happens when a private firm really seems willing to put up its own money to build a convention centre? City Council still wants to run its own one using taxpayer money, because the private one might not be big enough to attract really large international conventions and, because it's not right where Council would want it, might not provide as many spillover benefits.

Chris Hutching over at NBR (gated) has the story.* Alastair Porter wants to open a convention centre near the Queenstown airport, called "Remarkables Park". He wants to target smaller Australasian conventions, noting the pretty saturated market for the big international ones. He's lodged the consents to get started. Queenstown Council wishes instead to have a bigger venue downtown to anchor a retail, hotel and entertainment district.

Queenstown accountant Duncan Fea is quoted in support of the Council proposal, saying simultaneously that it will hurt the central business district because of the airport location and that, because it's at the airport, there will be logistical difficulties in getting attendees to and from downtown hotels. I'd have thought that conventioneers staying downtown and catching a shuttle would have given downtown Queenstown the best of both worlds: a centre they don't have to pay for, evening traffic from conventioneers, and no big deadspot downtown when there isn't a convention on.

I'd also have thought that Queenstown would have been a tough venue for big international conventions anyway because anybody going there needs to connect from Brisbane, Sydney, Melbourne, Christchurch, Wellington or Auckland. It's a beautiful spot, but it's a hop away only from places that already have, or are planning to have, ridiculously big convention facilities for international conferences.

I can't get how anybody's calculations would lead them to conclude you get higher net benefits for a downtown convention centre that you have to pay for than from one near the airport, whose visitors stay downtown anyway,** and that, critically, you don't have to pay for.

Does Queenstown really want to *punch* a gift-horse in the mouth?

Update: If it's really the case that everything would be so much the awesomer for downtown businesses with a downtown convention centre, Duncan Fea should start a PledgeMe drive among local businesses to fund it. If it's as great as he's claiming, they'll all be really keen to do it.

* You really should subscribe to get the whole story, and their other great coverage.

** And, even if the site did put up hotels, who the heck wouldn't spend some tourist-time in Queenstown while there?

Convention Centre Business Cases

Does the SkyCity convention centre deal have any particular implications for whether Christchurch should have a big convention centre too? I think it's a bit tough to argue that it increases the optimal convention centre size here, but opinions vary. Here's what I told Marc Greenhill from the Christchurch Press when he asked.

"It's possible that Hon. Gerry Brownlee is right that a Christchurch Convention Centre could get a lot of overflow traffic from Auckland. Perhaps the new Auckland centre will generate a ton of international excitement about New Zealand as a convention destination, and conference organisers finding out that Auckland is fully booked will decide to stick with New Zealand and come to Christchurch instead. I'm not sure that I'd bet a lot of money on that happening, but it isn't impossible." 

"And, Minister Brownlee is also right that some parts of Convention Centre business do not cannibalise across different centres. Armageddon Expo visits each of the main centres, for example. And national organisations will often shift their annual conventions across different centres in rotation; again, a nicer Auckland centre doesn't cannibalise that kind of traffic. But whether expansive convention centres in both Auckland and Christchurch would tend to do more to build international demand for New Zealand in total or to split the "let's have our conference in New Zealand this year" market, well, it would be interesting to see the business case backing that call."

As best I'm aware, we as yet have no business case for the proposed Christchurch convention centre. I'd be interested in perusing the document when it comes into existence.