Funding The National Religion

Keeping score with the cost of the Rugby World Cup

by Gordon Campbell

Like most clichés, the notion that rugby is this country’s national religion has an element of truth to it. That’s if you think of religion as a code for punishing the flesh on a weekly basis, in order to achieve a fleeting sense of spiritual elation and moral superiority. It is a competitive sport, this quest for God – but you can only achieve it (so they say) when you stop trying so hard. I’m sure Graham Henry has already taken that on board.

Certainly, successive Rugby World Cup tournaments since our sole victory in 1987 have been way stations on this country’s Calvary road of penitence and humiliation (“If it is possible, let this Cup of Suffering be taken from me.“ Matthew 26: 39) as inexplicably, we keep on falling and losing, losing and falling…If anything, this year could be even more difficult. This time, the stakes for the All Blacks have been raised by the prospect of (a) being humiliated in front of the people who believe in them most and (b) New Zealand having spent truckloads of money on a tournament that a financially depressed nation can ill afford. No pressure, guys.

Just how much money New Zealand is spending – and how much it stands to gain or lose – from the RWC are deep mysteries, and I’m not going to pretend to produce a final and complete balance sheet here. The interesting thing is that we are extensively subsidising the RWC process, and what the readiness to do so says about us. For years, New Zealand has been flexing in the mirror and admiring its hyper rational, market toned physique – no subsidy flab on this neo-liberal diet, people.

So how do we square that with a Rugby World Cup that floats entirely on a cushion of subsidies, where an allegedly professional sport has its facilities and tentpole events largely paid for by taxpayers and ratepayers, and where we seem to have no qualms about picking winners and prioritizing the business of rugby above all the other investment options available? To that extent, there is ample reason to regard the Rugby World Cup as corporate welfarism on steroids. Other countries may have had stimulus packages to get them through the global recession – while all around the country, we built and/or renovated facilities for the Rugby World Cup.

Does it make sense – either on principle, or as an investment? Not much. Are hundreds of millions being spent for nebulous returns? It would seem so. We can – and probably should – quibble about the costs and the rewards but the reality is that the Rugby World Cup is happening regardless, and the tournament is more about faith than economics. In future, New Zealanders won’t be able to say anything bad about the poor in India who place their humble offerings on golden altars in opulent temples that they can’t afford, not by any rational yardstick. We resemble them in more ways than we like to think. Because when it comes to the Rugby World Cup, we’re dealing in the economics of faith and feeling, and not in the measurement of material reward. It is about the pursuit of transcendence.

Running the RWC is not all that different from running a KFC outlet. We pay for the right to manage it, and – as in every other major enterprise of this sort, the big winners are the people who own the rights to the franchise and not the people who manage the outlet, serve the customers and clean the premises. In that respect, New Zealand stands to do no better – and no worse – than other countries have done of late from hosting major sporting extravaganzas.,

Sri Lanka for instance, has just racked up an initial $23 million loss this year from staging the recent Cricket World Cup tournament on behalf of the International Cricket Council, thanks to the building and renovation costs for the stadiums involved. South Africa is a special case, in that – as a relatively undeveloped country – it had to build the stadiums and facilities for the FIFA Football Cup last year from scratch. Even so, as the Daily Telegraph reported last December, things turned out far worse than expected :

South Africa made a return of just £323m on the £3bn it spent on building stadiums and infrastructure for this summer’s tournament, according to official figures.

Moreover, South Africa got fewer tourists than expected :

The country predicted it would receive an initial boost of £570m from tourists flocking to attend the festival of football. However the tournament failed to attract as many foreign visitors as expected. Marthinus van Schalkwyk, South Africa’s tourism minister, said just 309,000 foreign fans attended the tournament, compared to predictions of 450,000.

In addition, a narrow range of firms benefitted from the economic stimulus provided by the tournament :

South African-based companies also failed to reap the benefits of the tournament, according to a study by KPMG. Just 22pc of KPMG’s 100 biggest African clients, including several multinationals, said they had benefited from the World Cup, compared to 45pc predicting a boost last year.

