Stadium follies

If you're going to build a stadium, don't do it in hopes of boosting GDP.

Sam Richardson ably surveys the international literature before weighing up the effects of stadium construction in New Zealand.

He finds:

• There's a short term boost to construction activity during the stadium build. He reckons Wellington had 56 more full-time-equivalent construction jobs during its build. 
• But, there's no effect on regional GDP, even during construction, barring some effect from arena builds as compared to stadiums.

He concludes:

The results from this analysis suggest that predictions of substantial economic impacts of sports facilities have generally not materialised. Optimistic predictions need to be tempered, with particular attention paid to the existing facility landscape. There are several reasons why economic impacts fail to materialise, many of which have been mentioned in the literature review section of this paper. A short-term increase in construction sector employment for certain facility types appears to exist during construction; however the effects largely disappear post-construction. Real GDP is generally unaffected during the construction of facilities and during the post-construction period. If the intention of local government funding in such projects is to stimulate employment or GDP, projects that generally do not deliver anything more than short-term sector-specific impacts would not appear to be appropriate. 

Local policy-makers should also be mindful of other potential impacts, in particular the opportunity cost of subsidising facilities. It has been noted elsewhere in the literature that a change in employment composition resulting from subsidising facility projects could potentially bring about a worsening in economic development. If a facility project results in the creation of low-skill employment at the expense of high-skill employment, the host area may well experience a deterioration in economic development relative to other areas (Baade & Dye, 1990).

If you want to spend a pile of money throwing a party, or building a place for such things, justify it on those grounds - not on potential effects on GDP.

I wonder if Sam will turn his eye to convention centres....

Stadium plans

Sam Richardson points out some problems with the proposed stadium-plus-office-towers combo for Christchurch:

It is not clear yet where exactly the funding for Christchurch's stadium plans is coming from, but it is fair to say that it will be largely funded by taxpayers - locally, regionally and nationally to some degree. As such, if my taxpayers money is going into funding a stadium, I would like to see some evidence that this amenity is going to be at least self-sustaining, and should not be detrimental to the local area. The idea that office buildings will make the stadium profitable is missing the point. If the office blocks are the profit-making parts of the venture, why not just build the office blocks? If they must be built as part of a stadium plan, we have to acknowledge that the rents earned by stadium offices will simply be transferred from other office spaces elsewhere within the city. It may well be the case that office space is at a premium in Christchurch, in which case the stadium offices may be beneficial to the city of Christchurch in that clients who were previously unable to obtain office space may now be able to do so. If, however, the offices are simply populated by clients who relocated from the suburbs, then this isn't making money (nor necessarily welfare enhancing either) at all - it is merely redistributing the rents on office space from the suburbs back into the CBD.

It is exactly the same argument as the claim that stadiums generate conference revenues too - which is only beneficial if the conferences wouldn't have been held in the city in the first place without the stadium conference spaces.

If people are willing to pay more for office space overlooking a rugby field than for office space elsewhere, then that can make a case for the stadium/office combination. And I can believe that there are plenty of tenants who would be willing to pay more for stadium office space than for regular office space - it isn't implausible that the project is feasible. But if that complementarity comes from tenants expecting to watch games from their offices for which they'd otherwise have to pay, then it's a trade-off against ticket revenues for the stadium's tenants - sports clubs would then be willing to pay less for use of the facility.

Lunchtime discussion in the economics staff room wondered whether we mightn't instead have hotel towers and a stadium including conference facilities. But that does start getting awfully close to Danyl's proposal from last year:

Christchurch Mayor Bob Parker and Earthquake Recovery Minister Gerry Brownlee provided more details of the rebuild blueprints for the earthquake-devastated city today, including plans to build a second sports stadium inside the new convention center to be constructed on Cathedral square.

‘The sports stadium will be a core attraction for visitors to the convention center,’ said Brownlee. It will be fully covered, provide seating for up to 2000 spectators, and will also contain a state-of the art convention center.

The sports stadium inside the convention center will complement the services provided by the main convention center. It will include business hotels, retail outlets and a covered sports stadium with natural fixed turf, which will also contain a convention center to attract business tourists who want to attend sports events during their stay.

