GG rr aa nn dd PP rr ii xx tt ee nn ss ii oo nn ss The Economiiics offf ttthe Magiiic Puddiiing

I s t h e e c o n o m i c i m p a c t o f t h e G r a n d P r i x w o r t h t h e p u b lll i c i n v e s t m e n t ? A Critique of the Economic Impact Evallluation of the 1996 Transurban Australllian Grand Prix 16 September 1997

Prepared fffor ttthe Save Alllberttt Park Group c o n t e n t s

T a b l e o f C o n t e n t s

TABLE OF CONTENTS------2 GLOSSARY------3 ACKNOWLEDGMENTS------7 G R A N D P R I X T E N S I O N S - E X E C U T I V E S U M M A R Y ------8 GRAND PRIXTENSIONS - DETAILED SUMMARY------11 1. INTRODUCTION ------24 2. THE ECONOMIC THEORY OF ECONOMIC IMPACT ANALYSIS------27 2.1. The Role of Government ------27 2.2. Rate of Return & Economic Impact Analysis------28 2.3. Background to Economic Impact Analysis ------33 3. THE ANALYTICAL CONTEXT OF THE AUSTRALIAN FORMULA ONE GRAND PRIX EIA------39 4. SURVEY QUESTIONS------44 4.1. Population Sampling Methodology ------44 4.2. Design of the AFOGP Survey------54 4.3. Survey Administration------57 5. SURVEY RESPONSES ------59 5.1. Stay-aways and Go-aways------63 5.2. Estimating Visitor Numbers and Visitor Expenditure------75 5.2.1. Estimating AFOGP-dependent visitors ------75 5.2.2. Expenditure Results------79 5.2.3. Summary of Enhanced visitor effect direct expenditure ------80 5.3. Enhanced duration effect------81 5.3.1. Summary of section 5.3. ------82 5.4. Retained Victorian Expenditure ------82 5.4.1. Summary of section 5.4. ------84 5.5. Expenditure by Event Personnel------85 5.5.1. Summary of section 5.5. ------86 5.6. Complementary Events - Grand Prix Rally ------86 5.6.1. Summary of section 5.6. ------87 5.7. Induced Tourism ------87 5.7.1. Summary of section 5.7. ------88 5.8. Enhanced Resident Expenditure Effect------89 5.8.1. Summary of section 5.8. ------90 5.9. Summary of Direct Expenditure Impacts ------90 5.10. Application of the Multiplier------91 6. ECONOMIC IMPACT OF THE FOREGONE PROJECT------93 6.1. The significance of ------93 6.2. Alternative Investments to the AFOGP ------94 6.3. Net Benefit Impact of the AFOGP------98 6 4 The Real Opportunity Cost------104 c o n t e n t s

7.1. /Productivity Commission modelling ------107 7.2. Keynesian versus neo-classical controversies------111 8. RETURN ON INVESTMENT ------113 8.1. The AFOGP Business Structure------113 8.2. The Real Cost of the AGPC------115 8.3. Management Incentives & Cost Control------126 9. CONCLUSION: HYPOTHESIS UNSUPPORTED------128 APPENDIX A - ESTIMATES OF CORPORATE & NON-CORPORATE OVERSEAS & INTERSTATE VISITORS------132

G l o s s a r y

Glossary, in part, sourced from Driml (1993)1

Consumer and producer surplus When consumers purchase an item, they pay a in or bartering. The consumers receive a ‘surplus’ when the price they paid for a commodity is far less than that which they would have been willing to pay. Thus a consumer may be willing to pay $2.00 for an apple, but only had to pay 20 cents. The difference between the $2.00 and the 20 cents is $1.80. The $1.80 is the consumer surplus.

Similarly, a producer may be willing to pay more to receive an input than the price demands. The producer gains the difference between what would have been paid, and what was paid. This difference is known as the producer’s surplus.

Cost-benefit analysis This is the formal name for an analytical technique designed to weigh all the costs and all the benefits of a particular project in order to identify its net contribution towards increasing social . This is then compared with the cost-benefit analysis from other possible projects in order to identify the ‘best’ project.

Direct economic benefit A project can generate cashflows which are net additional increases in economic activity (rather than re-direction of existing cashflows) - these are referred to as direct economic benefits. For example, a Japanese tourist brings money to Australia which is a direct economic benefit because this money is a net addition to the . When the money is spent, it creates additional benefits known as indirect (as the money is respent by other businesses) and induced benefits (as the money is respent by employees from their paid out of the money brought to Australia).

Economic welfare The economic welfare of society can refer to two different types of values, depending on the context of the discussion. Economic welfare in the context of the values of society implies ‘happiness’, ‘’, or ‘satisfaction’. The main purpose of economics is to maximise the amount of economic welfare (ie. happiness) felt by society for a given amount of resources. If this is achieved, then the society is efficiently using its resources. c o n t e n t s

Economic welfare can also refer to the health of the economy. The economy is the exchange and production of and services. The economy is measured as the flow of financial and/or physical transactions (ie. bartering) and production. The health of the economy refers to four issues. • Is the economy producing the maximum amount of output? • Is the economy producing the maximum amount of output, once all inputs have been accounted for? • Is the economy producing the maximum amount of output (gross or net), once have been taken into account? • Finally, and most accurately, is the economy producing the maximum income per head of population, once externalities have been taken into account?

Economic The phrase 'economic value' also varies, depending on the context in which it is used. In the context of an assessment of the social welfare value of a protected area, economic value refers to the amount of 'happiness' (ie. welfare) generated for society by the site. In the context of a discussion about the impact on the economy of a protected area, economic value refers to the size of the change in the economic variable under analysis.

Economic activity This phrase is used almost exclusively with regard to the economy. It is used by to describe the volume of transactions and production taking place in the economy; ie. the more transactions, the greater the amount of economic activity.

Economic impact analysis Seeks to identify the best possible outcome for the economy. The definition of best possible outcome is likely to be controversial, but is normally taken to mean wealth-maximising outcome.

Economic output This is another phrase used by economists to describe the level of output (production) in the economy over a prescribed time period.