FIFA, on the other hand has done extremely well out of the nations who have been willing to take on the hosting role. As FIFA president Sepp Blatter recently bragged, FIFA’s income has grown in spectacular fashion during his tenure :

[FIFA] grew exponentially by a factor of 16: we went from $257 million in the period of 1995-1998 to $4.189 billion after the South African World Cup, [during]the period 2007-2010.

How could FIFA – and similar governing bodies – do otherwise, when the deal entails the host nation paying for all the infrastructure and running costs while the licensing body (for the RWC, this will be the International Rugby Board) takes all the royalties and rights? Hosting can become a debt nightmare. Montreal, for instance, took 30 years to finally pay off the billion dollar debt burden that the province of Quebec incurred from hosting the 1976 Olympics. The Japanese city of Nagano spent so much on the 1998 Winter Olympics that the officials reportedly destroyed the financial records of the event. The economics of next year’s Olympics in London are proving almost as controversial. Besides a 387 million pound debt legacy that will be inherited by the Greater London Authority when the agency hosting the Games winds up in 2012, there are already reports that the spin-off benefits promised to east London at the time that London made its successful bid are simply not materializing:

Why then, if hosting such events is almost a surefire way of losing public money do cities, countries and governments continue to clamour to host them? In February 2010, the CNBC network asked the very same question about hosting major international sports events, such as the summer and winter Olympics. CNBC’s answer ? People get carried away by their own rhetoric :

So what makes a city want to host the games when the whole project so often turns into a money pit? There’s a ‘stirring of the blood’ when [local and central government] committees, consultants and officials get together.

“The motives of the committee members can vary from civic pride to raising their own profile,” says [La Salle University economist David] Robison. “They start building the case for the public to host the games. The momentum gets going and it’s hard to stop. Everyone starts seeing dollar signs even if they aren’t really there.”

During the 2000s, whenever the need arose for a dose of enigmatic wisdom about the workings of public policy, it was always hard to go past former US Defense Secretary Donald Rumsfeld. In his diary entry for May 10, 2002, Rumsfeld could have been talking about our willingness to spend public monies on the RWC tournament when he wrote :

Subject : Spending money. When people spend their own money on themselves, they are careful about how much they spend and about what they spend it on. If people spend their own money on others, they are careful about how much they spend, but not as careful about what they spend it on. If people spend other peoples’ money on themselves, they are not careful about how much they spend, but they are careful about what they spend it on. If people spend other peoples’ money on other people, they are not careful about the amount of money they spend, nor are they careful about what they spend it on.

So true. As yet, there has been little in the way of comprehensive data on the scale of spending by central and local government on the Rugby World Cup, and the likely – as opposed to hoped for – net returns. In June, the ANZ Bank will release a survey of the potential impact of the RWC on the private sector. In late April, the New Zealand Herald published a controversial article about the economics of the Rugby World Cup. Essentially, the Herald estimated a circa $500 million shortfall between their tabulation of the money committed, and the benefits. Their tally: $1.2 billion in outlays including $555 million in stadium upgrades. The estimated direct economic returns? About $700 million. Of that $1.2 billion outlay, the Herald estimated that ratepayers would be stumping up for $288 million, and taxpayers for much of the rest. Not all of it would be new money, nor would some of the benefits be short term. As the Herald report noted :

Included in the survey are projects that will be useful after the cup – such as improvements to signs – and spending that has come out of existing budgets. Some, including turf upgrades, might have been necessary regardless of the tournament. Other expenses – such as the $12 million inflatable rugby ball used to advertise the tournament and $150 million in hosting fees paid to the International Rugby Board – are of more limited benefit.

The Herald figures do not appear to include the offsetting money from ticket sales, which are being forecast by officials to be still on track to the sales target of $268 million.

