Saturday, December 01, 2007

Sunday dollars+sense: This'll be worth millions!

Dishonest spruiking masquerading as economic analysis.

The standard of journalism on commercial television, rarely high, hit a new low on Wednesday.

That’s when were told in all seriousness that the visit of David Beckham to Sydney would boost its economy by $20 million.

They are the sorts of claims frequently made but hardly ever tested.

The Australian government has done everything it could to frustrate independent testing of the absurd claims made about the Sydney 2000 Olympic Games. It was meant to bring in an extra 1.5 million tourists in the months that followed. In fact tourism numbers collapsed - even before the September 11 terrorist attacks.

In Canberra at that same time a series of V8 car races was meant to bring the city $11 million to $13 million each year by creating a “vibrant city”.

Our government kicked in $4.5 million in capital works and a $2.5 million per year subsidy, which climbed to $4.7 million.

On this occasion the Auditor General did get to look at the books. Mark Harrison, the consultant who prepared the report, was stunned.

Here’s what he told me at the time: “The Cabinet submission couldn't even add up the numbers properly in its columns. It didn't discount future cash flows, which had the effect of exaggerating the net benefits of the project by more than a third. It involved double counting, and the benefits it did list were vastly exaggerated.”

He concluded that the event had actually cost the territory money. In his language, it brought “significant negative economic results”.

As it battles to survive I am half expecting the National Capital Authority to claim that Friday’s Elton John Concert brought the territory a net economic benefit.

It certainly benefited him. But Canberra, or the nation?

Most of the people who go to these events are locals (nearly all of the visitors to Floriade are). If they spend money or time there, it is likely they are not spending money somewhere else.

Most of the non-locals come from other states. Even if their spending boosts the ACT’s economy, it doesn’t boost Australia’s.

And if ever thousands (or millions) of visitors did come from overseas for a big event and spend like crazy, the main effect would be to push up Australia’s exchange rate and hotel room rates. And perhaps even interest rates.

So please, no more talk about the Beckham effect. And no more about Sir Elton. Unless it’s about football or music.

ACT Auditor-General’s Office, Performance Audit Report. V8 Car Races in Canberra, Costs and Benefits July 2002.

Peter Martin, The Economics of Big Events, Insight, SBS TV, October 09, 2003 (transcript below):

The economics of big events:

The Rugby World Cup kicks off tomorrow across the country. There will be 48 games from 20 national teams spread over seven weeks.

We've been promised it'll create jobs in every Australian city and give our nation an $800 million economic boost. But do the figures stack up? Economics correspondent Peter Martin.

PETER MARTIN: This man is obsessed with rugby.

TIM HARCOURT: It's the game they play in heaven.

The game is as important to him as economics. Tim Harcourt is the economic chief at Austrade, where he speaks about Australia in terms of rugby.

TIM HARCOURT, AUSTRADE: If you think about the Australian economy, it was very much closed and sort of very amateur, a bit like rugby used to be.

The Rugby World Cup, bringing 20 nations to Australia for 48 games in 10 cities, from tomorrow, will be a defining moment for the game in Australia and perhaps for Australia itself in the view of economists like Tim Harcourt.

TIM HARCOURT: In terms of direct benefits, the Australian Rugby Union estimates around 800 million.

REPORTER: Extra boost to the Australian economy?

TIM HARCOURT: In terms of expenditure.

REPORTER: Almost $1 billion?

TIM HARCOURT: There's been ranges, up to 800, some have been 400, some have been 800, some have been up to a billion. We've also seen estimates of international visitors, people coming here. The estimates have ranged between 40,000 and 55,000 visitors, internationally.

BOB CARR, NSW PREMIER: Distinguished guests, ladies and gentlemen, Sydney is greatly honoured to be hosting the Rugby World Cup.

