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).
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).
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.