As we shall see below, it will matter a lot how many foreigners (as opposed to locals) are buying those tickets. The critical reaction to the NZ Herald report – epitomized by this angry response by the Newmarket Business Association – claimed that much of the spending has been on stadiums and other infrastructure that will be of lasting benefit to the community. Perhaps, but that’s almost a given. It would seem inevitable that spending on this large scale would have some lasting effects – and that’s why Treasury is normally sceptical of special pleading mounted along those lines. In rebuttal, Treasury usually cites the opportunity costs of what would be foregone, due to the spending path that is being advocated. Recently The Economist magazine described the concept of opportunity cost in these terms :

The true cost of something is what you give up to get it. This includes not only the money spent in buying (or doing) the something, but also the economic benefits that you did without because you bought (or did) that particular something and thus can no longer buy (or do) something else.

In the case of Auckland, it could be argued that spending on the RWC has already crowded out the funds available for such things as the CBD rail loop – which, arguably, can mount a far stronger case for its lasting social and economic benefits.

Moreover, the overseas evidence suggests that stadiums can be a dubious community asset – in that they lie relatively idle for much of the year ( in stark contrast to the daily use that communities make of libraries) and they entail high and ongoing maintenance costs. Opportunity costs however, do not seem to be mentioned anywhere in the defences of RWC spending that have so far been mounted. In the NZ Herald report, RWC Minister Murray McCully simply cites the $700 million in direct benefits, and the allegedly lasting economic advantages of the investment :

Mr McCully said there was real value in an event such as the cup. “We’ll get about $700 million or so of income as a country from people coming to visit, and we also will be investing in assets that will provide a return for many years.”

The striking thing about McCully’s estimate is that the $700 million is said to be income “ from people coming to visit.” This is a salutary reminder that the Rugby World Cup is essentially an income neutral exercise when it comes to spending by New Zealanders. Meaning : what we spend in September/October at RWC venues – and thanks to the Christchurch earthquakes, most of the RWC spend will now mainly be of benefit to the North Island – is the same money we would have spent elsewhere during the year on other things, both before and after the tournament.

That’s why it matters so much how many foreigners stump up to buy the tickets. There will not be much (if any) added value if the “sold out” signs at the games have been the result of New Zealanders buying the bulk of the tickets. Yet as of April, ticket sales were still $100 million short of the estimated target. And while RWC chief executive Martin Snedden has remained upbeat about the rate of demand for tickets, it seems very likely that when say, the final bundles of tickets get released on July 4, the bulk of them will be sold locally, and not to people coming from outside New Zealand.

The other major question is – how reliable is that $700 million figure? Has it included (or subtracted) the spending by our normal level of visitors during the September/October period? Ultimately, the best way of working out the value of the RWC tournament will be to calculate the arrivals that occurred in September/October last year – and then compare the stats for the same period this year. This comparison should clearly tell us whether the RWC has (a) significantly boosted the tourism spend (b) merely compensated us for the general decline in tourist activity this year, worldwide or (c) had little discernible impact. By early 2012, the figures for that exercise should be readily available.

For now though, the RWC organizers are continuing to cite a figure of 85,000 foreign visitors expected here for the Cup. This figure was not been publicly revised (up or down) since it was first announced late last year, In part, the 85,000 estimate relied on projections derived from the visitor numbers achieved during the last Lions tour – ie, before the global financial crisis came along.

That could be a worry, given that the NZ Tourism website shows that visitor numbers from the United Kingdom are currently down by 25.8% for 2011. That’s either very bad news – or a sign that every possible Pom visitor this year is timing their holiday/business visit to co-incide with RWC 2011. Maybe the Poms will all arrive at once. We can only hope.

Foreign visitors tend to spend about $3,000- 3,200 each during their average stay of 20 days in this country – multiply that by 85,000 and accept the normal multiplier effect (of two or times that amount as the monies circulate through the economy) and you get somewhere between a lowball outcome of $510 million and $765 million at best, which is roughly the figure that McCully and RNZ governor Alan Bollard seem to have been relying on.

