Government financial involvement is justified on the grounds of either the return on government funds or the overall benefits to the community.
The commercial structure of many hallmark events like the Grand Prix is such that they can never make a profit for their operator, hence the need for taxpayer subsidy. The experience of Adelaide and the US Formula One races confirm that if all costs are allocated to the event (see the Citizens' Guide to the Australian Grand Prix Corporation Finances) it is a loss- maker.
Hence:
"The potential economic and tourism promotion benefits become the justification for the event, and for the use of taxpayers money in subsidising the event Assessing the extent to which these benefits outweigh. the costs requires a systematic examination of an array of issues, including the significance of the event, its direct and indirect economic impacts, and social costs." (T Mules, 'The Economic Impact of Special Events').
The political and institutional interests associated with these events makes them prone to 'boosterism'.
"Research in this area has been biased towards exaggeration of the economic benefits in order to gain credibility and support, and has been flawed by theoretical and methodological problems. (C. Hall, Hallmark Tourist Events, 1992, p. 61).
Three basic models are used. The three differ on what to include in potential benefits and on the methodology used for allocating costs to events. One of the characteristics of the boosterism associated with major events is to exaggerate the benefits and minimise the costs.
Most impact studies apply multipliers to calculate the total direct effect on the State's economy. These express the amount of income generated by the additional expenditures by visitors and other out-of- State sources of revenue. The misuse of multipliers to boost potential benefits is discussed later.
Three categories of costs should be included in an assessment:
This is a basic cost-benefit approach recommended by Getz (see his Festivals, Special Events and Tourism) which involves:
Ken Davidson recommends that all staging costs plus repayment of loans from government over the period of the race contract and an opportunity cost at 10 year long term bond rate of 9%. must be included in the cost side along with all the additional social costs arising from use of park, etc.
A multiplier is applied to estimate the total macroeconomic benefits.
This is the recommended model if the event suffers significant operating losses.
These evaluations define the costs as the staging and capital costs funded by South Australian sources. These sources include:
Benefits include total visitor expenditure, and that proportion of the staging costs which are fielded by non-local sources (i.e non -South Australian).
Burns and Mules use the estimated proportion of Grand Prix Board income sourced from outside the State (i.e ticket sales, corporate revenues , sponsors, concessions) as the basis for allocating a proportion of the events costs expenditure as benefits to the State, i.e as new expenditure funded from outside sources (The Adelaide Grand Prix -The Impact of a Special Event). For example, if 40% of income is from non-residents, then 40% of the staging costs are classed as a benefit. Hence, information on data on Grand Prix ticket and corporate facilities sales to non-Victorians is very important.
This approach is used by the Price Waterhouse Report in relation to its report on the 1992 Grand Prix also. While this approach to estimating net benefits has merits if the AGPC's revenue and expenditure is similar and there is significant non-Victorian ticket sales revenues etc, it is not appropriate if the staging costs far exceed revenue income for the event.
The National Institute of Economic and Industry Research (NIEIR) impact study of the 1989 500cc Motorcycle Grand Prix treated all staging and capital costs as expenditure that would not have otherwise occurred and hence as part of positive economic impact (NIEIR 1995, p.4). This is a difficult assessment to make because it would appear to be conditional on economic circumstances.
It assumes also a higher benefit if the race had been retained in Australia by including as benefits expenditure of Victorians who would otherwise have travelled interstate to see the event.
It is evident that the smaller the economy the larger the expected ratio of visitors to local expenditure, the more likely the event will lead to a spread of potential benefits, and the greater the leakages (smaller the multiplier).
The main benefits are derived from international and interstate visitors expenditure, and from corporate entertainment and sponsorships from non-Victorian sources. The key assumption is that benefits are expenditures that would not have occurred otherwise in Victoria-
Conservative cost-benefit analyses treat expenditures on the Grand Prix from State Government, Victorian business and residents to be redirected expenditure, unless there is evidence that expenditures would have otherwise occurred inside the State. Expenditure by the State Government and residents will represent expenditure opportunities foregone as a result of switching public and private expenditure from other activities to the Grand Prix.
Expenditure Switching can take several forms:
Methodology
Key data is the number of visitors and per capita expenditure which are used to estimate total expenditure by visitors on accommodation, food, and other entertainment.