'Efficient' Efficient prices has a very specific meaning in economics. The term suggests that the market and hence the economy within which the ‘efficient’ prices have been set, are themselves efficient. It implies that there is no feasible rearrangement of inputs, given the level and type of demand which would enable an increase in output to take place. Thus, there are no windfall (ie. gifts, ‘free lunches’ etc) gains to be achieved from rearrangement of the economy.

Externalities When a market is efficiently organised (see efficient prices above), the owner of a process or object receives all the positive and negative values associated with the object. In economics, the traditional example has been the rose garden. The owner receives benefits from the rose garden, but passers-by also receive the some benefit from seeing and smelling the flowers. These passers-by are receiving an . Similarly, when bees from a protected area pollinate adjacent crop fields, the farmers receive a positive benefit. In an auction, for example, only one person is entitled to the benefit (whether negative or positive) of buying a good. If someone else at the auction were to receive either a negative or positive benefit as a result of someone else’s purchase, then this effect would be known as an externality.

Financial value The converse of the financial value is the non-financial value. In order to describe the benefits and costs that human beings receive from objects, the notion of financial and non-financial values has been introduced. In economics it is clear that some objects provide financial benefits (costs) and non-financial benefits (costs) to their owners. Financial values describe the benefits derived from an object which can be traded and valued in a market place. Non-financial values covers all the values which cannot be traded or valued in a market place.

Gross Domestic Product (GDP) GDP is a measure of the total flow of the produced by an economy. It measures the value added by each level of production or transaction. It is measured over a specific time period, normally a year or a quarter (three months). The value added at each level is measured at its market price, and then aggregated. c o n t e n t s

Gross and net economic benefit The gross economic benefit is that derived from the intended project. The net economic benefit is equivalent to the gross economic benefit less the economic benefit that would have been generated by the projects that were foregone. The foregone projects are those projects that were given up in order to provide resources for the intended project.

Input-output analysis Input-output analysis is a means of measuring all the transactions in an economy. Driml (1993:62) defined it as “a technique for modelling flows of production and consumption in a defined regional or national economy. The flow-on, indirect and multiplier effects throughout the economy of output or employment produced in any one sector may be examined with the model.”

Multiplier effect The multiplier effect describes the economy-wide impact of a single economic transaction. The multiplier effect evaluates the scale of the initial impact, plus the scale of the ‘ripples’ which follow from that impact in other sectors of the economy. The multiplier effect eventually ebbs as a greater and greater proportion of the ‘ripples’ ebb away into purchases of imports.

Multiplier This refers to that component of the multiplier effect which is paid as profit. Other components of the multiplier effect may be received as wages.

National Accounts framework The United Nations developed a System of which has been adopted by most countries to record and classify by type, all the annual transactions of their economy.

Net profit Used in the context of company reports. Net profit is equivalent to the return to shareholders before tax and hence is equivalent to the definition of profit mentioned below - once we allow for tax. Net profit is gross profit less items like and depreciation (and sometimes tax), although these definitions are not set in ‘concrete’ and habits vary from person to person.

Non-financial value The converse of financial value, it is described above as part of financial values.

Non-use values This refers to values which do not require direct consumption of the underlying object.

Opportunity Cost This is the net benefit/s foregone by not pursuing the next best alternative option.

Order of magnitude estimates An order of magnitude estimate is an estimate of the scale of a likely benefit, in the absence of data, which allows the accurate estimation of the precise size of the benefit.

Profit component Profit is the return on capital earned by a business. Profit component is that part of the national income which accrues to the owners of capital. Other components of national income are wages for example or taxes that are paid to government.

Public Goods In layman’s terms, public goods are those goods and services which provide net benefits to society and yet cannot be optimally supplied by the private sector because they could not realise a profit from the transaction. Defence, the road system and education are three examples.

Sensitivity Analysis Sensitivity analysis is a means of testing the effect of the unreliable variables in a calculation. The process involves giving the ‘unreliable’ variable a range of values, and checking the impact that this has on the full calculation. c o n t e n t s

Shadow price The shadow price of a value is the efficient price, that the value would have if the underlying market and economy were ‘efficient’. The converse of a shadow price is a distorted price reflecting the distortions in the underlying market and economy.

Social welfare analysis Social welfare analysis seeks to identify the best possible outcome for society as a whole, including future generations.

Transfer payments These payments are ‘injections’ of cash from outside an economy. By definition, they must be received from outside the economy.

Use values Refers to values received from directly using an object. Also known as direct values.

Utility benefit Projects, goods and services generate utility or ‘welfare’ - otherwise thought of as happiness or satisfaction. Utility benefit refers to the capacity of a project to generate positive utility.

Utility output This refers to the production of utility by a project.

Value-added (Driml, 1993:12) Value-added implies that putting inputs together to form output results in an output which is more valuable than the sum of the value of the inputs, when all prices are measured at market prices. a c k n o w l e d g m e n t s

A c k n o w l e d g m e n t s

Francis Grey,,,, Principal Economist At Large & Associates,,,,

PO Box 256, Noble Park, Melbourne Victoria 3174

Tel: 61 3 9562 4472 Fax: 61 3 9562 4118 Email: [email protected]

David Littlewood Save Albert Park Group

JJJULIETTE BRODSKY EDITOR

Anonymous (((( plural))))

1116 Septttember 111997 e x e c u t i v e s u m m a r y

G r a n d P r i x t e n s i o n s - E x e c u t i v e S u m m a r y

The Victorian Government claims that the Grand Prix held at Albert Park during 1996 created $95.6m in economic benefit to the State. This so-called economic benefit was derived from an economic impact analysis of the 1996 Australian Formula One Grand Prix (AFOGP) commissioned by the Victorian Government and released last year. The Premier told Parliament that

..Simply because we held the race, we gained an economic benefit to industry in the state of $95.6 million of extra expenditure. (Jeff Kennett, Victorian Parliamentary Hansard, 14 May 1996, Questions Without Notice, page 23) This claim was repeated more recently as a justification for accepting a $2.7m loss from the 1997 Grand Prix. However, an extensive review of the economic impact study titled Grand Prixtensions (GP), prepared by Economist At Large and Associates, has found that:

1. the above claim is a misrepresentation of the size of the economic benefit; 2. claimed gross benefits are overstated or non-existent; and 3. ironically, compared to what might have been achieved, Victorians are poorer where they could have been wealthier, if the Government had chosen a more “boring” investment than the Grand Prix.