Currently, the tournament itself is expected to ring up a $40 million operating loss, to be borne by a joint venture where two thirds of the loss is to be met by the government and one third by the NZRFU. The Budget papers (see pages 139 – 140 of the Budget Executive Summary, in the section listing Crown contingent liabilities of over $100 million ) go on to cite the Crown picking up the tab for the added costs from any income tax incurred by the 2011 Office or Rugby Union via the RWC joint venture. The government has also apparently agreed “to re-imburse NZRU for New Zealand with-holding tax that might be incurred on certain payments made in relation to the tournament.” No word yet on the likely cost of these tax breaks.

Lets go back to the foreign visitors. As this point, we can’t know how many of them will be additional to the normal visitor numbers during September/October. As mentioned, the RWC tournament may (a) deter some tourists who otherwise might have come here ( b) top up the usual tourism spend we would have got anyway or (c) bail us out from a situation where tourism numbers are in decline.

Apologies for the multiple uncertainties – but I hope it is sufficiently clear that the public investment in the RWC has been a huge up-and-under kicked hopefully aloft – and we will have no way of telling the outcome of where it has landed until we get the breakdown of visitor numbers for September/October 2011 and of the foreign vs local split in ticket sales. Tune in again sometime in early 2012.

How much of a gamble is involved with this kind of speculative allocation of public money? For insight, I turned to tourism academic Dr John Moriarty (pictured left), a senior lecturer in Victoria University’s School of Management. Moriarty has had 25 years of private sector experience as a senior manager in IT, rail and telecommunications. More recently, Moriarty has been involved in several official research projects into the financial and economic drivers of tourism in New Zealand.

Yes, he confirms, around two or three is the accepted multiplier effect of tourism spending on – for instance – accommodation and retail in the wider economy. “The trouble is, that technique by itself is nothing more than a very grand approximation. I know that its been used by a lot of regional tourism associations to justify more advertising from their stakeholders in central and local government.”

As this article has stressed, Moriarty also believes it is crucial to work out where the dollars are coming from. “If they’re coming from overseas its very simple. Most overseas folk will have an average expenditure in New Zealand of around $3,000, minus air fares which are not counted. The average overseas visitor for an average length of stay [currently about 20 days]will spend about $3,000. All of that counts. Aussies spend a lot less, Japanese spend a lot more, Germans spend more …”

Moreover, Moriarty also confirms, domestic spending will not only be fiscally neutral, but will indeed be telescoped into the period of the tournament itself, to the detriment of retail spending before and after :

“What normally happens for domestic tourism is they money not spent in Auckland is spent in Wellington. And money mot spent in Wellington will be spent somewhere else. There’s no net change, across the country. All that happens over the course of the year is that the money to be disposed of gets spent quicker or slower, but we roughly spend the same amount. Our employers won’t shell out more money to indulge us when we feel like being happy.

So, a lot of these RWC type things are probably best looked at very objectively from their overseas content because the NZ content is neutral ….We’re seeing this in the industry where a lot of tourism expenditure has stopped at the moment. People aren’t patronizing hotels as much as we would have expected them to. And we also at the moment believe that after the RWC that the patronage again, won’t be as high as we would have expected. So, people are showing a kind of prima facie pattern of deferring their expenditure to the Rugby World Cup…The net effect is that they will spend what they were going to spend over the period of 12 months.

There is also a tendency, he believes, for the likely returns to be over-stated :

“When we do international studies on this sort of thing we see the multipliers coming back, back, back and not being as high as people thought, because the economic analysis is becoming more and more sophisticated and they’re overcoming some of the very gross assumptions that optimistic people have been making about it.

Okay. But going beyond these more sophisticated methods of quantifying the accommodation and retail spend – aren’t there also some far more intangible halo effects that will be to New Zealand’s benefit, arising from the positive perception of the country that (hopefully ) will be fostered by us staging a successful tournament ?