Model 2 methodology depends heavily on accurate estimates of ticket sales to out-of State patrons, sales of corporate facilities to out-of-State corporations, and identifying sources of sponsorship and concessions revenues.
There are a number of problems arising from the application of Models 1, 2 and 3:
i) The assumption made that, but for the event, a Victorian corporation or government department would have spent the money outside the State, and hence its expenditure on the event is a net benefit. This is an assumption which is easier to make in the case of Adelaide than Melbourne which has more opportunities for high profile corporate entertainment.
ii) In the absence of turnstile counting, the number of visitors can only be estimated. Academic studies comment on the difficulties that organisers have in estimating numbers. Estimates of the numbers of overseas and international visitors are equally difficult to make because they rely heavily on knowing the total numbers attending.
The authors of the 1985 Adelaide impact study noted that visitors from overseas were 'usually overestimated' (Burns p. 37). Both the 1987 America's Cup and the 1985 Adelaide GP over- estimated projected visitor numbers by over 30%. (Syme et al p. 110).
Visitor numbers are always estimates based on varied methodology.
iii) True net benefits can only be based on visitors who would not have come but for the event, namely primary visitors, or on the extra days that would not have otherwise been spent in Victoria.
iv) Calculations of expenditures are based on surveys.
The Research Officer at the South Australian Tourist Commission has warned that expenditure data was difficult to analyse because of sample problems and the reliance on memory and estimates. The results will depend on sample design (flame and selection) and size and collection methodology and the survey instrument. The response rate and language used (English) will introduce biases which will affect the result as expenditure levels vary between countries of origin.
Visitor survey results indicate that there are sharply different results depending on the country of origin of tourists , eg Japanese who spend fewer days in Australia spend three times more than UK visitors who spend much longer here. The evaluation of the 1985 GP found that 68% of overseas visitors were New Zealanders who rank low in the expenditure figures collected by the Bureau of Tourism research.
The sample design is crucial. The 1985 Grand Prix survey attempted to address the expected variability in type of visitor by using two levels of stratification: by ticket price and by type of accommodation.
The survey done for the Price Waterhouse 1992 impact study was not as thorough. It relied on gate interviews, "random selecting" of patrons queuing to get in, and randomly approaching patrons inside the circuit. These are more accurately described as "convenience surveys" and are not truly random. The interview screening questions on point of origin were used to determine the proportions of South Australian and non-South Australian visitors. Self-cornpleted questionnaires were used to get a 39.5% response rate.
One methodological problem is that surveys of this type are more likely to select visitors who are the more regular attenders of the event.
Grand Prix visitor surveys tend to report levels of expenditure higher than found.by the regular Visitor Monitors done by Bureau of Tourism Research.
Any impact study using visitor expenditure surveys should provide details of sample frame, design, methodology and response rate.
v) The NIEIR study of the Australian Motorcycle Grand Prix includes a category 'visitor retention'. This is expenditure by Victorians who would have gone to Eastern Creek if the race was not held at Phillip Island. The 1993 Mardi Gras also includes a category of 'holidayers at home'.
The patron survey would have to estimate how many would have gone interstate for another purpose instead of Eastern Creek or Adelaide, this is another switching opportunity.
If this benefit is counted, the study should assess the numbers who go away because of the event. In 1996 the South Australian Tourism Commission did a 6000 leaflet drop in the City of Port Phillip urging locals to escape the race. The Conum'ssion estimated that 500 Victorians would go to Soudi Australia and "pump more than $350,000 into the State's economy" (Sunday Mail, 19/11/95).
All impact studies apply multipliers to the income to calculate the total direct effect. These express the amount of income generated by the additional visitor expenditure and by other out-of-State sources of revenue.
Works on major events commonly warn about the use of inappropriate multipliers that exaggerate the benefits (Getz, Burns et al.).
There are two pitfalls to watch:
These tables attempt to determine the total aggregate secondary effects of economic activity in different sectors of the economy. They do not take account of costs or inputs and hence do not measure net effects.
The 1985 Adelaide Grand Prix study (p. 13) explains the problems of double counting in output multipliers and how estimates of economic impact are exaggerated by the use of output rather than value added multipliers. A spokesperson of the Victorian Department of Business and Employment observed in a telephone conversation (8/6/95) that input/output tables were too broad to assess specific events; any multiplier exceeding 1.9 should be treated with scepticism.