1 / M i s r e p r e s e n t a t i o n o f t h e e c o n o m i c b e n e f i t The Government’s economic impact analysis (AFOGP EIA) states that the Albert Park Grand Prix created a gross economic benefit of $95.6 million in 1996. Use of this gross estimate misleadingly overstates the economic benefit of the Grand Prix. The AFOGP EIA, by its own reasoning, should have reported the net benefit estimated on page 62 (see attached photocopy). The gross benefit records only the estimated economic impact of the Grand Prix. The net benefit records the alleged economic impact of the Grand Prix, after subtracting the alleged economic impact of the projects that were given up to pay for the Grand Prix. Page 62, Table 7.4 of the AFOGP EIA, under the column headed 1996, reports that the net economic benefit figure is $46m (in 1990 dollars) - or $51.49m in 1996 dollars. This represents the first year impact in a three year cycle. The AFOGP EIA data, which we do not accept, suggests that the average annual net economic benefit of the Grand Prix is in the order of $57.72m in 1996 dollars. After analysing the data presented in the report, we suggest that the actual economic impact is more likely to be an annual $23.67m or lower.

2 / O v e r s t a t e d a n d n o n - e x i s t e n t e c o n o m i c e f f e c t s o f t h e R a c e The AFOGP EIA analysis is critically dependent on expenditure estimates obtained by survey and other means. The AFOGP EIA estimated gross direct expenditure (the first round of payments) resulting from the event at $64.33m. By contrast, we estimated direct gross expenditure at $29.55m. The difference between our estimate and that provided by the EIA is due to some of the estimates, within the EIA analysis, being wrongly included or overstated. Examples include:

 The survey did not account for ‘stay-aways’ and ‘go-aways’ - people who avoided Victoria or left Victoria because of the AFOGP. (GP report, Section 5.2.1)

 The number of out-of-state visitors was overestimated - possibly by up to 40%. This reduced visitor dit ti t f$242 t $1733 (GP t S ti 521) e x e c u t i v e s u m m a r y

 The EIA argued for an enhanced duration effect (whereby existing visitors extend their visit to attend the Grand Prix) without supporting evidence from survey data - this $4.4.m was eliminated from our estimate (GP report, Section 5.3).

 Estimated expenditure by retained Victorian visitors (visitors retained in Victoria who would otherwise have gone to Adelaide) was reduced from $10.6m to $5.89m - the supporting evidence provided by the EIA was unconvincing (GP report, Section 5.4).

 The EIA claimed an induced tourism effect of $6m. The EIA admitted that no evidence was available to support this conclusion - hence this amount was also not included in our estimate (GP report, Section 5.7).

 The EIA claimed a $9.9m expenditure impact from changes in patterns - ie. Victorians reduced their savings and permanently increased spending because of the Grand Prix. We considered this extremely unlikely, as insufficient supporting evidence was provided. Consequently, the amount was deleted from our analysis. (GP report, Section 5.8.)

3 / M i s s e d O p p o r t u n i t i e s The Victorian Government promotes the Grand Prix owing to its alleged economic benefits. Our analysis shows that the capital sunk into the Grand Prix could have been deployed in other uses which would have generated a bigger economic benefit. Significantly, world-renowned management consultant Kenichi Ohmae2 comments that:

“politicians and bureaucrats push(ed) hard for major events because they were not willing to take day to day business events seriously, or because they did not understand the economy. ‘They are excited about it: they get to meet big people. And yet the economy is more based on the day to day ins and outs of information, money, companies and people...... ’."3 Our analysis of the Grand Prix supports Ohmae’s comments. In other words, rigorous economic analysis cites increased wealth as the performance benchmark for choosing between projects. We noted that by our estimates, the Grand Prix would put only $22m of wealth (remaining asset value, profits from the Australian Grand Prix Corporation and other Victorian businesses) in Victorian pockets by 2005. This is a very poor perfor mance. It may have been economically better for the Victorian Government to have invested in a dull, ‘bread and butter’ project, rather than a ‘glamorous’ Grand Prix.

If we accept the EIA at face value (which we do not), it estimates increased wealth of $240m. If, however, a comparable investment had been made in a Victorian company conducting a ‘normal’ business, it could be expected that a similar amount would be earned over ten years on the project alone, before we take into account the flow-on (or multiplier) benefits. Taking account of the flow-on benefits from a commercial project could increase profits by an additional amount - probably in the order of another $290m. A proper commercial investment may return $500m in wealth in the same period as the Grand Prix, while on the EIA’s best estimates, the AFOGP can only muster $240m - or $22m on our estimates.

Economic benefits come from the ‘day to day’ bread and butter activities of good government. Thus, the Grand Prix should have been subjected to a rigorous cost-benefit analysis before being extensively subsidised by the Victorian taxpayers. It would appear - according to our calculations - that the Grand Prix is a major economic loser, relative to what Victorians could have achieved through other uses. If the Grand Prix is as good for the economy as the EIA claims, then those industries who are benefiting ought to be able to buy out the government share - at a price that gives a commercially viable return to the taxpayers’ extensive investment. e x e c u t i v e s u m m a r y