Moriarty : “We’d like to think so. But when you talk about the halo effect you’ve also got to talk about the other halo effect of revenue foregone. We foreswore about $500 million of tax or something to purchase this halo and I don’t see people rushing to include that figure in the calculations. On one hand we’re very happy to take some of the benefits – but we’re also a bit coy about admitting to some of the costs that were incurred in securing them. But yes, there is no doubt every overseas visitor drops the money into the economy. If they didn’t come, we wouldn’t have it.”

Even on that score though, experience has taught Moriarty to be cautious. As he says :

“The total benefit we got out of the America’s Cup that we had for a fair bit of time was $500-600 million. That was equal to only about a couple of weeks of tourism returns. And that Cup was here for six years, for God’s sake. It was a lot less than what people thought. What we’re talking about is the consumption that occurs as a result of the expenditure. We don’t really know if the profitability of that is all that good either. People are lifting their prices up a wee bit in anticipation of it.

I have to say if you take the pre World Cup, World Cup and post World Cup ….and add those three [periods] together you’re going to get a slightly different story. Because what we’re seeing is demand shifting to a very narrow window and with negatives both before and after it, by the look of things. That’s what the Sydney Olympic Games discovered to their horror. They thought the benefits would linger afterwards – and they budgeted for them, by the way. And there was a lot of wrist slitting when it didn’t happen.What you can say with some credibility is that every visitor who comes here will spend an average of $3,000 and that s an import we wouldn’t get otherwise.”

Good, but not enough, he concludes. “If you’re trying to build a stadium or a new hotel on the basis of that, I certainly wouldn’t want you as my investment adviser.”

With the advent of the professional era, rugby was supposed to become a business – on and off the field – and one played by the cold, hard rules of the commercial world. The rate of taxpayer and ratepayer subsidy for the RWC says otherwise. Rugby seems to be being treated as a special case. Certainly, not many other businesses qualify for massive state handouts to fund their core facilities and running costs, or can rely on the government to step in to underwrite two thirds of the expected losses on their biggest showcase event. Somehow, the fabled disciplines of the market went missing in action quite early on in these proceedings.

As things stand, rugby is likely to be the winner, all the way to the bank. Taxpayers of both genders are paying for this indulgence – even though rugby is a game played mainly by men, and watched disproportionately by men in the company of other men. It is not only ageing 1981 Springbok tour liberals who think there’s something amiss with this arrangement. Over ten years ago an excellent monograph published by the Business Roundtable ( and written by US economist Tyler Cowen ) warned about the evils of government funding for public events, on the grounds that government funding “may crowd out the relevant private means of producing the public good.” Furthermore, Cowen added this chilly reality check :

If entrepreneurs know that the public sector will step in to make good any finance shortfall, their incentive to solve the problem will be correspondingly weaker. For this reason, the success of private supply may require that governments take a firm stance against continuing discretionary intervention to fund public events.

In other words, fun should either be self-funding. or gone without. Anything else, the BR monograph suggests darkly, is not only wrongheaded, but is Bad Economics. Which brings me back to where I started, with the pursuit of virtue. Personally, I don’t think there’s any way that central and local government can justify the spending of hundreds of millions on the Rugby World Cup – not on any rational economic grounds, nor to further any worthwhile social cause.

Forget about rationality though, for a moment. The RWC seems more about chasing that “King of the World” feeling, in the hope and certain belief that we’ll wake up afterwards feeling changed for the better. Four centuries ago, John Milton talked about the value of such epiphanies -“those transcendent moments of awe, that change forever how we experience life, and the world.” That’s the aim, Bruce. Win or lose, New Zealanders will wake up after their RWC binge facing the usual array of problems, and poorer than before. Yet if things turn out well onfield…also feeling more satisfied about their lot. A bargain at any price, some would say.

ENDS