‘We have one or two exciting ideas for what to include in that last convention center, but I don’t want to give too much away,’ Brownlee told reporters. ‘Let’s just say Crusaders fans will be very excited.’ City Council insiders suggest the convention center’s sports stadium’s convention center might house a sports stadium.

I still wonder whether it might be best to let the Crusaders own the stadium and to gift them the insurance payout for the AMI stadium. Tell them to make the best go of it that they can while writing legislation that the Mayor, Council, City Manager, and both the General Manager and Coach of the Crusaders will be shot in the face have something very bad happen to them if Council ever provides any other subsidy ever to the stadium or its tenants.

The Dismal Science: Stadiums edition

The rather strong consensus of the academic literature shows that government subsidies to sports stadiums fail to deliver promised economic benefits. 

Massey's Sam Richardson, and co-blogger at The Dismal Science, has done the academic heavy lifting in New Zealand; most of the other bloggers syndicated at The Dismal Science have chimed in from time to time with our takes on things.

Close-Up highlighted some of Sam's work on stadiums; I popped up a bit but the serious work on this issue is Sam's. When Mark Sainsbury asked what Earthquake Recovery Minister Gerry Brownlee thought about the economic case for stadium subsidies, Gerry replied: 

"They say that economics is the Dismal Science. And you've found some really good exponents of that."

Indeed, Gerry. Indeed. 

I will be hitting some of the highlights of our collective prior efforts on stadium subsidies at The Dismal Science feed at SciBlogs. Enjoy the mini symposium! 

The market for dodgy

If a consulting firm is asked to produce a dodgy report, and delivers what the client wants, where's the harm? Bill Kaye-Blake asked that last week.

Monday's New Zealand Herald reports:

Crucial figures for the $68.5 million Claudelands Events Centre were influenced by city council staff who increased the number of events and inflated the revenue expected in the first three years of operation.

A $30,000 peer review of the original "overly optimistic" 2009 Claudelands business case has revealed Hamilton City Council staff told the original author of the business case, Campbell Consulting, to increase the already optimistic number of events in the business plan by up to 50 per cent. [Emphasis added]

Staff also used higher revenue projections than those provided in the business case in the council's 10-year budget - inflating the figures in the first three years by between 6 and 11 per cent. But at the same time they lowered the operating costs by 6 to 9 per cent, which made the budgets look more attractive.

Hamilton mayor Julie Hardaker said she was waiting for chief executive Barry Harris to complete his investigation into what happened and refused to speculate on whether the council had been deliberately deceived. Council staff had been unable to explain the variation.

So instead of turning a $1.1 million surplus, Claudelands returned a $1.5 million deficit.

You can argue that Campbell Consulting is entirely blameless. They were asked by Council to provide revenue forecasts under a few different scenarios and did so to the best of their ability. Or, you can argue that they were party to a fraud on predictably gullible Hamilton voters undertaken by the Claudelands's backers within Council; they either knew or ought to have known that the revised figures requested by the funders were hopelessly unrealistic and only really had evil applications.

Voters seem to love Councils putting up big stadiums and events centres - they want to believe the lie that the venue will either turn a profit directly or will stimulate sufficient indirect economic activity to cover its costs in the grand scheme of things. If Campbell hadn't provided the case, somebody else likely would have. There's a demand for dodgy ultimately because voters like it, at least in the short run. I still think we ought heap scorn on those supplying that demand to increase the reservation price for producing dodgy reports. But in a world in which voters have no individual incentive to sort out which firms specialize in dodgy and which ones turn down RFPs where the funders make pretty clear what kind of result they want, it probably doesn't do much to solve things.

HT: Fair Play and Forward Passes, where Sam Richardson writes:

It is a sorry state of affairs, but by no means an isolated event. Hamilton ratepayers don't have to look too far to see a similar story with the V8 supercar race a prominent example. Unfortunately the same story has been repeated all around the world - overstated measures of benefit, understated measures of cost and a projected bottom line that is much more palatable than what actually eventuates.

V8 Supercar Races, Events Centres, Stadiums, Monorails, Escalators to Nowhere...