Getz warns of the tendency to use multipliers to demonstrate macro economic benefits without consideration of the economic costs (p. 307-8).
The size of the multiplier depends on the type of expenditure and the estimated leaks of expenditure, i.e to out of State expenditure. As the economy opens up the size of the multiplier will tend to fall, e.g. the NIEIR reduced the multiplier for the Australian Tennis Open from 1.9 to 1.7 to allow for increased deregulation.
The 1.7 is used because it is an international event. The NIEIR uses a multiplier of 1.33 for the 500cc GP (NIEIR 1995, p.4). This is higher than used for the Adelaide GP (1.089), which is explained by the differences in State economies, but it is also higher than the one used for the Sydney Mardi Gras (1.2).
The GDP multiplier used by NIEIR for the ATO and 500cc is a value added multiplier representing wages, profits and salaries of all producers in chain of production. This is similar to an income multiplier.
The Australian Bureau of Statistics advises that conservative first round effects multipliers should be used for events like the Grand Prix where the flow-on of expenditures is difficult to estimate.
There are many problems in the application of multipliers. In the case of the Melbourne Grand Prix the size is affected by the number of South Australian companies that were engaged for setting-up works and a NSW company had a major concession.
"Because of the unreliability of multiplier measures, the Melbourne Major Events Unit is tending to place more emphasis on the economic benefits arising from direct expenditure by visitors, and any gains in sponsorship and other revenue, rather than relying on justifying an event in terms of its multiplier effects." ( Trevor Mules, ",The Economic Impact of Special Events").
The Grand Prix is a short-term event which is vulnerable to peaking problems arising from the brevity of the event and the short timelead for goods and services which cannot be produced ahead of time and stored. (Burns, et al., p. 6).
The amount of excess capacity of the economy, levels of unemployment, and availability of suppliers of goods and services will all affect the real outcomes.
Numerically more people stand to lose from the event's losses, but they are widely spread and less organised than those who benefit from the event.
It is not known how widespread are the benefits. Indeed as Mules suggests "it could be argued that the event should be financed by a levy on those who stand to benefit - namely the tourism providers, such as hotel and casino owners." (Mules p. 5). Black and Pape's study of the Indycar also argues that in fact only certain sectors benefit at the expense of the rest.
'Slop' or 'turbulence' effects refer to the tendency of expenditures to slop around, so that income will increase in some areas and fall in others. The sharp fall in business trading in the City of Port Phillip is typical of major events. Similar phenomena occurred in Fremantle in 1987.
"The economic effects of having hallmark events are not distributed uniformly throughout the local economy because of the pattern of non-resident spending associated with the event, the potential displacement of non-event related tourist expenditure (the displacement effect) and the changed pattern of resident spending in the light of the hosting of the event. (Hall p. 59).
Colin Hall's Hallmark Tourist Events documents cases where local traders experienced losses in income, where clashes with existing events led to losses of regular visitors, downturns in tourist attractions, and uneven impacts on tourist attractions (p. 59).
Hall draws attention to the experience of Fremantle 1987 where a group of businessmen approached State Government after the America's Cup demanding compensation for lower than anticipated receipts, and the 1986 US Festival where non-local traders inside the festival captured 78% of the visitor spending (p.60).
The distribution of benefits may be unexpected. At the America's Cup in 1987 60% of restaurants in Fremantle reported a downturn in income (Hall, p. 58).
Impact studies tend to avoid the harder cost questions. In fact many impact studies confine themselves to benefits and take no account of costs. There is a temptation to exclude two sets of costs:
i) Opportunity costs - benefits that could be earned by an alternative investment, eg the $50 million-spent on construction could earn 9% p.a in long-term bonds. The issue of opportunity costs of generating the additional spending is often ignored and is discussed in Black and Pape's study of the Queensland Indyear.
"The weakness of input-output methodology for assessing the impact of special events is that it fails to recognise the costs incurred in generating the benefits of the additional spending. Instead, it identifies only the additional spending and does not evaluate the opportunity costs of using public funds on alternative projects."(Black,T.andPape A., "The Indycar Grand Prix: Costs and Benefits", Australian Accountant, September 1996).
ii) Externalities - expenses or problems created directly or indirectly by an event that would not be accounted for in the event budget.