S u m m a r y T a b l e Direct Economic Impacts (original & adjusted) from the Melbourne 1996 Grand Prix, ($m 1996 dollars). Note that data to the right of the decimal point can be affected by rounding errors. Categories of Direct Economic Impact EIA4 Modified Relevant Section of the Report Victoria $m $m 1 Enhanced visitor effect 24.20 17.33 Stay away & go-away effects not included. Section 5.2.1 2 Enhanced duration effect 4.40 0 Section 5.3 3 Expenditure by event associated personnel 6.00 5.19 Section 5.5 4 Complementary events 3.20 1.14 Section 5.6 5 Retained Victorian expenditure 10.60 5.89 Section 5.4 6 Induced Tourism effect 6.00 0 Section 5.7 7 Enhanced resident expenditure effect 9.90 0 Section 5.8 8 Direct import content 00Not discussed 9 Total Direct Economic Impact 64.30 29.55 Section 5.9 10 Total Gross Economic Benefit 95.60 43.93 After applying the EIA consultants ratio (Increase in GSDP)56 @ implied @ implied of 95.6/64.3 to 29.55, we obtained multiplier of multiplier of 1.487 1.487 43.93. Section 6.3. 11 Average annual Net Economic Benefit 57.72 23.67 Section 6.4. The net benefit is likely to (Increase in GSDP) or be smaller if alternative 'opportunity smaller cost projects are chosen 12 Effect of the choice of Adjusted Adjusted Net benefits may be smaller if a neo- data cannot data cannot classical rather than Keynesian model is be provided be provided used. Section 7 13 Net Profit of the AGPC for 94/95 & 95/96 -4.93 -5.04 Section 8, Table 8.4 14 Net Profit adjusted to include appropriate -9.72 -10.47 Section 8, Table 8.6 & 8.5 depreciation 15 Net profit adjusted to include Government -9.72 -10.97 Section 8, Table 8.6 taxes 16 Net profit adjusted to include land rental -9.72 -15.07 Section 8, Table 8.6 17 Estimated Capital cost of the AGPC 47.90 54.25 Section 8 18 Rate of return on invested capital %/yr -20.29 -27.78 Section 8 19 Benchmark rate of return on ‘risk-free’ 8% 8% Section 8 Commonwealth 10 year bonds (est.) (nominal) 20 Benchmark rate of return on commercial 20% 20% Section 8 investments (est.) (nominal) 21 AGPC net financial position after 10 yrs -97.20 -150.70 Section 8 22 Total estimated net wealth of the AFOGP 239.28 21.87 Section 8 investment in 30 December 2005 23 Total estimated net wealth of the C/W govt 10 78.02 127.10 Section 8 bond investment in 30 December 2005 24 Total estimated net wealth of the commercial 230.25 260.77 Section 8 - this excludes the multiplier investment in 30 December 2005 excluding effects, and hence is an understatement multiplier profits 25 Commercial investment including multiplier 230.25 260.77 Section 8 profit effects equivalent to those estimated for + 288.58 + 118.33 the AFOGP by the EIA consultants =>500m =>300m

Shaded/heavily bordered area represents our interpretation of the data provided by the EIA.

4. AFOGP EIA (1996:46), Australian Formula One Grand Prix Economic Impact Assessment report published on behalf of the Department of State Development (Tourism Victoria) Melbourne Australia July 1996 e x e c u t i v e s u m m a r y

G r a n d P r i x t e n s i o n s - D e t a i l e d S u m m a r y

"A peculiar thing about the Puddin' was that, though they had all had a great many slices of him, there was no sign of the place whence the slices had been cut. 'That's where the Magic comes in,' explained Bill. 'The more you eats the more you gets. Cut-an'-come-again is his name, an' cut, an' come again, is his nature. Me an' Sam has been eatin' away at this Puddin' for years, and there's not a mark on him. Perhaps,' he added, 'you would like to hear how we came to own this remarkable Puddin'.7"

T h e A F O G P E I A : P o s t - E v e n t R a t i o n a l i s a t i o n In 1993, the Kennett Government in Victoria bought the rights to the Australian Formula One Grand Prix (AFOGP) from Adelaide, commandeered Albert Park for the building of the racetrack, and set the wheels in motion for an annual international event. All of this was well before an economic impact analysis of the Grand Prix was even commissioned. The subsequent Economic impact evaluation of the 1996 Transurban Australian Grand Prix (referred to in this document as the EIA) was released by the Victorian Government four months after the inaugural Grand Prix at Melbourne’s Albert Park in 1996.

The Kennett Government hypothesis behind the annual Grand Prix was to create an international splash in order to generate a large economic benefit for Victoria. According to the Government and various spokespeople for the Australian Formula One Grand Prix, the EIA is “proof of the puddin’ ” that they’re onto an economic winner that generates - and will continue to generate - substantial for Victorian coffers. e x e c u t i v e s u m m a r y

Moreover, simply because we held the race, we gained an economic benefit to industry in the State of $95.6 million of extra expenditure. (Jeff Kennett, Victorian Parliamentary Hansard, 14 May 1996, Questions Without Notice, page 23.)

We have audited the Government’s EIA to examine the accuracy of this claim. This EIA is important, because it provides the only evidence that their Grand Prix investment is economically beneficial for Victoria, and therefore an event that can be justified to the taxpayers.

The results of our analysis are contained in a report called Grand Prixtensions (GP). This section of the GP report provides only a detailed summary of the findings. The explanatory information can be found in the full version of the report, which can be obtained from the Save Albert Park Group, or by contacting Economist At Large and Associates8 directly.

Significantly, world-renowned management consultant Kenichi Ohmae9 comments that: “politicians and bureaucrats push(ed) hard for major events because they were not willing to take day to day business events seriously, or because they did not understand the economy. They are excited about it: they get to meet big people. And yet the economy is more based on the day to day ins and outs of information, money, companies and people...... "10

Caustic observations by management experts notwithstanding (!), our review of the EIA found the following:

G o v e r n m e n t c l a i m s - b a s e d o n w r o n g n u m b e r s The economic impact analysis (EIA) for the 1996 AFOGP states that the Albert Park Grand Prix created a gross economic benefit of $95.6 million. The report, by its own reasoning, should have reported the net benefit estimated on page 62. Use of the gross estimate in the EIA’s executive summary misleadingly overstates the economic benefit of the Grand Prix.

8 Economist At Large and Associates Ph 03 9562 4472 Fax 03 9562 4118 Email ecolarge@ozemail com au e x e c u t i v e s u m m a r y

Page 62, Table 7.4 of the EIA, under the column headed 1996, reports that the net economic benefit figure is $46m (in 1990 dollars) - or $51.49m in 1996 dollars. This represents the first year impact in a three year cycle. Based on the data provided by the EIA, it would seem that the official analysis is implying that the average annual net economic benefit of the Grand Prix is in the order of $57.72m in 1996 dollars. By contrast, our estimates suggest that the likely outcome is of the order of $23.67m per annum - or lower.

