Titans threat to abandon Cbus confirms governments have wasted money on super stadiums

Based on the Courier-Mail report of a threat from the Gold Coast Titans to abandon the Cbus Super Stadium, over allegedly high charges imposed by Stadiums Queensland, the huge investments successive state governments have made in super stadiums (e.g. Suncorp, Cbus and now Townsville) may have been unnecessary. Hundreds of millions of dollars that would have been better spent on health or education priorities have been misdirected. The clubs can actually make do with smaller venues. The Courier-Mail reports:

The Courier-Mail has learnt that in a tense round of high-level negotiations, the Titans issued the explosive threat to sell home games to other venues both within Queensland and interstate, leaving Cbus Super Stadium as a $160 million white elephant…Titans officials got a taste of life away from the yoke of Stadiums Queensland when they went on the road to Toowoomba and Gladstone recently and were thrilled with the operational ease and commercial success of hosting those matches.

So the clubs don’t need the super stadiums after all! That would save the state government over $50 million in grants each year (see my Stadiums Qld post from yesterday). However, I expect the Queensland Government will find a more footy-friendly Stadiums Queensland board and it will reach a new deal with footy clubs so the government doesn’t suffer the political embarrassment of a $160 million white elephant. That, of course, would be a demonstration of the sunk cost fallacy. The government is losing money via Stadiums Queensland every year and it would be doing taxpayers a favour if it closed down the most uneconomic of its stadiums and sold them to the private sector to redevelop.

Incidentally, I had several excellent comments on my Stadiums Queensland post yesterday. Regular reader Brad suggests the governing bodies (e.g. NRL, AFL) could make a greater contribution:

One area of concern here is that the stadiums should be charging the national leagues much more money to recover costs. Each of the different leagues typically collect approximately 80% of their revenue from TV rights but those funds are not distributed to the clubs. Therefore, the leagues are getting rich while the government pays for the stadiums as the clubs have no money. The state government funding of stadiums enables the leagues to keep their money rather than them paying full cost recovery for the use of the stadiums.

Regular reader Jim noted it was a timely post:

…given the additions to the stocks of loss-making sporting assets on the back of the Commonwealth Games.

And Lateral Economics CEO Nicholas Gruen asked:

What is it with stadiums? All down the Eastern seaboard governments of both political persuasions seem to have lost their mind.

Finally, on the poor economics of the Townsville Super Stadium, see this excellent post from my old friend and former Treasury colleague Joe Branigan:

Townsville Super Stadium guest post by Joe Branigan

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Stadiums Qld is a financial drain

The Sunday Mail yesterday hinted the Queensland government may replace the current board of Stadiums Queensland, given that the allegedly high charges for the use of its stadiums, such as Suncorp, are causing financial issues for football clubs. I must say I have some sympathy for the current Stadiums Queensland board, which appears to be making the best of a bad situation. They have been put in charge of a loss making government-owned business with no prospect of ever making a genuine profit. The Sunday Mail reported yesterday that:

Stadiums Queensland says taxpayers should not foot the bill for costs associated with hosting sporting events when the Government had made considerable investment in construction of the facilities. Levy prices were fixed by TransLink and Queensland Police.

“Under this model, the hirer receives the majority of game-day revenue such as ticketing, signage, sponsorship and this means in Queensland, unlike many other states, our clubs have a greater potential to derive revenue from their events,’’ a spokesman said.

Stadiums Queensland made some excellent points there. Consider the massive capital costs of its operations. Its financial accounts from its Annual-Report 2016-17 reveal depreciation and amortisation account for 49% of its expenses from current operations, $59.3 million out of total expenses of $121.5 million (see figure below).

Stadiums2

Sporting clubs and event promoters which use the stadiums do not even account for half of Stadiums Queensland’s revenue. The state government provided Stadiums Queensland with $51 million in grants in 2016-17 or 56% of its revenue (see figure below).