The Albert Park Grand Prix involves, to quote the Sydney Morning Herald (7/3/96), an "enormous cost to the city's environment."
The evaluation the 1985 Grand Prix in Adelaide does make a serious attempt to make a thorough assessment of the social impacts including the 'boon' effect of traffic accidents and costs associated, impact of traffic congestion. Estimates of the social costs of the Adelaide GP ranged between $9 and $ 12 million.
The Albert Park Grand Prix presents the challenge of assessing the costs of loss of amenity and disruption to sporting clubs, golfers, and the many park users. The park represents an asset with real rental value exceeding the $100,000 maximum licence fee set in the AGP Act 1994, and a thorough study would have to calculate the costs of the partial occupation of the park by the AGPC over several months.
One of the issues that can be expected to arise in regard to the Albert Park Grand Prix is the treatment of construction costs. The investment in the reorganisation of Albert Park, over and above the $10 million spent by MP&W on pavilions and direct park enhancement, must be allocated to the event and treated as an investment which has use for the duration of the contract only.
Most of the investment into Albert Park does not constitute "physical infrastructure with future benefits for other events or projects" unless the Government breaks an undertaking of no other motor racing in Albert Park (Burns et al., p. 17).
An evaluation might properly assess the economics of investing in a further temporary racetrack when other tracks were available for upgrade for less investment and available for cost efficient greater utilisation and extended scope of usage
No study attempts to calculate the avoidance of costs of people who stay away or go away because of the event.
Short-term claims for the economic benefits of major events rest heavily on boostedsm namely inflating benefits by exaggerating visitor numbers and expenditure levels and s ' costs by failing to allocate the full costs to the event and omitting the more difficult external social costs.
The taxpayer has to decided ultimately what is the Grand Prix all about. Is it a political event or is it economically rational?
Colin Hall, an academic expert on hallmark events, currently based at the University of Canberra, is one that stresses the political nature of these events.
"Hallmark events represent the tournaments of old, fulfilling psychological and political needs through the winning of hosting over other locations and the winning of events themselves. " (Hall, 84)"Hallmark events are first and foremost, political events. The very nature of toe hallmark event as an image building exercise created a situation in which personal and institutional interests receive a high degree of publicity and visibility. " (Hall cited in Syme et al , p. 219).
"Hallmark events are political events. They are political in the desire of governments and individuals to obtain them, political in their planning and operations, and political in their research. " (Hall in Syme et al p. 219).
There is a range of sources who see little substantial benefits in short-term events like the Grand Prix. Even those who might be expected to promote the impact of Grand Prix racing are dismissive:
"But what about the true benefits of running a grand prix? Is it really the key to international recognition, cue to investors to descend, contracts in hand, upon thisfair city?
To be honest, the figures from Adelaide aren't hugely convincing. For every hundred tourists who went to Adelaide for the Grand Prix, there is probably only one who will return now that the race has gone. " (Mike Doodsen, motor sport journalist, The Age, 7/3/96).
The lack of economic justification is evidenced by the assessment of economists who are seen as economic rationalists. Apart from the well known international business expert, Dr Kenichi Ohmai who described the Grand Prix as part of the "political disease" of major events which damages cities and their economies. (The Age, 21/11/94), local economists have also been critical of major events.
In the November 1995 report on the state's economy by the South Australian Centre of Economic Studies, with a reputation as a 'conservative think tank', events such as the Grand Prix were described as providing 'no real benefit to South Australia'. The report noted that "We might get a buzz from such activity but their impact on the economy is trivial." It went on to criticise the SA Government for "diverting time and money to such events while losing sight of creating continuing, useful and interesting employment." (Adelaide Advertiser, 1/12195). This is the second time that the Centre has dismissed the economic impact of the Grand Prix. The Executive Director of the Victorian-based Institute of Public Affairs has also said that on "Most of the evidence is that they're not economically rational.", referring to events like the Grand Prix and "attractions like the Commonwealth Games or the Olympic Games." (Late Night Live, 1/2/96).