The EIA calculation methodology used on page 62 is endorsed by normal economic practice. In other words, it is prescribed economic practice for the net economic benefit to be calculated, rather than the gross economic benefit. This prescribed was advocated and discussed by the EIA report. Logically, citing the gross economic benefit from the EIA report - rather than the net economic benefit - amounts to changing the report outcomes. Government spokespeople citing the EIA’s gross economic figure ($95.6m) - when they should be using the net economic figure($57.72m) - are in fact guilty of overstating the Grand Prix’ economic benefit by about 40%.

The net benefit is the difference between the gross benefit created by the Grand Prix and the gross benefit that would have been created, had the opportunity cost projects been given the go-ahead instead. The opportunity cost projects are those investments which were cancelled in order to provide capital to finance the Grand Prix. (See GP report Section 6.3; also Summary table - at the end of this summary - Line numbers 9, 10, 11.)

S u r v e y m e t h o d s h o w s b a d e c o n o m i c p r a c t i c e The net economic benefit is estimated by surveying Grand Prix visitors and by calculating the number, and expenditure patterns, of international and interstate visitors. e x e c u t i v e s u m m a r y

The EIA does not describe its survey methodology. The integrity of the survey determines the integrity of the economic estimate. Without a transparent description of the survey methodology, we cannot be sure of the error estimates, or of the randomness or unbiased nature of the results. The EIA expects us to trust the survey manager. At the very least, it is bad economic practice not to reveal the survey methodology. (See GP report, section 5.)

S u r v e y i g n o r e d ’ s t a y - a w a y s ’ a n d ‘ g o - a w a y s ’ Moreover, the survey does not account for ‘stay-aways’ and ‘go-aways’ - people who avoided or left Victoria because of the AFOGP. Failure to include these people will artificially inflate the estimated benefits. Events such as the Grand Prix can lead to a ‘repulsion’ effect11, whereby normal tourism is reduced. In Los Angeles, for example, tourism expenditure was reduced by $163m because of the repulsion effect from the 1984 Olympics12. Yet there has been no attempt to measure this effect for the Australian Formula One Grand Prix - despite the evidence presented in the EIA which made the following statement:

While the conference was regarded as a success, interstate numbers were down compared to other years mainly due to a difficulty in obtaining accommodation.13

This evidence is further supported by data from the Australian Bureau of Statistics which indicate a slow-down in the tourism growth rate for Melbourne in March 1996. Also in March 1996, there was an absolute fall in visitor numbers in the Melbourne CBD area. (See GP report, Section 5.1.)

On this basis, the estimated annual average net benefit of $57.72m could be overstated by an unknown amount. (See GP report, Section 6.3. See also Summary table line number 1. Our estimates of direct expenditure did not include ‘stay-away’ and ‘go-away’ effects, thus our data, in line number 1, is also likely to over-state the value of the direct expenditure.)

11. Leiper, N., (1996:6), Australian and New Zealand Tourism Professional, Summer 1996 edition, 'Olympics: An Alternative View’ 12. Crompton, J.L. and McKay, S.L., (1994:33-43), Festival Management & Event Tourism, Vol 2. p 33-43, Cognisant Comm. Corp., ‘Measuring the Economic Impact of Festivals and Events: Some Myths, Misapplications and Ethical Dilemmas’ The authors are with Texas A&M University Texas Agricultural e x e c u t i v e s u m m a r y

K e y v i s i t o r n u m b e r s a r e o v e r - e s t i m a t e d The estimate of ‘bodies’ attending the Grand Prix is 197,686. The source of this ‘estimate’ is not identified by the EIA consultants. The EIA report does even consider it necessary to describe the calculation methodology.

The survey-based visitor sample is used to indicate the proportion of interstate (I/s) and overseas (O/s) visitors within the overall attendees. If we assume that the EIA survey is correct - that is, random and unbiased (this is a source of great doubt) - then the EIA estimates that 16,916 of the I/s and O/s visitors were only there because of the Grand Prix. The largest proportion of the economic benefit of the Grand Prix comes from these additional visitors - who came only because of the AFOGP (i.e. AFOGP- dependent visitors). The EIA estimate of AFOGP-dependent visitors was achieved by averaging the difference between questions 25 and 26 in the survey. Unfortunately, Question 25 is not a reliable indicator of which I/s and O/s visitors were there simply because of the Grand Prix (See GP report Section 4.2). Question 25 asks: what was the main reason for visiting Melbourne? This question should have been phrased in a more rigorous manner: Would you have visited Melbourne in March 1996 if the Grand Prix were not held? The result of the ‘woolly’ nature of Question 25 is that it inflated visitor demand for the Grand Prix. Question 26 is somewhat better, and we have adjusted the data to cancel out some of the ‘visitor ’ caused by Question 25 (See GP report, Section 5.2).

Reworking the data, conservative estimates for I/s and O/s visitors suggest that they are in the order of 10,399 on one measure - or 14,060 on a different basis. (See GP report, Section 5.2.)

If there were only 10,399 AFOGP-dependent visitors, then the economic benefit could be reduced by up to 40%. We have estimated that the direct expenditure benefit of these visitors is likely to be closer to $17.33m or lower, rather than the claimed $24.9m. (See GP report, Section 5.2, also Summary Table Line no. 1.) e x e c u t i v e s u m m a r y

K e y e x p e n d i t u r e e f f e c t s n o t b a c k e d b y e v i d e n c e The EIA report examines a number of areas to compile a list of economic benefits. Key elements are not supported with sufficient evidence or any evidence.

Enhanced duration effect: no evidence gathered

The EIA report also includes an enhanced duration effect (worth 6% of the direct economic benefit) which should have been surveyed, but wasn’t. The EIA instead relies on estimates from Adelaide. There is no explanation of why this figure was not surveyed, and hence we do not accept the estimate. (See GP report, Section 5.3, also Summary Table Line no. 2.)

Enhanced savings (resident expenditure) effect: insufficient evidence The EIA claimed also that there was an enhanced savings effect (reported in the EIA as the enhanced resident expenditure effect), because people changed their lifestyles as a result of the AFOGP. This alleged change in the Victorian lifestyle was worth 15% of the direct economic impact. Evidence of the change in lifestyle was not provided, and hence was also not acceptable. Evidence that savings were used was tendered. However, the key issue of savings increases either prior to, or after the event, was not covered. These may have offset the savings run-down and eliminated the claimed effect. (See GP report, Section 5.8, also Summary Table line no. 7.)