Stadiums1

The financial statements for Stadiums Queensland reveal a 2016-17 operating loss on continuing operations of $28.7 million, but, thanks to some clever accounting, it reported net comprehensive income of $44.5 million. That clever accounting involved an increase in the asset revaluation surplus of $73 million, i.e. it was due to unrealised capital gains. The bulk of these capital gains were not on the underlying land on which the stadiums are sitting. In 2016-17, that land only appreciated by $3 million (see p. 50 of the annual report). The bulk of it was a $70 million revaluation of “improvements”, i.e. a revaluation of the stadium assets themselves, using a replacement cost methodology. The financial statements note (on p. 47):

The valuations have been determined using a cost approach (i.e. a modern/current replacement cost) due to there being no active market for such specialised facilities.

The reason there is no active market is because the stadiums are loss-making propositions. No one would buy them unless they could redevelop the land they are sitting on. Hence, although it complies with accounting standards, from an economic perspective it is misleading for Stadiums Queensland to include the revaluation of the physical assets in its comprehensive income statement. There is no way Stadiums Queensland could ever realise the capital gains it is relying on to pretend it is profitable.

The Sunday Mail claims it has evidence that Stadiums Queensland actually makes money for the state government:

Confidential financial records obtained by The Sunday Mail reveal millions of sporting dollars are pouring into Government coffers through the Stadium Queensland deals.

I’d like to see those documents, and unless they are made public there is no way of verifying whether the estimates are reasonable. The actual published financial accounts show Stadiums Queensland is a substantial cash drain on the state government. While the cash flow statement on p. 34 reveals a net increase in cash (and cash equivalents) of $25.1 million in 2016-17, it needs to be kept in mind the state government provided operating grants of $22.2 million and capital grants of $29.0 million that financial year.* So the net cash loss on Stadiums Queensland from the state government’s perspective was around $26 million. It goes without saying there is a high opportunity cost to subsidising Stadiums Queensland. Arguably, the money could be better spent on health or education priorities, for example.

*Technical note: the key to understanding how Stadiums Queensland can actually increase its cash at bank is to recognise that depreciation is a non-cash expense.

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South Brisbane & South Townsville top Qld in building approvals so far in 2017-18

In my last post, I considered the Queensland construction industry outlook. In today’s post, I take advantage of new data on building approvals at the small area level (ABS SA2 regions) for 2017-18 so far released by the ABS yesterday. The chart below of the top 20 Queensland small areas by the value of building approvals shows South Brisbane and South Townsville leading the state. Residential approvals dominate in South Brisbane, while non-residential approvals, no doubt mainly related to the $250 million North Queensland Stadium development, dominate in South Townsville.

Approvals_top20_FYTD_Feb18

Within the Brisbane metro region (see map below), we again see the familiar pattern of development being concentrated in the inner city and outer-lying areas, partly due to constraints on development such as heritage protection in many Brisbane suburbs, as discussed in Bradley Rogers’s 2013 QEW guest post Old Queenslanders in a new city.

Brisbane_map_approvals_Feb18

In a recently published research paper Housing in Queensland, Queensland Productivity Commission (QPC) economists Matt Geck and Sean Mackay have noted that such regulations contribute to supply constraints on housing. They allude to the economic idiocy of such regulations when they note (on p. 33):

In large areas of Brisbane’s inner and middle suburbs, for example, character zoning is used to preserve the aesthetics of areas with clusters of well-located low-density housing built in 1946 or before. These clusters often surround some of Queensland’s highest-capacity public transport infrastructure, such as Park Road, Buranda, Dutton Park, Newmarket and Eagle Junction train stations.

That is, Brisbane City Council is restricting development in many of the suburbs best suited for population growth!

Incidentally, the QPC has an impressive capability to undertake economic research and it could be better utilised by the state government. It could, for example, analyse a potential switch from stamp duty to land tax, phased in over a 10-20 year period, as the ACT is doing and as QPC economists Geck and Mackay suggest may be desirable in Queensland (pp. 41-42 of their report).

I recall that, at the Australian Productivity Commission’s horizontal fiscal equalisation hearing in Brisbane in February, Under Treasurer Jim Murphy said Queensland Treasury had crunched the numbers on replacing stamp duty with land tax, but it couldn’t come up with a feasible model. According to the transcript on p. 596, Mr Murphy noted:

We’ve looked very hard at replacing all stamp duty with land tax, but it’s like other states, we’ve found it an incredibly difficult task to do that, especially as the impact on the state in the short-term.