Hall notes that "There appears to be little evidence to suggest that a comparable hallmark event, such as an Exposition has stimulated long term growth." (Syme et al p. 14) He cites as evidence a study of the Montreal Expo 67 which found that after the successful 67 Expo, Montreal "slipped from being the largest urban area in Canada to second place, and has had the lowest growth rate of any of the nation's major metropolitan centres."
A study of Montreal which has used a major events strategy could be a valuable case study for the success of Melbourne's current tourism and promotion strategy.
The longer term benefits are more difficult to quantify. There is no known longitudinal study of the impact of successive Grand Prix on individual regions. The closest is possibly Adelaide where three studies were conducted in 1985, 1988 and in 1992. It is significant that the third and last (1992 Price Waterhouse) can find very little conclusive. to report about the longer term effects.
Exaggerated predictions of job creation should be examined very critically. The report on the 1992 Grand Prix estimated that the equivalent of only 96 full-time jobs were directly created.
The Price Waterhouse report is cautious about using long term employment multipliers as they assume a sustained increase in activity in the economy. Permanent staff appointments as a result of such a one-off event are thought 'unlikely' (p.26).
The author of the 1994 South Australian Centre for Economic Studies Briefing report on the State economy is reported as describing the event as "an attempt by the previous Labor government to provide short-term unemployment relief' (The Adelaide Advertiser, 25/3/94).
These conclusions are supported by academic studies of major events:
"Most events generate little in the way of permanent employment" (D Getz, p. 28).
As job creation programs, they do not address the usual type of unemployment except seasonal. Coinciding with Moomba, convention and conference time, the Grand Prix does not come in an obvious slow-down.
The Price Waterhouse report presents no evidence that the GP has any significant impact on long term growth in tourism to SA (p.46). Claims in the report that SA has continued to maintain a respectable growth in interstate and overseas tourists (p.52) is not supported by the report itself or ABS data.
The Report acknowledges that Adelaide "has not had the same levels of growth (in visitors nights) evident in other States." (p.44) despite the fact that "The Grand Prix theme has been used extensively in promotion of South Australia and Adelaide as a tourist destination." (p.46).
There is no evidence that the Grand Prix has had any positive impact on South Australian tourism:
The percentage of overseas arrivals nominating Adelaide as the primary destination in the December 1992 quarter was lower than for 1988 when collection of this data began and even lower than for the preceding two quarters of 1992 (ABS, Overseas Arrivals by State of Intended Stay, cat no. 3402).
Mary Crooks has observed on ABC Radio that it is impossible to quantify the flow-on tourism effects of a major event (Terry Laidler, 18/3/96).
The Grand Prix is one of 16 similar events and is part of a network of motor sport grand prix racing. It does not constitute a unique tourist attraction and does not possess a 'comparative advantage' quality to make a tourist attraction.
The Price Waterhouse study could offer little more than a few cases of consulting services in conduct of sporting events and one case of export business in sale of clothing to racing teams anticipated to have been worth $1.4 million in 1993 (p. 41) . Beyond that the cases related to direct Grand Prix suppliers.
The remainder of the assessment rests on the subjective judgement of the 147 companies surveyed. The perception of 70% of business that the Grand Prix had a positive long term effect on the economy could be explained by a belief that GP was good for consumer confidence. There is no evidence to substantiate the claim (p.43).
Businesses had a quite different assessment of the immediate effect on business. Price Waterhouse's survey of businesses found that only 16% recorded a positive assessment; 26% thought it had a negative impact and 56% no effect (p.43).
Industrial impacts including research are more likely to occur where there are regular events around which suppliers and related industries can concentrate. This was envisaged by the Confederation of Australian Motor Sport in 1983 when it advocated a permanent special purpose track rather than a street circuit for the Grand Prix.
The Victorian promoters have made much of the international television audience for the GP as a means to promote Melbourne.
The 1985 Grand Prix study provides a methodology for assessing the value of the television coverage (pp. 53-4). No assessment was done, but the authors comment that "the value of this benefit is much lower than is often claimed." and warn that any exposure is only a first step in marketing Adelaide. Interestingly, the later Adelaide impact evaluations make no reference to the target audience or value placed on it for the promotion of Adelaide.
Claims of the size and value of the international television audience have to be looked at critically. Federation Internationale de'l Automobile (FIA) data on Intemet distinguishes between the race audience, "additional programs", and the number of television viewers who catch the event on a news program. Analysis of the real value of the claimed 300 million race viewing audience would need more information on the country and socio-economic background of the viewers.
