My fellow economists and friends are doing a good job of making me redundant as a blogger. Today’s guest post is from Joe Branigan of the SMART Infrastructure Facility and Cadence Economics. GT.
So JT* wants a brand new football stadium in Townsville.
There’s a stadium already in Townsville that seemed to work pretty well last Friday night when the Cowboys overran the Broncos, and no one has raised safety concerns.
Sure, the existing stadium doesn’t have corporate boxes featuring gigantic fish tanks, a sushi chef and mood lighting but it hasn’t reached the end of its useful life, has been upgraded regularly and, with ongoing maintenance and more upgrades, the stadium could probably last another decade. Perhaps enough time for the Cowboys, the NRL and broadcast rights holders, the Townsville City Council and ticketholders to save up and pay for a new one themselves.
The Department of State Development took a look at the proposal for a $533 million stadium (that includes an initial $250 million construction cost and $283 million in ongoing maintenance costs) and found ‘negative benefits’. In other words, DSD found that the project was a bad idea and taxpayers money would be better spent elsewhere.
The ‘benefit-cost’ ratio of 0.24 didn’t come within a bulls roar of a barely passable 1.0 let alone the commonly accepted benchmark of at least 1.5 to cover for the inevitable optimism bias from salivating project proponents, the cost of raising the taxes to pay for the stadium (which the Henry Tax Review estimated to be 30-40 cents in the dollar), not to mention the general uncertainty around any estimate of a project’s future costs and benefits.
So what do you do if you are one of the backers of this project and the original cost benefit analysis comes up a bit short? You do another one of course – and add in a few ‘extra benefits’ to try to get your project over the line.
The ‘extras’ business case for the Townsville Stadium was released last week, presumably timed for maximum impact during the federal election campaign.
The first problem with the report is that it’s not clear about the purpose of the taxpayer investment (is it jobs, urban development, stadium amenity?). When playing around with taxpayers’ money, you need to be very clear about what the problem actually is. Otherwise, you can’t identify the lowest cost way to solve a problem if you haven’t even identified one.
The report simply compares a new stadium to the existing stadium, and assumes that 1300SMILES Stadium can’t be upgraded over time. But of course the stadium has been and can be upgraded incrementally in the future – in the same way that we might renovate our house over time rather than opt for a much more expensive knock down and rebuild.
There are several technical problems with the analysis, such as counting construction wages as a benefit, when it should be a cost, and counting the projected increase in property values near the stadium as a benefit (which, depending on the approach used in the confidential DSD CBA, could be double counting), without counting the reduction in property values near the existing stadium as a cost.
The report counts as a benefit increased spending at the stadium, but it does not subtract the inevitable reduction in spending by tourists and visitors in the surrounding regions or wherever those visitors are from. After all, we can’t be in two places at once and we can only spend a dollar once.
Proponents of new stadiums all over the world argue that their project will improve the local economy by creating construction jobs and generating new spending, bringing in more tourists and creating a ‘multiplier effect’ that raises local income and causes still more new spending and job creation. They also like to argue that new stadiums spur so much economic growth that they are ‘self-financing’ providing new tax revenues back to the government.
In his book Sports, Jobs, and Taxes, Professor Roger Noll of Stanford University finds that new sports facilities have either an extremely small or negative impact on overall economic activity and employment in the local region. Noll examines dozens of case studies in the United States and finds that: “No recent facility appears to have earned anything approaching a reasonable return on investment. No recent facility has been self-financing in terms of its impact on net tax revenues.”
But even if there was to be a small benefit to the Townsville economy from the injection of $250 million from outside the city, Queensland and Australia lose. And, if the investment is a bad one, as the original DSD report indicates, then the losses outweigh any local gains.
Here’s the reality check: 1. The mining boom is over, which means government revenues are permanently lower than during the last decade. 2. Spending commitments to health, education, pensions and the NDIS are growing faster than the rate of economic growth soaking up more and more of the Federal and state budgets each year. 3. Queensland Treasury has forecast fiscal deficits and rising net debt in each year for the rest of this decade. 4. We therefore no longer have the luxury or the leeway to make bad infrastructure investments.
Joe Branigan is a Senior Research Fellow at the SMART Infrastructure Facility and an Associate with Cadence Economics
* I suspect Joe is either referring to Johnathan Thurston (above) or a prominent politician with the same initials. GT.