They are forecasts enthusiastically endorsed by Bob Carr the Premier of the main host State. He speaks about a benefit to NSW alone of $300 million an extra 2,500 jobs, an extra $2 million in payroll tax. They're impressive-sounding numbers of the kind we've heard before, but can we take them seriously? In the case of the Rugby World Cup probably not. In an earlier life, John O'Neill was head of the State Bank of NSW, he's now head of the Rugby Union, and in charge of the Cup. John O'Neill came up with the figure of an $800 million World Cup by extrapolating from a Victorian estimate of the benefit of hosting the Bledisloe Cup in 1997.

JOHN O’NEILL, AUSTRALIAN RUGBY UNION: So if it was $60 million for one match over three days, and you think about 48 matches over 7 weeks and it's a World Cup, 40,000 visitors from overseas, 100,000 Australians travelling interstate to watch games, I don't think it's very hard to substantiate, albeit a guesstimate, of 800 to $1 billion of economic impact.

But the Victorian Government estimate was based, in part, on spending in Victoria by visitors from interstate. It's irrelevant in a national context because it doesn't take into account the money the interstate visitors would have spent had they stayed at home.

ADVERTISMENT: For every fan who's travelled from afar to support his or her country, Australia is ready. You beauty!

And there are other more fundamental problems with the estimates of benefits from the World Cup, as there are with the estimated benefits of just about every other big event ever held in Australia.

As good a place as any to begin to understand the mysterious art of estimating the economic benefits of big events is Floriade, Canberra's annual spring flower festival. Each year it attracts 300,000 visits. But that's not the economic benefit - which is what Angela Smith and her team from Canberra University have been commissioned to determine. They start by eliminating those visits that don't add to the ACT economy.

ANGELA SMITH, CANBERRA UNIVERSITY: Well, firstly, we screen out local residents - they were gonna be spending that money anyway, so, for example, going to the local mall to buy a coffee or going to the local nursery to buy some flowers.

ANGELA: So how many times a year do you come to Canberra?

And then we move on and talk to those who are from out of town.

ANGELA: OK, would you have travelled to Canberra on this occasion if it were not for Floriade? OK. Thank you very much. Enjoy your stay. Thank you, bye-bye.

We want to screen out those people who came basically to Canberra for other reasons. They have bought money into the local economy but Floriade is not what bought their money into the local economy.

Their conclusion - the benefit to Canberra isn't the 300,000 people who pass through the Floriade turnstiles, it's the mere 38,000 visitors attracted to Canberra especially for the event, and the money they spend. But even that is most probably an overestimate of the benefit to Canberra. It takes no account of those visitors who would have come to Canberra but stayed away because they knew Floriade was on.

What the promotional videos don't say is that every big event brings with it negative effects as well as positive. The Sydney 2000 Olympics illustrated that perfectly. The Games were good for restaurateur Stan Sarris and this business in the heart of Sydney's party zone, but very bad for others.

STAN SARRIS, WINEBANC: And it was reported. I mean, it's quite common knowledge, it was reported some businesses were down 20% or 30%.

They're negatives not usually counted when economic impact statements are compiled.

MARK HARRISON, ECONOMIC CONSULTANT: They tend to exaggerate the benefits and ignore the costs and, in fact, the net benefits that result from these things are often only 5% or 10% of the kinds of numbers that these studies come up with.

Canberra resident Mark Harrison was employed by the ACT Auditor-General to examine a Government decision to back a series of V8 car races. He was shocked at what he found.

MARK HARRISON: The Cabinet submission couldn't even add up the numbers properly in its columns. It didn't discount future cash flows, which had the effect of exaggerating the net benefits of the project by more than a third. It didn't deal adequately with the risks that were being imposed on ACT taxpayers by the agreement to underwrite the race. It involved double counting, and the benefits it did list were vastly exaggerated, I estimated by over 50%.

The shoddy state of the assessments used to justify big events is an open secret among Australian economists.<>
Peter Forsyth is Australia's pre-eminent micro-economist. With John Madden, he's part of a small team attempting to introduce what he calls best practice into the assessment of big events. That means evaluating their surprising costs as well as their more obvious benefits.