Induced Tourism effect: no evidence! Likewise, it is claimed that induced tourism would result in $6m in expenditure (worth 9% of the direct economic benefit). The report itself states that: e x e c u t i v e s u m m a r y

There is still no firm data available from the tourism research bodies on the impact of international exposure of Australian cities from major sporting events on induced tourism.14

For this reason, we could not accept this figure either. Other figures have been reduced or rejected. These have been summarised in the table below. (See GP report, Section 5.7, also Summary Table Line no. 6.)

Retained Victorian expenditure over-estimated Estimated expenditure by retained Victorian visitors (visitors kept in Victoria who would otherwise have gone to Adelaide) has been reduced from $10.6m to $5.89m - supporting evidence provided by the EIA is unconvincing (GP report, Section 5.4, also Summary Table Line no 5).

$ 9 5 . 6 m g r o s s b e n e f i t e x p e n d i t u r e r e d u c e d t o $ 4 3 . 9 3 m The EIA estimated a direct expenditure effect of $64.3m. The most credible figure that we could estimate was a direct expenditure of $29.55m - and even this could be reduced further by effects we have not been able to quantify. Effects that we have not been able to check include, for example, the multipliers used in the EIA. Instead, we have been forced to accept, uncritically, the EIA estimates of the relevant multipliers. The EIA applies multipliers to obtain a measure of the gross economic impact. Thus, the EIA estimates that $64.3m in direct economic benefit is transformed, via multipliers, to $95.6m in gross economic benefit. We estimate direct economic expenditure of $29.55m, which, after application of multipliers (supplied by the EIA), should provide a gross economic benefit estimate of $43.93m. (See GP report, Section 6.3, also Summary Table lines 9, 10 & 11.)

N e t e c o n o m i c b e n e f i t s h r i n k s Of course, the EIA claims that we should really look at the net economic impact. We have estimated that the claimed gross economic benefit of $95.6m implies an average net economic impact of $57.72m per year, e x e c u t i v e s u m m a r y

based on EIA data. We have estimated the gross economic benefit to be $43.93m. As a result, the net economic benefit should become $23.67m - based on our analysis of the EIA data. (See GP report, Section 6.3, also Summary Table, lines 9, 10 & 11.)

The net benefit is equal to the gross benefit minus the benefits of the opportunity cost projects. Depending on what opportunity cost (foregone) projects are identified, the net benefit could shrink further to zero, or even become negative. The choice of the opportunity cost projects could overstate the estimated net benefit by a considerable margin.

A G P C o p e r a t i n g l o s s i s a b o u t $ 5 m The Australian Grand Prix Corporation (as a distinct financial entity) is running at an operating loss. The EIA forecasts imply (on page 62) a loss (called a contingency) of approximately $4m per year - every year. The land cost has not been factored in at an accurate level, and is, in fact, a hidden subsidy to the race. Government tax payments are not known, and may have been waived, providing another hidden subsidy. Altogether, we estimated an operating loss of $5m in 1996, which blows out to $15.07m when estimated levels of depreciation (assumed to be $5.58m), government taxes (possibly $0.5m per year), and land rental (worth $4m in rent per annum) are taken into account. (See Table 8.4, Section 8; see Summary Table Line 13.)

A l t e r n a t i v e s c o u l d m a k e p r o f i t s , c u t d e b t , c u t t a x e s & b o o s t t o u r i s m The EIA framework relies on alternative projects to provide a comparison with the Grand Prix. The chosen alternative projects were an aerospace museum, roadworks and a cut in household taxes. It is claimed that these were foregone to enable the funding of the Grand Prix. Given the Government’s aggressive commitment to , we envisaged that the real opportunity cost of such discretionary funds was other more economically beneficial projects, such as repaying government debt, cutting payroll tax (boosting industry), or advertising Victoria directly to overseas e x e c u t i v e s u m m a r y

Such alternative projects are critical to the overall scale of the net economic benefit. It is possible to imagine that if the Grand Prix capital had been used to repay debt and invest in industry, the Victorian economy would be much better off. Alternatively, some of the money could have been used in a trust fund to finance direct advertising of Victoria to international tourists.

The impact of international tourism advertising has been researched by the Australian Tourism Council15. By contrast, claims that the Grand Prix provides cost-effective advertising benefits16 are not supported by the EIA. No evidence is provided in the EIA to justify the claimed TV audience, nor the alleged flow-on benefit of induced tourism. Indeed, the EIA makes the claim that

There is still no firm data available from the tourism research bodies on the impact of international exposure of Australian cities from major sporting events on induced tourism.17

M i n u s 2 0 % r e t u r n o n i n v e s t m e n t The losses of the AGPC create a loss of wealth (and hence jobs) for Victoria. This loss is in the order of -20% on combined EIA/AGPC estimates and -27% on our estimates. The AFOGP was supposed to be good for the economy, yet alternative investments like commercial projects earn upwards of +20% per year or even +8% in staid and safe Commonwealth Government bonds. The race fee (which is unknown) is likely to be far too high, and is probably undermining the viability of the event all on its own. (See GP report Table 8.6, Section 8; see also Summary Table Line 18, 19, 20.)

As a commercial deal, the AFOGP does not stand scrutiny. AGPC shareholders (the Victorian public) will be about $97.20m behind in ten years’ time, based on EIA/AGPC data. On our figures, we estimate that the cumulative loss to the shareholders of the AGPC will be in the order of $152m based on 1996 financial accounts (see GP report Table 8.7, Section 8; see also GP report Summary Table Line 21). Of course, according to the

15 Australian Financial Review 6 March 1997 page 5 e x e c u t i v e s u m m a r y

EIA, some of the losses to the Victorian public as shareholders will be offset by the economic benefits estimated in the EIA. Thus the EIA would like us to believe that the combined net effect of the AGPC losses and the net economic benefits will make Victorian citizens better-off.

$ 5 0 0 m v s $ 2 2 m a f t e r 1 0 y r s In general, economic impact assessment methodology is flawed because it does not take account of the final accumulation in net wealth at the end of the ten year period, if different projects had been undertaken.

Economic impact assessment methodology normally estimates the increase in gross state product across an entire economy. Gross state product reflects the additional value created by a new enterprise directly, and through its multiplier benefits. This ‘value-added’ is the difference between the costs of inputs and the received from sales.