Unfortunately, what happens in Treasury mostly stays in Treasury, so it’s hard for outsiders to judge whether Treasury’s analysis was adequate. Why not have the QPC investigate the issue and produce a public report for community debate?

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Queensland construction industry outlook

The construction industry is very important to the Queensland economy, and it employs nearly 10 percent of all workers (see Queensland Treasury’s Employment by Industry brief). One part of the broader industry, residential construction, has grown strongly in recent years, owing in part to the huge amount of apartment construction activity in Brisbane. But activity in residential construction has always been expected to fall back as projects were completed, and indeed it has been doing so. Private dwelling construction in Queensland in December quarter 2017 was 5.8% lower than in December quarter 2016. In contrast, non-residential construction activity is recovering nicely from its post-mining-investment-boom slump, with private non-residential construction increasing 11.6% over the same period. Growth in non-residential construction has therefore offset the adverse impact of the recent slowdown in dwelling construction on the state economy.

But what does the future hold? To gain some insight, we can examine building approvals data, the latest batch of which (updated with February data) were released last Wednesday by the ABS. Broadly speaking, as discussed below, the outlook is positive, based on recent approvals data and expected public sector capital works (e.g. Cross River Rail) and resources sector developments, possibly including the Adani mega mine (see this recent AFR article), although many observers remain doubtful it will ever proceed.

Non-residential construction

Non-residential building approvals have been at higher levels over the last couple of years after recovering from the trough in 2014-15 (chart below). This gives us reason to be confident about non-residential construction activity, although Queensland has not experienced the massive surge in non-residential approvals seen in NSW and Victoria.

nonres_vis_Feb18

A closer look at the non-residential building approvals data reveals a large part of the recent surge in NSW and Victoria was associated with buildings for education in the public sector. Also, Victoria has seen a doubling in the value of approvals for office buildings. Regarding Queensland, what struck me about the data is that we are disproportionately intending to invest in new retail and wholesale trade buildings, which strikes me as odd given recent trends in the sector.

nonres_bytype_vis_Feb18

Incidentally, Master Builders Queensland has a good summary of the outlook for non-residential construction in its 2018 Building Industry Outlook (p. 7):

2018 will see improvement in the demand for non-residential construction work with increased investment in a number of key industries that have been performing well.

The tourism industry will continue to perform well, requiring further investment in hotels and other short-term accommodation…Retail and wholesale trade buildings which is the largest source of demand for non-residential work, has already seen an increase in building approvals which bodes well for the coming year.

The office market will continue to work through an excess of supply and the industrial segment will see no growth.

Note that the non-residential approval figures I refer to above do not encompass engineering construction activity, such as that associated with roads, bridges, rail lines, and earthworks. But we can be confident regarding engineering construction activity due to increasing state government capital works spending (expected to increase from $7.9 billion in 2017-18 to $9.8 billion in 2018-19 according to the 2017-18 MYFER) and positive developments in the resources sector.

The Queensland Resources Council (QRC) provided me with a brief update on its sector earlier this week. Key points included:

  • According to IHS, Thursday’s coking coal price was USD 197.95—one year ago the price was USD 155.25
  • Four new coal mining leases were recently granted to Stanmore Coal securing 210 jobs
  • The Palaszczuk Government has awarded two preferred exploration tenders to two junior exploration companies, Metroof Minerals and Sojitz Coal; Metroof was awarded 86 square kilometres while Sojitz Coal received 45 square kilometres; both areas are within 60km south-east of Middlemount
  • Queensland based coking coal company Vitrinite, owners of several assets in the Bowen Basin, has signed an agreement with Japanese trading company Itochu Corporation to fast-track development of the coking coal Karin deposit

Developments such as these reinforce my confidence in the sector.

Residential construction

Regarding residential construction, Queensland’s new home approvals are on an upward trend (see chart below) and this will offset to some extent the decline in apartment construction. This was foreshadowed by Queensland Treasury last December in its 2017-18 Mid Year Fiscal and Economic Review (p. 8):

With the value of work in the pipeline now easing, it is expected that dwelling investment will fall in 2017-18 and 2018-19. However, a recent pick-up in approvals for houses, combined with a strengthening in population growth, suggests the decline in dwelling investment will likely be modest when compared with previous housing cycles.

