Opinion: Don't subsidise stadia or events without referenda

By NZ Business Roundtable executive director Roger Kerr Stadiums and events involving central and local governments are often controversial. The redevelopment of Carisbrook is a case in point. Wild claims are often made about the economic benefits of such projects. There has also been a sorry saga of cost overruns. When the feasibility study for Wellington's Westpac Stadium was done in 1994, the cost was estimated at $62.75 million. By the time it was finished it had risen to $122 million. Another financial embarrassment was the Waikato Stadium project, which the Hamilton City Council bailed out in 2002 for $5.5 million. And in 2005 it was reported that the Auckland Regional Council was facing potential losses of nearly $1 million after only selling half the corporate seats for Ericsson Stadium's new grandstand. Similar stories abound abroad. According to a Victorian Tourism Industry Council survey, the Commonwealth Games in Melbourne provided only a fleeting boost to the Victorian economy, despite claims by the state government of massive economic benefits. A detailed study found that even the Sydney Olympics had only a modest economic impact. Most of the venues have been little used since the games. An Auditor-General's report found that Canberra's annual tax-funded V-8 Supercar races, which the Wellington City Council sought to stage in 2005, generated more costs than benefits. Various bogus arguments are put forward in support of subsidies for stadiums and events, often by consultants who are paid to provide the answers councils want. One is that they generate community benefits above and beyond the benefits enjoyed by those who attend events or watch them on television. But such benefits can be captured in many ways such as naming rights, corporate boxes and donations, as well as admission fees and television rights. All or most of the benefits from the stadium or event can be captured or "˜internalised' through these means. The Business Roundtable argued that businesses that stood to benefit from a V-8 car race in Wellington should put their hands in their own pockets, not those of ratepayers. Many studies invoke "˜multiplier' arguments associated with attendance at events (for example, spending on accommodation or meals) as additional benefits. These are usually fallacious, because disposable income spent in this way is not spent on goods and services produced by other businesses: there is no overall net gain. Such expenditure-switching should not be confused with the creation of real economic value. A further error is to confuse gross spending with value added. The costs of producing goods and services such as food or transport need to be deducted from gross spending to calculate real economic benefits. There is no evidence that subsidies for stadiums and events increase the economic well-being of cities. A variety of studies have found no correlation with rates of economic growth, employment or rating bases. Many stadiums and events lose money. These are not arguments against stadiums and events. The point is rather that just because people enjoy them and they produce economic benefits it doesn't mean they should be subsidised. Most activities generate economic benefits and most operate privately without subsidies. Taxes to fund subsidies harm other worthwhile activities. The mere fact that councils are faced with calls to subsidise stadiums and events may suggest that public support for them is broadly lacking. Private investment in stadiums and events is perfectly feasible in many cases: Tauranga's Baypark Speedway Stadium and the annual Gisborne Rhythm "˜n Vines festival are examples. A willingness on the part of councils to subsidise projects is likely to displace private investment. Moreover, private investment in such projects is less costly to the economy. Rates and taxes are costly to raise, not just because of the administration involved but because they distort behaviour and make the economy less productive. The total costs may well be of the order of at least 30-50 cents for each dollar raised. Thus the returns on subsidy-funded projects need to be commensurately higher than those on private investments. Why then do we see so many cases of subsidies, financial losses and cost overruns in relation to stadiums and events? The answer is that subsidies often benefit stadium owners, sporting organisations, event sponsors, local politicians and limited groups of fans, rather than the general public. These groups have incentives to publicly campaign for projects and offload the costs on to the larger body of ratepayers. Voters are often kept in the dark and have little say. I believe councils contemplating subsidies for such projects should publish information about the costs and the implications for rates, and hold a referendum requiring the support of, say, two thirds of ratepayers for the project to proceed. Direct voting, rather than "˜public consultations' that are often dominated by politicians and interest groups, is a much more accurate way of gauging what people are prepared to pay for. * This piece by Roger Kerr first appeared in the Otago Daily Times, August 11, 2006. Roger Kerr (rkerr@nzbr.org.nz) is the executive director of the New Zealand Business Roundtable.