Advertising is more important to sponsors than shots of the city. Some overseas circuits are designed to give advertisers more time as cars go through corners slowly.
The long term study of the impact of the Winter Olympic Games on Calgary commented on the lack of research to document the assumption that hallmark events lead to any enhanced awareness or reputation of the host region. He noted that it was difficult to measure any shifts in knowledge of destination or to accurately define the relevant target groups, and the lack of clear relationship between awareness and knowledge gained from event promotion and interest in commercial or industrial activity (Ritchie, J., "Assessing the Impact of Hallmark Events: Conceptual and Research Issues", Journal of Travel Research, Vol. 20,1, 1984.).
"The benefits ofan event in terms of tourism promotion and raising awareness in a way that may stimulate other commercial activities are not readily measurable." (Mules p. 6).
'If spending taxpayers money on an event cannot be justified 'm terms of its direct economic benefits, falling back on "promotional benefits" is risky. Such benefits are difficult to measure and may be quite small for regions which already have a high tourism profile.' (Mules, "Economic Impact", p. 11).
Michael Hall is also sceptical of large events compared with community based events. In "Australia Talks Back" Hall has referred to their costs, their tendency to drive people away, and the lack of clear evidence that they attract investment or create employment (Radio National, 11/3/96).
Black and Pape are particularly critical of governments subsidising special events.
"The majority of taxpayers do not receive benefits from subsidising the Indy, and there are many areas of government spending that could use the money, for example hospitals, police, and schools.""When government becomes involved in the business of operating and funding special events such as the Indy, incentives exist for groups to lobby for taxpayers to fund events which benefit these groups but which in aggregate reduce the wealth of Australia. " (Australian Accountant, Sept., 1995).
| Convenience sampling: | Where respondents to a survey are selected on site rather than through genuine random sampling of all patrons. |
| Externalities: | External diseconomies or costs which are not directly carried by the organisers but result from the event such as traffic congestion, loss of amenities, health costs, increased levels of crime, traffic accidents and so on. |
| Multiplier: | The number by which the initial change in expenditure must be multiplied in order to determine the resulting change in State income or State Gross Product |
| Opportunity costs: | Interest, profit or service yield that would be obtained if the Government were to put the public funds expended on the event to an alternative use. The opportunity cost is commonly measured at the current long term bond rate (9% p,a ). |
| Random sampling: | Sample selected in way that gives each member of the population (i.e race patrons) an equal chance of being included in the sample. Only if the random is sample, will it be free of bias and satisfy the assumptions of probability theory to enable statements to be made about the reliability of the results. |
| State Gross Product: | A measure of the total flow of goods and services produced by the State economy. Only goods used for final consumption or investment goods are included, avoiding the double counting if intermediate products were included. |
Black. T. and Pape A., "The Indycar Grand Prix: Costs and Benefits", Australian Accountant, September 1995.
Burns, J., Hatch, J. & Mules, T. (eds.), The Adelaide Grand Prix - The Impact of a Special Event, The Centre for South Australian Economic Studies, 1986.
Getz, D., Festivals, Special Events and Tourism, Van Nostrand, 1991.
Hall C, Hallmark Tourism Events, Bellhaven, 1992.
Mules, T., "The Economic Impact of Special Events" (unpublished paper)
National Institute of Economic and Industry Research, An evaluation of the economic impact of the Australian Motorcycle Grand Prix at Phillip Island, post 1996, May 1995.
Price Waterhouse, 1992 Formula One Grand Prix: Economic Evaluation, April 1993.
Ritchie, J., "Assessing the Impact of Hallmark Events: Conceptual and Research Issues", Journal of Travel Research, 20,1,1984.
Syme, G. et al. (eds.), The Planning and Evaluation of Hallmark Events, Averbury, 1989.
Top of this page
Search our site
© 1995 - 1999 Save Albert Park ; permission to copy is given provided this copyright notice is reproduced in full
Postal Address: PO Box 1300, South Melbourne DC, Victoria, Australia 3205
Telephone: 61 3 9690 3855 ; Fax: 61 3 9690 3544
Email: SAP (sapark@save-albert-park.org.au) ; you may encrypt email sent to us - click here or contact us for more information