Some of the ‘value-added’ is paid to employees as wages, while some is paid to the owners of capital as profit. It is the return on capital that determines the net increase wealth. The chosen investment option should be the project with the greatest net increase in wealth, given that the same amount of capital is invested in each project. Therefore, the appropriate test of any investment is the extent to which it increases wealth - relative to an alternative investment. The measure of investment effectiveness is the degree to which profits are increased. By applying an estimate of the profit component to the economic impact results, we can obtain an estimate of the likely profit increase earned in Victoria as a result of the Grand Prix. This places economic impact analysis on a sounder theoretical foundation, so long as the underlying assumptions are sustainable.

The summary table indicates (based on EIA data, and using generous assumptions about the profit share in the economy) that Victorians hold assets of $239m after ten years from the combined effect of the multiplier profits generated in the economy and the ‘profits’ generated by the AGPC. Our estimates suggest that because of a diminished direct expenditure impact and hence a diminished multiplier impact, as well as much higher e x e c u t i v e s u m m a r y

operating losses, Victorians are only $21.87m ahead in assets after ten years of effort.

An equivalent commercial project, using EIA data, and earning a conservative return of 20% per year would have resulted in a net wealth position for Victorians of $230m after ten years - before multiplier induced profits are included. If the AFOGP can only create $239m after allowing for both the return on the AGPC and the multiplier profits, then the equivalent commercial project is clearly and unambiguously superior. If we had multiplier-induced profits on the scale of the EIA Grand Prix estimates, the net wealth position of the commercial project after ten years could be up to $500m. (See GP report Table 8.8 and Section 8.2; see also Summary Table Lines 22 to 25.)

In summary, the Grand Prix EIA suggests that Victorians could be $239m ahead after 10 years from direct and multiplier profits combined. We suggest that a more accurate estimate is $21.87m. However, if the capital had been invested in a commercial project, Victoria may well have accrued $500m in wealth over the same ten year period. The economic benefit would appear to be low, compared with what could have been - had the Government followed other strategies.

V i c t o r i a n s a r e w o r s e o f f To summarise, the Australian Formula One Grand Prix gives the appearance of providing major economic benefits. It seems more likely that the event causes (or is perceived to cause) congestion, which reduces the number of other visitors. It also appears that the report’s estimates of overseas and interstate visitors are excessive.

We have concluded that the event is likely to be a net cost to Victorians, because Victorians’ capital could have been invested elsewhere for a better return in terms of increased economic performance. In consequence, Victorians are likely to be considerably poorer as a result of the AFOGP. e x e c u t i v e s u m m a r y

A u s t r a l i a n s a r e p o o r e r ! It is notable that our assessment tends to confirm the Industry Commission analysis of the Adelaide Grand Prix. The Productivity Commission (formerly the Industry Commission) concluded that the long- term impact of the Adelaide Grand Prix was to reduce total and per head real Australian economic output; i.e. make all Australians poorer18. (See GP report Section 7.1.) The Victorian Grand Prix is on a bigger scale than the Adelaide Grand Prix. It is conceivable that had the IC model been applied to the Melbourne Grand Prix, the results would be similar, or worse.

L e t t h e W i n n e r s c o m p e n s a t e t h e L o s e r s If the AFOGP created all the economic benefits claimed, then it could be expected that private industry would be willing to step forward to privatise the race, in order to secure the on-going flow of future benefits.

In theory at least, the winners (i.e. the industries making all the claimed profits) should be able to compensate Victorian taxpayers for their losses - perhaps via a bed tax! - and still come out ahead, and happy. We await developments with interest.

Economist At Large & Associates

PO Box 256, Noble Park, Melbourne Victoria 3174

Tel: 61 3 9562 4472 Fax: 61 3 9562 4118 Email: [email protected] e x e c u t i v e s u m m a r y prepared for the Save Albert Park Group i n t r o d u c t i o n

1 . I n t r o d u c t i o n

The Victorian Government is developing a major events strategy for Victoria which is intended to act as a booster to the state economy. In particular, the Australian Formula One Grand Prix (AFOGP) is the ‘jewel in the crown’ of the various major events being organised for Melbourne. The major events strategy is premised on achieving strong and positive economic impacts in return for government investment; and in this sense, is the present Government’s alternative to the previous Government’s efforts with the Victorian Corporation (VEDC). In essence, the Government has proposed that the AFOGP creates major economic benefits.

A leading international specialist in management consulting, Dr Kenichi Ohmae19, formerly of McKinsey and Company, held a different perspective. In a newspaper article, he described:

Melbourne's Grand Prix motor race (as) part of a "political disease" of major events which damage cities and their ...'If you have to bet your chips on the Grand Prix and the casinos - good luck' he said. But a strategy of attracting major events to the city was "absolutely not" good...Dr Ohmae was scathing about cities which sought the Olympics, Expos and World Cup, saying these cities usually went into post-event depression and some never recovered...He said Sydney businesses were so overcome by hosting the 2000 Olympics that they were ignoring richer opportunities available now in Asia...He supported the Committee for Melbourne, which has been boosting the city's prosperity by forging links with Asian cities. "What they are saying makes enormous sense to me" he said...Dr Ohmae said politicians and bureaucrats pushed hard for major events because they were not willing to take day to day business events seriously, or because they did not understand the economy..."They are excited about it: they get to meet big people. And yet the economy is more based on the day to day ins and outs of information, money, companies and people. That’s the economy, that’s employment."20

Leiper confirmed Ohmae's insight:

Our libraries contained publications about mega-events where tourism booms failed to materialise. Instead tourism decreased temporarily. Examples were London in 1981 (a month long festival celebrating a royal marriage), Los Angeles in 1984 (Olympics), and Perth and Fremantle in 1987 (Americas Cup). In these and other cases where i n t r o d u c t i o n

researchers have studied mega events in major cities, tourism was well below the level expected.21

The contrast between the premise of a major events strategy and the insights of economic and tourism specialists could not be more stark.

The premise that major events, or other major government activities, can lead to a rapid economic benefit creates a sense of Norman Lindsay’s mythical 'magic pudding': more major events, more government subsidies trigger the influx of international and interstate tourists and hence, generate more economic benefit. According to this world view, there is no apparent limit, or self-restraining stabilisation process, to the free lunch.