PETER FORSYTH: If, for example, people come from overseas to go to the Rugby World Cup, these people will come and spend money in Australia, so what we've got is a - let's say a mini export boom. Now, what we know from export booms is that they tend to push up exchange rates. That tends to squeeze out other export industries. So these industries could be the primary exporters, the mining industry and indeed, the elaborately transformed manufacturing industry.

Using techniques that are standard in other areas of economics, Peter Forsyth is able to trace all of the connections to estimate the net effect of an event on Australia's gross domestic product, which he then slashes to work out the net national benefit.

PETER FORSYTH: When you get an increase in GDP, this invariably means that extra resources, extra inputs have to be used. More labour, more capital, more land, you name it - they're not free, and we have to factor in that cost.

REPORTER: And when you do that, how much lower is the economic benefit?

PETER FORSYTH: When you take into account other costs, for example, the cost of building up infrastructure, any environmental costs that some of the special events might have, then the net benefit from these events could well be negative.
Even if we accept that big events are beneficial, even the biggest of them has had only a tiny effect on the Australian economy. The $6.5 billion Olympic boost sounds big, but it was an estimated benefit over 12 years, and amounts to only 0.1% of Australia's GDP each year.

JOHN MADDEN: And it might not have been as high as 0.1% if in fact the effect on real wages or the number of tourists weren't exactly what we assume they were before the event.

And they almost certainly weren't. The Government assumed an extra 1.5 million tourists would visit Australia in the years following the Olympics, 10 times as many as came here during the Games itself. In fact, tourist numbers fell a year later as a result of other global events and showed little sign of recovering. However, there's one very big beneficiary of the hype associated with the World Cup - and that's the Australian Rugby Union. It's convinced each of Australia's State Governments to pay it money in return for the right to host some matches in the weeks ahead.

JOHN O’NEILL: Governments make these decisions with their eyes wide open. It really is the business that governments are in these days. Sports, business and politics do mix.

Politicians love big events. They get to rub shoulders with sports stars...

PREMIER BOB CARR: It doesn't come better than this.

..and seduce the media into taking an unusually non-critical approach.

REPORTER: This must be a proud moment for you tonight. It's times like this where we can build on this, isn't it - tourism, other industries? And, as you say, there's a long-term benefit, not just a short-term benefit?

BOB CARR: It brings money into the country. All those people who have been doing it tough - tourism industry, the restaurants with low bookings, the hotels with low occupancy rates, this is a boost to them.

They can play up economic expectations and then move on before the outcomes are properly assessed.

STAN SARRIS: People will get, you know, quite tired of the World Cup being in their face all the time.

Bar owner Stan Sarris isn't taking chances in the weeks ahead.

STAN SARRIS: We're going to make it more of a comfort zone. It's a getaway, it's a chill-out zone, if you like, from the World Cup.

TIM HARCOURT: We've got nearly, as of this morning, nearly 6,000 members of the rugby business club.

While at Austrade, Tim Harcourt is talking up the Cup's potential to create what he calls accidental benefits for exporters.

TIM HARCOURT: 50% of new exporters meet, you know, meet their partners by accident. It's like a Jewish matchmaking service. We basically find the companies from overseas that are going to come here to watch rugby and we're gonna match them up with exporters here.

It's an approach that may miss the point of what the World Cup is really all about.

PETER FORSYTH: I think we have lost sight of the ball in the case of valuing special events. The main purpose of the Rugby World Cup is to have some great games of rugby and the main benefits are likely to be in the benefits that the consumers of rugby, namely the rugby fans, are getting. And those benefits are probably very substantial.

JOHN MADDEN: Don't see this as a big economic boost, right. It's not a big economic boost. It's a really big sporting event.

Worth enjoying on its own terms, without pretending it will do much at all for our economic health.