The America’s Cup is not about the money

The America’s Cup might be returning to NZ and local newspapers are already weighing in on what it means for the economy:

As Team New Zealand moves close to match point there is already speculation that the next cup series will bring over half a billion dollars in financial gain to the country.

Don’t believe it, says Shane Vuletich of Covec, specialist in economic evaluation of tourism and major events, who warns numbers already being used are far too large.

Vuletich and TVHE’s straight-talking Shamubeel Eaqub—”the economic benefits of a cup regatta in 2017 would be based on ‘over-hyped studies that are proven to be absolute b…….. after the fact.’”—are absolutely right: major events don’t tend to be good financial investments. What surprises me is that this is worth reporting. The only relevant question is whether New Zealanders get enough enjoyment from hosting to cover the expense.

It’s a bit like going on holiday: it’s only a bad use of money if you don’t end up enjoying the break. The financial return is hugely negative but that’s fairly irrelevant when one’s enjoying a hike in the French Alps or lounging on the beach in Mallorca. What we really need to ask is whether the public gets sufficient enjoyment from hosting events like the America’s Cup.

The obvious answer is ‘yes’, nations compete to host events and have done for as long as historical records exist. Hosting is incredibly prestigious and competitive, which suggests that there is no shortage of benefit from hosting. It isn’t as if the legacy of hosting large events is unknown, yet cities and nations continue to bid huge sums for them despite that. After the London Olympics last year, “eight out of ten said it was worth the extraordinary cost, even as cuts to public services began to bite.”

Against that there are the public choice arguments. Perhaps it is the politicians who get to bask in the glory of the events they’ve organised, while taxpayers pick up the bill. If the bill is small enough not to influence voting decisions then it could still be worthwhile for the politician to bid for the event even if it is costly to voters. In addition, the benefits may be highly salient to the public, while the costs are largely hidden within the Government’s Budget plans.

Those considerations militate in favour of providing further information to the public about the costs of hosting. However, as Vuletich points out, misleading estimates of the financial benefit should have very little influence over hosting decisions. So long as people know what they’re paying for the thrill, we shouldn’t worry too much about the money.

  • Richard29

    I’m generally opposed to government handouts to sports teams, their billionaire backers or their already highly compensated crews.
    Where I would be happy to see a bit of spending is Auckland Council/Waterfront Auckland/NZ Government pitching in for some improved transport infrastructure on the CBD and Waterfront (e.g. bring forward the dates for the city rail link, complete the Wynyard Tram link to Britomart). Stuff that adds value to the CBD and would happen anyway over a longer period but might be brought forward for the timetable of the event.
    But also, the Americas cup yachts look almost like futuristic spaceships soaring above the waves – which makes me think that the other opportunity is to use the cup as a pretext to pour some public money into advanced scientific research – similar to what the USA does with NASA, and DARPA or how Israel has set their economy on a high value technology footing with all the government funded technology research their defence department does. We already have the cup delivered to us with world leading kiwi computer graphics, there are probably opportunities for NZ companies in the area of materials science around carbon fibre composites or in advanced hull design etc.
    The cup may come or go in a few years but the benefits for New Zealand’s economy from improved infrastructure and a big increase in research and development may stick around for much longer…

  • Wilbur Townsend

    So, I’m not convinced here. I understand (and agree with) the general case for large sporting events, but I thought that that was based on the Winner’s Curse . That is to say, given uncertainty about benefits of large spring events, bidding countries will tend to win if they overestimate the benefits the most (and therefore commit to the most extravagant spending). That line of reasoning obviously doesn’t apply to the America’s Cup, given the lack of a bidding process. So it’s conceivable that we’ll be able to make a positive return from it, if we choose too.

    • Seamus Hogan

      I don’t think the general case relies on the Winners Curse, although that will make things worse for events that are competed for. Rather it is problems with political economy. The decision to have an event is made for non-financial reasons (e.g. for some people who want the event, it is a decisive issue for determining their vote, for those opposed it is non-decisive) and then exagerated numbers are produced to give an ex post rationalisation.

