Scoop Election 08: edited by Gordon Campbell

On the dubious economic case for the Auckland convention centre

April 23rd, 2012

For now, Labour and the Greens are not opposing the convention centre in Auckland per se, but are asking for the tendering process to be re-opened. That would, at least, enable a more up to date public examination of the business case for the convention centre to be carried out, to see what kind of economic risks and benefits the proposal holds for taxpayers and ratepayers, quite apart from the issues to do with problem gambling.

Right now, the most comprehensive public document on the economic case for such an enterprise was carried out by the Ministry of Economic Development, and published in 2009. One could well ask – if the business case for the convention centre is so robust, why isn’t Economic Development Minister Steven Joyce wheeling out updated Ministry research to say so?

On the weekend, Joyce denied that the government is selling out our gambling laws in return for a shiny new convention centre in the Queen City. In Joyce’s view, such deals are done all the time, as when the Labour government changed the law to provide incentives for the film industry – but that’s an extremely weak argument.

Presumably, Joyce was referring to the tax deal for the Lord of the Rings trilogy. Yet that tax deal (as then-Finance Minister Michael Cullen pointed out at the time) enjoyed bi-partisan support at select committee stage (amusingly, Richard Prebble even once claimed credit for the tax subsidy as an Act Party initiative) and the measure was passed to grandparent (and close) a tax loophole that had been opened under the previous National government. There is simply no comparison with the current sweetheart deal between Sky City and the Key government.

The need to make the business case again is real – if only because last week, some business leaders were expressing frustration that arguments about “politics and pokies” were deflecting attention from the convention centre’s alleged economic benefits to Auckland, and to the nation.

To say the least, that case is unproven. As mentioned, in September 2009 the Ministry of Economic Development released some preliminary research into the likely economic risks and benefits of an international convention centre in Auckland. Friends and foes alike of the proposal could find ammunition in that particular piece of research, which said that yes, if it was built in the right part of town – not on the waterfront – such a centre could eventually turn a profit. To do so however, and until the centre reached full capacity, an extra $10 million in subsidies would be needed from the government of the day.

Moreover, all the crucial marketing (much of it overseas) would have to be carried out by Tourism New Zealand and by Tourism Auckland, and via the website run by the conference industry’s lobbying association. As Tourism Minister, John Key has not yet indicated how much additional funding Tourism New Zealand will need each year to carry out this essential work – or will it be expected to find the means within its existing funding?

Existing budgets will be raided and opportunity costs incurred in other ways as well, in order to keep the business case for the convention centre afloat. As the MED found in 2009, such a convention centre in Auckland would be likely to succeed only if other cities (such as a rebuilt Christchurch) abandoned or scaled back any plans to compete for the available conference business. That could hurt them. Holding X numbers of New Zealand-sourced conferences annually is a crucial part of the business model being mooted. Yet other cities will have to defer, if Auckland is to succeed.

Also, the usual tourism dollar multiplier effects could not be presumed to apply in this case. As the MED report suggests, catering and banqueting onsite would be a likely ingredient of a successful business model for the centre, which means that other hotels and restaurants in Auckland could not expect to see many benefits from the conference visitors to the new centre. If anything they could lose some of their current business.

The clear winner from the proposal would appear to be Sky City. While the casino operator would need to meet the circa $350 million upfront cost in building the convention centre, Sky City would be allowed to install extra pokies in its current casino, and would also be expecting to benefit from a steady supply of well-heeled conference attendees spilling over into its gambling operations in future.

All the economic risks related to the ability of the centre to break even or turn a profit would be borne by the taxpayer/ratepayer. These risks include the global trend towards tele-conferencing, and a related trend in hard times for international conferences to be located closer to home or near to major transport hubs, such as Barcelona, Istanbul etc. Auckland’s distance from the world may attract some, but could well lose more convention bids.

As mentioned, the public would also be paying for marketing the centre both here and overseas, on top of the estimated $10 million in subsidies until the centre is fully operational and turning a profit. At which point, via a concept called “subvention” the government would almost certainly have to pay Sky City a slice of the wider economic activity that was being generated, even if that turnover was the product of marketing that the public had paid for. As the MED report puts it, “subvention policies recognise the economic value of conferences to host destinations.”

The political heat about this deal with Sky City is being turned up. The concerns about the gambling addiction problems are genuine, and likely to increase. Some publicity has already been given to the wide disparity in community returns from poker machines located elsewhere – these are set at at a minimum of 37 %, while the casino’s poker machines return only about 3% at most, back to the community.

The problem is not simply that more machines will generate more problem gamblers, although that’s a genuine concern. Those new Sky City machines will also attract existing players from machines located elsewhere, machines are paying higher returns back to the community. As yet, there have been no estimate of the likely displacement effect and cost of the extra machines being mooted for Sky City and the related decline in the funds remitted to fight problem gambling.

Finally, isn’t the whole thrust of the government’s local government reforms meant to be against councils getting embroiled in risky commercial ventures of this sort which seem to be chronically dependent on public money ? In this respect, the MED report (p 20) made a relevant point when discussing the possible imposition of a “ bed tax” on accomodation users coming here for such conventions, in order to help defray the costs to the public:

bed taxes are a blunt instrument, that target a select group of providers, but it could also be argued that they re less blunt than using general taxes or rates that are paid across society, and with no relation at all to benefits….

