To justify hosting the America’s Cup

Published on April 8th, 2018

In this report published by the New Zealand Herald, the University of Auckland Business School states how politicians should stop using unrealistic economic studies to justify holding big events in New Zealand.

The 2021 America’s Cup should see an end to overblown official estimates on how hosting big events will earn New Zealand “millions and millions of dollars” in burgeoning economic benefit.

For too long, says Tim Hazledine, professor of economics at the University of Auckland Business School, such estimates have been painting rosy pictures of the financial bounty for host nations of big events – when the reality is otherwise.

“There are good reasons to host big events like the America’s Cup, the Lions tour and the Rugby World Cup,” he says. “But direct economic benefit usually isn’t one of them.”

Hazledine points to a now-discounted economic study by consultants commissioned by the Ministry of Business, Innovation and Employment (MBIE) last year – looking into the benefits that would accrue from the Cup hosting.

The initial report used a technique known as “multiplier analysis” and pictured up to $1 billion injected into the New Zealand economy, with thousands of jobs created and a return of more than $7 for every dollar invested in new wharf facilities.

“It just wasn’t right,” said Hazledine. “There’s no way it could have been right. If you had a development that was promising you a $7 return on every dollar of investment, you wouldn’t wait around for the America’s Cup – you’d do it anyway.”

MBIE later corrected the report – on December 21 last year. Its initial cost-to-benefit ratio estimate was between 1.8 and 1.2, meaning benefits would outweigh cost by between 80 and 20 per cent. However, it today revised this to a high of 1.14 and a low of 0.997 – with the latter scenario meaning the cost would outweigh the benefits.

The report passed quietly by – Hazledine says close to Christmas is a terrific time to release such news as few people are thinking about anything except a holiday – after it was detected as mistaken by policy think tank the New Zealand Initiative.

At the time Research Fellow Sam Warburton pointed out that the alleged net benefit of the Cup was relied on by key decision makers (including Economic Development Minister David Parker and Auckland Mayor Phil Goff) adding: “As in every public project, cost blow-outs and optimism biases are a possibility when hosting the America’s Cup. A benefit-cost ratio of just around 1 is not a sufficient basis for committing taxpayers’ money to this event.”

MBIE said the error did not affect its economic impact estimates for hosting the regatta in Auckland. It maintained that between 2018 and 2021 it would add between $0.6 – $1 billion in value-add to New Zealand’s economy and boost employment by between 4700 and 8300.

Hazledine says politicians must stop using reports “to position the hosting of big events as ‘investments’ when clearly, most of the time, they are not.”

He expects the America’s Cup to cost New Zealand money: “It’s very hard to get to the bottom of all this but my guess is that the regatta will make less for the country than the amount Emirates Team New Zealand are asking the government for.”

Part of the problem is that while Treasury officials have a Social Cost Benefit Manual that clearly sets out how to form such an estimate, they seemed to have “no power” to stop other ministries from commissioning studies based on other criteria, he says.

“It’s time the politicians stopped playing with facts and figures like this to justify holding such events. They can’t justify it that way.”

The same game of cost-benefit analysis was played out in the 2011 Rugby World Cup in New Zealand, he says. The then Minister of Sport, Murray McCully, said the Cup would have lasting economic value for New Zealand but probably more important was the country building its brand on the international stage.

“We convince more tourists to come here, we convince more businesses to do business here with New Zealand companies and enter partnerships with them,” McCully said. “So those legacy values are arguably the greatest, and that’s why we’re determined to do it properly.

“We’ll get about $700 million or so of income as a country from people coming to visit, and we also will be investing in assets that will provide a return for many years.”

But, also at the time, Hazledine said official estimates were overblown and there was only a weak economic case for hosting the Cup, with the benefit to the economy much less than $700m. In 2012, McCully commissioned independent research which claimed the World Cup had added $573m to the economy.

Hazledine said, to calculate true benefits it was necessary to deduct tourism dollars that would have been spent in New Zealand anyway and account for profit margins: “In total, you can find about $150 million actual money-in-the-pocket benefits to New Zealand.”

“The Lions rugby tour here probably made a profit for the economy because it didn’t displace many other visitors. But the America’s Cup, held at the height of summer, in peak tourism season, could displace many more who won’t want to come here and pay the increased hotel rates and experience the crowds.”

Personally, Hazledine says, he is looking forward to the regatta and there are intangible reasons – including building New Zealand’s brand and reputation overseas – that justify holding the Cup here.

An economic boom isn’t one of them.

Key dates:
✔ September 28, 2017: 36th America’s Cup Protocol released
✔ November 30, 2017: AC75 Class concepts released to key stakeholders
✔ January 1, 2018: Entries for Challengers open
✔ March 31, 2018: AC75 Class Rule published
June 30, 2018: Entries for Challengers close
August 31, 2018: Location of the America’s Cup Match and The PRADA Cup confirmed
August 31, 2018: Specific race course area confirmed
December 31, 2018: Late entries deadline
March 31, 2019: Boat 1 can be launched
2nd half of 2019: 2 x America’s Cup World Series Preliminary Events
February 1, 2020: Boat 2 can be launched
During 2020: 3 x America’s Cup World Series Preliminary Events
December 10-20, 2020: America’s Cup Christmas Race
January and February 2021: The PRADA Cup Challenger Selection Series
March 2021: The America’s Cup Match

Protocol of the 36th America’s Cup
Key Points of the Protocol
Deed of Gift
AC75 Class Rule (v1.0)

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