What will the Rugby World Cup be worth to New Zealand?

Big sporting events often make a loss, but the locals still enjoy the party. AFP/Franck Fife

RUGBY WORLD CUP – In the latest of The Conversation’s series on the Rugby World Cup, Massey University’s Sam Richardson looks at the costs and benefits to the host country New Zealand.

New Zealand has been rocked by several events beyond its control in recent years. The global recession, the devastating Christchurch earthquakes and the surging New Zealand dollar have all dampened the economic country’s climate. Yet on the horizon there lies a possible glimmer of hope.

New Zealand is about to host the 2011 Rugby World Cup: but will it be the economic catalyst everyone is hoping for?

There is some reason to believe that it might.

Counting the costs

The Rugby World Cup has been labelled the third biggest sporting event in the world by the International Rugby Board (IRB).

The original prediction of the economic impact in 2005 was a NZ$408m (AUD$324m) boost to the nation’s gross domestic product. This figure was revised upwards in June 2006 to NZ$507m (AUD$403m).

A 2008 Deloitte report suggested a potential NZ$550m boost to GDP. Just recently, a report from the Reserve Bank of New Zealand has suggested an influx of 95,000 international visitors to the country who will inject NZ$700m of spending into the economy.

Studies looking at the economic impacts of major tournaments often don’t include the costs of building new venues like the Otago stadium in Dunedin, which cost almost NZ$200m to build. Flickr/_setev

Economic impact studies of major sporting events are often fraught with shortcomings. Such studies tend to produce overstated gross impacts that do not materialise in the host economy.

These shortcomings include the substitution effect, which sees spending on the event result in less being spent in other competing sectors of the economy and the crowding out effect, which means the tournament could discourage tourists who might otherwise have come to the country.

Another shortcoming of these studies is the lack of consideration given to costs associated with the event itself.

Tickets don’t cover costs

Much of the expenditure to date on facilities and infrastructure has been from all levels of government. It is likely to have been diverted from alternative projects in host cities. These costs, which economists know as opportunity costs, are far from insignificant in this discussion.

The organisers of the Rugby World Cup have budgeted for NZ$268m (AUD$213m) in ticket sales. If this target is reached, the tournament will run at a projected loss of approximately NZ$40m. Two-thirds of this tab will be picked up by taxpayers, and the remaining third will be picked up by the New Zealand Rugby Union.

Economic impact figures have been used as justification for hosting the tournament despite the anticipated losses.

Past research has suggested that the realised economic impacts of major sporting events are often substantially less than what is initially projected.

No significant impact

Results from my own PhD research suggest that justifying government involvement in the provision of sports facilities and hosting major internationally-oriented events on economic impact grounds in New Zealand has been very much a hit and miss prospect.

There were a few specific cases where positive economic impacts were realised, and even a few cases where the realised impacts were negative.

The majority of facilities and events, however, were found to have no significant impact on the host city’s economy.

Cost under wraps

The costs of the Rugby World Cup are also something of a mystery. There have been no publicly released figures as to the total cost of the tournament to the country to date. An estimate from the New Zealand Herald in mid-2010 was NZ$500m and climbing.

One has to be careful about what exactly constitutes a cost (or indeed a benefit) of the Rugby World Cup.

What may be a benefit to one sector may be considered a cost to another. It is safe to say that much of the public expenditure on facilities and infrastructure was motivated by the tournament.

Some have argued that this area of spending should be considered as an investment for the future. Facilities that are being built or upgraded for the tournament will continue to be used well after the event has finished.

In this respect, New Zealand’s Rugby World Cup is rather different from many sporting mega-events.

Why host an event?

If the net economic benefit of the event is small, or even negative, is there a case for hosting the event at all?

One must be careful to not limit the measure of economic benefit to economic impacts, which are hardly compelling measures of benefit in any case. There are several potential intangible benefits from hosting a tournament of this magnitude.

These benefits include the value that New Zealanders’ enjoy from attending games that is above and beyond the price of the tickets they pay.

This benefit is known in economics as consumer surplus. Because consumer surplus from the event cannot be captured by ticket sales, there are grounds for government involvement in its provision.

The benefits are not restricted to those attending the games. There is a feel-good factor of hosting a global tournament in your own “backyard”.

Communities across the country may experience civic pride by hosting international teams throughout the country.

There may also also potential enhancement of New Zealand’s image to the rest of the world that results from the hosting of a successful event.

Hidden benefits can be measured

Many will question the extent to which these intangible benefits can be quantified.

Economists have attempted to place values on these benefits using a variety of techniques, but past research shows these benefits do exist and can be quantified.

The catch is that they are often not large enough to justify the extent of government involvement in many of these projects. They should not, however, be ignored in this discussion.

Given that the cost is generally unknown, this question is likely to be difficult to answer.

What we should expect is that the realised economic impacts are likely to be substantially smaller than the projected figures. The projected costs are aso likely to be higher.

The bulk of the benefits are likely to be intangible in nature. Indeed, the pride generated from a New Zealand win may well make the costs worth it to some taxpayers.

This is the second part of our Rugby World Cup series. To read the other parts, follow these links:

- Part one: Rugby World Cup: All Blacks, New Zealand Maori and the politics of the pitch

- Part two: What will the Rugby World Cup be worth to New Zealand?

- Part three: Art or science? Decision making in rugby

- Part four: Rugby World Cup: Are cheats prospering?

- Part five: Rugby World Cup: The Australian situation

- Part six: Selling the Rugby World Cup

- Part seven: Rugby World Cup injuries: That’s gotta hurt

- Part eight: Rugby World Cup a lottery amid refereeing chaos

- Part nine: All Blacks’ proud tradition of the haka insulted in Rugby World Cup