Exactly. Those benefits are captured by a very small segment of society. Clearly, ratepayers in Auckland and taxpayers elsewhere in the country need more information on this deal. That means having objective information on (a) the economic case for a viable convention centre and (b) on the social and economic costs of the gambling problems that will almost inevitably follow in the wake of the arrangement with Sky City that is currently being proposed. Joyce, for his part, is stressing that everything is still up in the air – from the exact number of extra pokies allowed, to the deadline for striking any deal at all.

As yet however, the government is showing only tentative sign of folding its cards, and backing out of the deal entirely. As a first step, those tenders for the convention centre need to be re-opened.

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    1. 3 Responses to “On the dubious economic case for the Auckland convention centre”

    2. By Margaret on Apr 23, 2012 | Reply

      In the 60 minute interview with Stephen Joyce a few weeks ago:- I watched it on line, Steven Joyce spoke about part of the deal involves changing the laws around Sky City advertising their gambling industry.

      Stephen Joyce said Sky City is a business so therefore should be able to advertise their business in our media, to attract more gamblers into the casino no doubt – do we want the law changed to allow Sky City more leeway in their advertising to go along with their extra pokie machines.

    3. By Andrew R on Apr 25, 2012 | Reply

      Steven Joyce demonstrated fact free decision making with his decision onroads of national significance. The decision to proceed with these was made before any cost benefit costings. Once the cost benefit costings came out showing how the holiday highway and the Levin to Wellington Airport components were net costs to the taxpayer, he just ignored that inconvenient result and (essentially) said he knows better.

      I don’t expect any different in relation to this cosy deal with Sky City.

    4. By Paul on May 14, 2012 | Reply

      The main issue of the Sky City proposal to build a convention centre appears to be the trade off involving the increased number poker machines at the casino. The income from more poker machines will help pay the costs of running the centre and increase turnover for the casino. Presumably the cost of building the convention centre will be recovered by the income from conventions and the hotel. The downstream effects, and the ethical dilemma, is likely to be more problem gamblers, along with fewer profits distributed to the community because Sky City keep a greater proportion of the profits when compared to local pub based poker machines.

      However, is it not Sky City’s purpose as a business to maximise profits for its shareholders? The economist Milton Friedman (2005) suggests that role of a business is in fact to maximise profits for its shareholders. The casino needs to examine new business opportunities that will help grow the business. By bringing on the new convention centre, the casino is fulfilling its role of increasing income and investment opportunity to its shareholders. How much social responsibility should the public expect from the casino?

      Sky City will be investing $350 million of their own money into a facility that will benefit the greater Auckland City. It will bring new business to the city which will fill hotels, restaurants and so on. Presumably it has done the figures and this proposal obviously stacks up. Sky City operates within the law, pays tax, and is legally able to operate its business. Is Sky City ethically responsible for all the downstream effects? Do not the benefits of having a large profitable company in downtown Auckland outweigh the downsides? A profitable company is able to keep operating, provide financial return to its shareholders, and employ a lot of people.
      The casino has programmes in place to help problem gamblers. How many other companies directly support customers with issues created by their business, for example, the alcohol industry? The new convention centre will bring a new market opportunity to the company and the emphasis will not be on gambling, but conventions.

      Will the addition of more poker machines as a result of the convention centre deal increase problem gambling? This is a debatable point, and no one will really know until the extra poker machines are added to the casino. There may only be a shift of gambling from other areas of Auckland to the casino with no net change in the problem. Does it make any difference for gamblers if a larger percentage of the profits go to the local community? Would this make it ethically better, when the underlying problem still exists? The issue surely is that people have gambling problems that need dealing with. This is where the social support systems paid for through taxes are best applied. The casino keeps a larger share of the poker machine turnover but don’t forget they also have added expenses like staff wages, electricity, rates and so on. The local pub machines don’t have these extra costs because they are paid to have machines on their premises.

      The casino is operating in an open and competitive market. They are still free to gamble at their local poker machines, and they do not have to support Sky City Casino. Friedman (2005) would argue that participation by gamblers is voluntary and ‘they need not participate’ (Friedman, 2005, p. 254). The casino is fulfilling its social responsibility by conforming to the basics rules of society and following the law. There is no requirement ‘to contribute to a general social purpose’ (Friedman, 2005, p. 254).

      Utilitarianism, where an action should produce the greatest good also applies. The ‘greatest happiness’ (Rachels and Rachels, 2010) to Auckland would be the creation of a convention centre. Should a small percentage of problem gamblers hold hostage a $350 million development? Surely the benefit to Auckland of a new facility that produces many jobs, and brings new tourists to the city, outweighs the downsides of a few that may be affected by the introduction of a few more poker machines? The poker machines already exist, so they are not a new threat. The benefits to the many outweigh the downsides to a few. This is often the case for many new developments, including for example, motorways.

      Your statement that ‘isn’t the whole thrust of the government’s local government reforms meant to be against getting embroiled in risky commercial ventures of this sort’ is quite correct. There have been many examples of local authorities wasting ratepayer’s money. Therefore I fail to see how Sky City Casino, through paying for the convention centre itself, can be putting ratepayer’s money at risk. Surely this eliminates the risk for rate and tax payers? It is not the ratepayers, nor taxpayers who are stumping up the $350 million.

      Reference

      Friedman, M. (2005). The social responsibility of business is to increase its profits. In G.D. Chryssides & J.H. Kaler (Eds), An introduction to business ethics (pp.249-254). London: Thomson Learning.

      Rachels, J. & Rachels, S (2010). The Elements of Moral Philosophy (6th ed). New York: McGraw Hill.

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