Thursday, April 19, 2012

SkyCity

I talked about the SkyCity - Convention Centre deal on The Panel on Monday. I come in around the 20 minute mark.

John Key's offered SkyCity a deal where they get permission to put in more gambling machines in exchange for SkyCity building a new convention centre for Auckland. Key indicated in the press that a government-funded one here could never meet its capital costs, so was looking for options that didn't cost the government anything.

On the plus side, it's unlikely this arrangement yields another Claudelands. SkyCity's on the hook for costs. They've reasonable incentive to keep things running properly: the Centre would complement their existing operations. The more conventioneers, the more potential customers at the nearby casino.

But it isn't true that the deal doesn't cost the government anything. If they were instead to hold an auction for the right to put a bunch of new pokie machines, people would bid for those rights. The value of the winning bid in that auction is the cost of the Convention Centre to the government. We would expect, though, that the amount paid in that kind of auction is less than the value of the concession to SkyCity; those rights, bundled with Convention Centre provision, are less likely to be eroded by toughened regulations on pokie machines from some future government than would be rights otherwise auctioned off. And, if I owned a pokie machine concession in a bar in South Auckland, I'd be awfully worried that the deal for SkyCity would come at the expense of an increased likelihood my pokie licences wouldn't be renewed sometime down the track; those are the folks most likely to bear the incidence of the concession if there's any holding to a sinking lid policy on overall pokie numbers. So it costs the government nothing in roughly the same way that the old French monarchs got money for free by selling state monopoly concessions. They're very likely getting a better deal from SkyCity than they'd get if they just put it up to auction, but that doesn't mean it's costless.

I'm no particular fan of "economic effects" numbers being used in selling the deal. The $90 million estimated "boost" to the economy is likely just estimated spending figures from conventioneers; spending isn't the same thing as benefits. And while the literature on the economic effects of convention centres is not as well developed as the literature on stadiums, I'd be pretty surprised if they were all that beneficial. Even the former head of the Tourism Auckland says convention centres typically lose money.

Bottom line: I do not believe the "broader benefits" case for building convention centres. Nothing stops hotels near a proposed centre from getting into sponsorship arrangements where they pay for listings in standard convention centre marketing materials to help fund the centre; I find it more likely that the benefits are too small to make it worthwhile than that public goods problems, easily resolved by assurance contract, stop things. But if we're going to have a new convention centre, this might be the least bad way of limiting fiscal risks. That's not a strong endorsement, because I don't particularly like the potential regulatory takings from the local pubs currently hosting pokies if the new machines are part of the sinking lid policy, and because there's a whiff of cronyism to the whole thing. But honestly, who else would be able to pull off the casino-convention centre combination in Auckland?

Update: See also Sam Richardson and Bill Kaye-Blake. Bill likes the deal less than I do; he worries about gambling being regressive taxation. I'd expect that it won't be as regressive as Bill thinks, mostly because of the likely closure of other machines in pubs and the consequent shifting of gambling clientele towards international casino visitors. Sam wonders about construction and other employment effects.

1 comment:

  1. You have to admit it's a pretty good deal negotiated by a politician, (albeit one with trading experience).

    Compare it to paying ~$1 billion to buy back Kiwirail when it was really on worth ~$200 million and remains lossmaking today.

    ReplyDelete

As I randomly delete anonymous comments, please use a handle. Comments on older posts go into moderation; sorry if there are delays in hoisting your comment from the moderation pool.