America’s Cup and Cost Benefit Analysis

There has been a lot talk about the impact of the America’s Cup and the economic impact it will have on the Auckland economy. Consultancies have suggested that the Cup could generate up to $1billion injected into the NZ economy, thousands of jobs created, a return of more than seven dollars on every dollar invested in new wharf facilities. These figures have come under criticism by Tim Hazeldene in the NZ Herald.

As for the value-added injection and the jobs created: to a first-order approximation, the net number of new jobs created in Auckland, with its already stretched construction and tourism industries, will be about zero. The workers needed will be bid away from other jobs, or imported as new immigrants. As a result, there will be no significant real output increases, the extra spending will be soaked up in higher prices.

Higher prices are harmful for domestic New Zealand customers and travellers but beneficial to the bottom lines of New Zealand and foreign owned businesses. It’s a trade-off. My expectation is that, overall, there will be net economic benefits from holding the Cup in Auckland but that they will be quite small — below the costs to which national and local government are being asked to contribute.

The economic impact is based a lot on the multiplier effect but the use of cost benefit analysis also considers those external costs and benefits which are not easily convertible into a monetary value.

Evaluation of CBA
It is clearly more efficient for public spending to be subject to rigorous analysis, rather than based on the whims of politicians. However, there are a number of criticisms of CBA, including:

1. It is often very costly to undertake, though usually this forms a very small proportion of total project spending.
2. Assessing the monetary value of external costs and benefits is often very difficult. What precisely is the value of the congestion that would be reduced if a new bi-pass were built around a busy town? How much extra tourist revenue will actually be gained from a new airport? How long will the building be used as a venue, as in the case of the Viaduct area in Auckland for the 2020 America’s Cup. One solution to this problem is shadow pricing, where analysts attempt to place a value on the costs and benefits of a decision or a project where an actual market price does not exist.
3. Changing circumstances can make initial projections appear grossly inaccurate. The Wembley Stadium project in London went considerably over-budget, and the majority Olympic Games are far more costly than originally estimated. For instance the Montreal Olympics in 1976 was eventually paid off in December 2006. Higher interest and inflation rates, and falling exchange rates can all dramatically affect costs.
4. Actual costs can also rise above planned costs as a result of moral hazard, where project managers go over budget because they expect that those who fund the project will make extra funds available, providing an insurance against their over-spending.
5. Ultimately, decisions to go ahead with projects are only guided by CBA, leaving politicians to make the final decision. Politicians are free, of course, to ignore the results of an appraisal.

If you have read the book Circus Maximus you will no doubt be aware that most big sporting events run over budget and in some cases don’t generate the benefits until well after the event if at all. So just because an event runs over budget is that enough to say that we shouldn’t go ahead with the event. There are a great many other benefits of hosting an event like the Americas Cup which are not measured by GDP. The sense of community and wellbeing that comes from New Zealanders performance whether it be in rugby or at the Olympics. It tends to bring people together feel a sense of belonging which has external benefits. More recently the NZ government have introduced the Treasury Living Standards Framework – LSF

The Living Standards Framework

The Treasury Living Standards Framework draws on international work to supplement income based on measures of well being. So as well as GDP – which tends to be the standard indicator as to the health of an economy – other indicators such as:

Natural Capital – land, soil, water, plants and animals
Human Capital – skills, knowledge and physical and mental health
Social Capital – Trust, rule of law, cultural identity
Financial and Physical Capital – Houses, roads, buildings, hospitals etc.

So how will the above be impacted by the America’s Cup in Auckland?

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