Monday 22 December 2014

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.

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