Overall, Queensland residential building approvals appear to be at reasonable levels, while they have soared in NSW and Victoria.

res_approvals_Feb18

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Qld economy well positioned in 2nd quarter 2018, esp. given Commonwealth Games

We are now in the second quarter of 2018, and it’s a good time to review the economic outlook for Queensland. Job vacancy data released by the ABS last Thursday were very encouraging, and suggest the current economic upswing, encompassing a variety of sectors including health and aged care, education, tourism, and mining, will continue into this quarter. As Peter Martin pointed out in his article Best odds since the mining boom: 10 unemployed for each 3 vacancies, the ratio of unemployed persons to job vacancies is at a very low level nationally, so it’s a good time to be a job seeker, particularly in NSW and Victoria (see my chart below).

Unemployed_to_vacancies_ratio_Feb18

Peter Martin noted that Queensland was one of the worst states in which to search for a job. But job vacancies are actually surging in Queensland, too, being 23% higher in February 2018 than in February 2017. There is a good reason Queensland’s unemployed-to-vacancies ratio hasn’t fallen as low as in some other states and our unemployment rate remains higher (6.1% in Qld versus 4.9% in NSW, 5.7% in Victoria, and 5.5% nationwide). The reason is that Queensland has had a very strong recovery in workforce participation—i.e. an encouraged worker effect—as the state economy has woken up from its post-mining-investment-boom slumber (see chart below).

Participation rates

As you’re no doubt aware, Queensland’s economy is expected to receive a substantial positive shock early this quarter with the Commonwealth Games on the Gold Coast from 4-15 April. My colleague Nick Behrens, Director of QEAS, has a great post at his blog on the Games:

Is hosting the Commonwealth Games really worth it?

Nick has a good summary of the expected increase in visitors and expenditure associated with the Games:

More than 1.1 million visitors are expected in the lead up to, during and post the Games spending more than $870 million in Queensland.

Within this it is forecast that the Games themselves will attract approximately 672,000 visitors, spending $323 million (356,000 day trippers, spending $35 million; 265,000 domestic overnight visitors, spending $225 million 50,000 overseas visitors (including more than 6000 athletes and officials), spending $63 million).

The day trippers are probably mostly from SEQ so their expenditure is largely irrelevant to calculating an economic impact, because any Games-related expenditure reduces the amount they can spend elsewhere in the Queensland economy. Also, a reasonable share of the domestic overnight visitors will be from elsewhere in Queensland, and the same logic applies. I would guess the genuine Games-related additional spending in the Queensland economy in the 2nd quarter of 2018 would be around $250 million. This amounts to additional spending of around 0.3% of Queensland’s expected Gross State Product in the second quarter.  The spending wouldn’t all translate into additional GSP, because of leakages associated with imported inputs and also due to the crowding out of some other economic activity, but there is no doubt the positive shock will be substantial.

The state government is hoping for an ongoing rather than just a temporary economic boost from the Games, via greater tourism as a result of the international exposure, but I’m pretty skeptical about purported long-term economic impacts from sporting events. For example, the 2000 Sydney Olympic Games resulted in a surge in visitation for the period of the Games but no lasting impact (see this Conversation article Hosting the Olympics: Cash Cow or Money Pit? by two of Australia’s leading economic modellers, John Madden and James Giesecke).

Despite my skepticism about a Games-induced long-term boost to tourism, there is no doubt tourism will continue to contribute to the growth of Queensland’s economy. Generally, tourism has been growing at a good rate in Queensland (with international visitors up 4.3% in 2017), although less strongly than in NSW (up 7.4%) and Victoria (up 8.1%). For these figures and more, see:

TEQ’s 2017 International Tourism Snapshot

I noted Queensland’s potential to improve in international education in my previous post, and the same can be said for tourism more broadly. We need to remove the web of restrictive regulations that are constraining tourism investment and consider, for example, Brett Godfrey’s excellent suggestion to open up our national parks to eco-tourism opportunities (see his January 2018 Courier-Mail opinion piece).