  • Peter

    I thought Sean Plunket raised a good thought in Sat’s DomPost which was, in effect, why assume we’d defend the cup in NZ? Would the enjoyment of it being in Akld really be any higher than the current happiness dividend we’re experiencing remotely from San Fran? (and, if it would, for what (small) portion of the population?) From another angle, let’s be explicit about the value proposition of a large govt subsidy. Are we chasing a transitory peak in tourist numbers, or increased international connections, showcasing innovation abroad, etc. As Sean pointed out, why not tender the defence like the Olympics are tendered. Perhaps we (NZ Inc) wouldn’t then need to subsidise the defence, and could pick amongst the package of benefits to NZ Inc that other hosts might be happy to offer. (Also, I think I read this morning that a value proposition for Emirates (i.e. subsidy reducer) was the profile for them in the North American market. Less sponsor value likely means greater subsidy. If we think of the govt subsidy in terms of procurement, let’s be clear on the outcome mix we’re buying and, as for any other large chunk of money, think about how some sort of contestability could improve the overall outcome.

    • http://www.tvhe.co.nz/ jamesz

      That’s an interesting idea and I totally agree that we need to be very clear about the alternatives for hosting. A public choice has to be an informed one, after all.

  • Seamus Hogan

    @James: “What surprises me is that this is worth reporting. The only relevant question is whether New Zealanders get enough enjoyment from hosting to cover the expense.”
    It would be nice if the economic commentary could grow up to the point where this was true. But as long as big economic-impact numbers are produced every time someone wants to host a sporting event, build a convention centre, etc. then it will continue to be worth reporting that these numbers are bunk.

    • http://www.tvhe.co.nz/ jamesz

      Can’t disagree with that but I would like it to be placed in context.

  • Peter

    We all (I think) accept the limitations of such economic assessments, but to dismiss the results as “bunk” is a bit dramatic (and surely the long-term interest is in economic assessments being published and debated). What’s missing often is contestable advice – from such reputable organisations as REFORM, BERL, NZIER and (even) Uni of Canterbury – and greater focus on the core assumptions on which the sexy results rely. Decision makers ultimately have to take a view on the crystal ball, but at least they’d then be better served by understanding the trade-offs, bands, senstitivies, maybe even better probabilistic estimates (as to how much risk they want to take … oh, maybe even risk sharing scenarios wherebythe subsidy is (at least partially) matched to some measurable outcomes). I see some parallels to Wgtn ratepayers being asked to believe that a runway extension is a great idea based on “the BERL report”. Spending a few million bucks or more (whether as a subsidy or other ‘strategic investment’) requires much more due diligence and contestable advice than we often see.

    • http://www.tvhe.co.nz/ jamesz

      You’re right, they’re not all bad; some of them are poor estimates but some are useful. However, all of them need to be understood as only one part of a complete assessment. Interpreting them as the only relevant information in a CBA is a huge mistake. As you say, decision makers need to be fully informed to make good decisions and these estimates are one, small part of the package of information they need.

      • Seamus Hogan

        James (and Peter). I don’t disagree that there is potentially some financial benefit to a region (i.e. other than the direct pychic benefits that James’ original post suggested we focus on) of events that draw in spending from outside the region, and so, in principle, we could seek to estimate those with careful analysis. But from what I have seen the choice out there is between horribly incomplete and straight out horrible estimates. The straight-out horrible produce the usual scams–multiplier effects, rosy-scenario predictions of likely numbers, etc. The horribly incomplete ones, might make believable estimates of the amount of spending drawn in from outside with no multiplier, but from what I have seen don’t attempt to estimate the spending that is diverted (e.g. people bringing forward a trip) and certainly not the opportunity cost of the resources diverted to producing goods and services sold to the visitors.
        The trouble is: there is no demand for such careful studies.