Incidentally, based on Tourism Research Australia data released last week, domestic overnight travel (i.e. travel within Australia by Australians) is expanding at a healthy rate in Queensland, but at a significantly lower rate than in NSW and Victoria (see chart below). It’s time to reassess whether the $100 million or so provided by the state government each year to Tourism and Events Queensland could be better spent.

Domestic_visitor_nights_2017

In summary, Queensland’s economy seems well positioned at the start of the second quarter in 2018. Note I will have a close look at the outlook for construction and mining in a post very soon.

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International education booms in southern states – Qld sector growing nicely, but can do even better

In the vicinity of my office at the Johnson on Boundary St, Spring Hill, it appears that Queensland’s international education sector is booming. During weekday lunch times, Boundary St is usually teeming with students, mostly East Asian, studying at the IES college. The cafes, convenience and food stores thrive, and the Council’s free Spring Hill loop bus to the city fills up quickly. The sector certainly appears to be booming, but, as an economist, I know I should always check the data.

The release earlier this month of Tourism Research Australia’s International Visitors Survey data for 2017 has allowed me to investigate the size of the international education boom (see the Fairfax piece More international visitors choose Brisbane for other coverage of the TRA data). As I expected, international education in Queensland experienced strong growth in 2017, with international visitors (for the reason of education) up 6.9% in Queensland and visitor nights up 4.4%. But these figures were dwarfed by the growth rates in southern states, where international education is absolutely booming, and recording double digit growth rates (e.g. see chart below).

Intl_visitors_education_chart_2017

The Queensland Government may need to revisit its grandly titled International Education and Training Strategy to Advance Queensland 2016-2026. Based on how the southern states are performing, I think we can do much better.

On the International Visitors Survey data, which are available on the TRA website, also see Pete Faulkner’s post from earlier this month:

International Visitors to Australia up 6.5%; TNQ continues to suffer down 0.4%

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Huge financial sustainability challenges for Qld’s remote Indigenous councils

Queensland’s remote Indigenous councils are facing huge financial sustainability challenges, with the councils typically running large operating deficits, averaging nearly 20 percent of revenue, and running down their asset base to survive (see figure below), according to the Queensland Audit Office’s financial audit report for Councils released last Thursday (also see this Brisbane Times article Qld Council’s are more than $5 billion in debt).

QAOpost_scatterplot

While the Indigenous councils have negative net financial liabilities (i.e. they have net financial assets), this may be because of previous grant money they have received from the federal and state governments, which the councils are running down over several years. The councils appear to be strongly reliant on grants to fund their operations and to avoid accumulating massive debts.

The large majority of councils that were assessed by QAO as being of higher relative financial risk are Indigenous councils (figure below). Nine Indigenous councils are in the higher relative risk category, seven are in the moderate relative risk category, and only one, Hope Vale, is assessed as lower risk.

QAOpost_barchart_riskassessment_2

The Indigenous councils at higher relative risk are located in Far North and North West Queensland, mostly in Cape York (Map below). Their remoteness adds to the challenges they face. The QAO provided the following concise summary of the challenges facing Indigenous councils (p. 4):

Indigenous councils have a higher risk of becoming unsustainable compared to the other council segments. This is due to their inability to raise their own revenue and their reliance on grant funding. Costs of living in these council areas are also higher due to the remoteness of their locations.

The inability to raise revenue is related obviously to limited economic development in remote Indigenous communities. Unfortunately, government policies to promote Indigenous economic development and well being have been largely unsuccessful, partly related to a lack of critical evaluation and reflection on policy initiatives, as argued by Sara Hudson from the Centre for Independent Studies in Mapping the Indigenous Program and Funding Maze.

QAOpost_Map_Qld

Finally, I should note the QAO report shows that many Queensland councils appear to be performing reasonably well financially: 45 out of 77 councils ran operating surpluses and had net financial liabilities below 60 percent of revenue, the QAO’s recommended limit. Queensland councils appear very averse to debt, and it is mostly larger councils, namely Brisbane, Ipswich and Townsville, that have net financial liabilities in excess of the QAO’s recommended limit of 60 percent (see chart below).

QAOpost_NFL_Population

 

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