The ‘dismal scientists’ (economists) would a priori be inclined to dismiss such a premise on the basis that ‘there is no such thing as a free lunch’. Less harsh, but more rigorous economists would suggest that if such benefits were easily achieved, why don’t more governments bid for such events? Indeed, it could be suggested that enough governments have already bid for such events up to, and possibly beyond, the point where there is any return left in the projects for the winning bidder. Certainly, the Grand Prix is a long-established entertainment option whose supply is relatively fixed. It is unlikely that a new host city would be able to squeeze much additional ‘juice’ from such an event, if other players had been there already. Previous players (generally speaking, these are governments seeking status, promotion and tourists) display a tendency to overbid for the event - setting a high purchase price that transfers most of the tangible, real profit to the Grand Prix ‘franchisor’ (see section 8 of this paper).

There is a political market place for such opportunities which, inter alia,22 should reach a state of equilibrium between buyers and sellers such that the return to the marginal (the last purchaser to step forward) buyer will be limited, non-existent or negative. These are the concerns of the neo- classical economists23 who believe that markets move efficiently to balance supply with demand. It would be easy to dismiss the AFOGP on this basis, but the fact remains that markets are imperfect, information can be asymmetric (limited), and hence opportunities undoubtedly exist for the insightful entrepreneur. Nevertheless, while neo-classical economists may be stretching the theory to eliminate all free lunches, it is indeed true that

21. Leiper, N., (1996:4), Australian and New Zealand Tourism Professional, Summer 1996 edition, 'Olympics: An Alternative View'. 22 ‘All other things being equal’ this of course is never the case i n t r o d u c t i o n there will be a point where the costs exceed the benefits. It is for this reason that it is vital that the claims surrounding the AFOGP should be tested.

In the case of Victoria, the current government - founded on neo-classical economic principles (privatisation, contracting out, etc) - has adopted a ‘Keynesian’ (ie. markets fail, therefore economic intervention is needed) strategy with regard to the annual Grand Prix. It is not self-evident, as Ohmae and Leiper note, that this strategy is economically beneficial. By doing so, the Government has implied a hypothesis that the cost of the AFOGP is justified by the benefits derived from the promotion of Melbourne and the economic flow-on effects.

Further, this implies that the market is sufficiently flawed and the net benefits sufficiently great to justify economic intervention by the government. The above hypothesis, that the AFOGP would produce net economic benefits, is supposed to be “proven” through the analysis provided in the economic impact assessment (EIA) document. e c o n o m i c t h e o r y o f e c o n o m i c i m p a c t a n a l y s i s

2 . T h e E c o n o m i c T h e o r y o f E c o n o m i c I m p a c t A n a l y s i s

2 . 1 . T h e R o l e o f G o v e r n m e n t

To be economically rigorous, an economic impact assessment should identify those flaws that have precipitated government intervention. It should also demonstrate that the benefits of intervention exceed the costs of intervention. The Australian Formula One Grand Prix EIA (referred to throughout this report as EIA or AFOGP EIA) analysis fails, however, to provide any justification for government intervention.

However, in the absence of any analysis from the Government, it is possible to provide the following background. In the case of the AFOGP, the flaw in the market that may justify a government intervention is the view that the economic opportunity would not be created if the Government did not provide some essential ‘leg work’ in facilitating the process. In other words, the AFOGP would not exist if the Government did not act as ‘middleman’. The benefits of the AFOGP accrue broadly across a number of economic agents, while the costs (and relatively few of the benefits) fall directly on the organiser. In theory, the agents cannot bind together to set up the AFOGP because the transaction costs (perceived or otherwise) of doing so exceed the perceived benefit.

In such a circumstance, where information or transaction costs prevent co- operation between economic agents, then there may be a rationale for government intervention24. The Government could have defended its intervention in at least two ways. It could claim that as the insightful entrepreneur, it had spotted an information asymmetry (misunderstanding) which meant that it was economically non-viable for the economic agents e c o n o m i c t h e o r y o f e c o n o m i c i m p a c t a n a l y s i s

to bind together and create an AFOGP. Hence, it (the Government) stepped in and seized that chance. Alternatively, it could claim that only government, because of its unique nature, has the necessary communications capital (expertise and contacts) to set up such a project in operation, in a cost-effective manner. There may be other explanations that the Government would like to put on the table - and we would welcome the opportunity to review them - but in the absence of an explanation, the above two reasons seem the most plausible.

2 . 2 . R a t e o f R e t u r n & E c o n o m i c I m p a c t A n a l y s i s

These observations on the role of government lead to a useful insight which allows us to benchmark the performance of the major event as a boost to the economy.

In theory, and in practice, once government has overcome the hurdle of information or transaction costs, and established the central co-ordinating body, then it should be theoretically possible for the economic beneficiaries of the AFOGP to take shareholdings. If there is a genuine economic benefit to be had from the AFOGP - which is felt in a diverse range of businesses - then it would seem correct that the beneficiaries could afford to take shareholdings in the central co-ordinating authority. Meanwhile, the shares would be valued sufficiently low to provide a competitive return to the beneficiaries, but sufficiently high to enable the Government to recover its investment in full with appropriate dividends to compensate for its entrepreneurial risk. In the tradition of economics, it does not matter whether the AFOGP is privatised. Economics suggests that if the AFOGP is a good investment, then the beneficiaries, in theory at least, must be capable of appropriately renumerating the Government while still realising their return. If this is not the case, then the investment is inefficient - and hence a relative net loss to the economy - compared with what could have been.

The beneficiaries of the AFOGP will receive a boost in their business turnover from the AFOGP. This will provide extra profits. Generally speaking, the beneficiaries receive this increase in business without having to make a capital outlay. By buying shares, they are simply making an ‘investment’, for which the increase in profits is the return. In this sense, the shares reflect the value ofthe AFOGP to the owners of each e c o n o m i c t h e o r y o f e c o n o m i c i m p a c t a n a l y s i s

Melbourne-based business that receives economic benefits. The shares also need to reflect the price of the capital investment made by government - if an entrepreneurial government is to realise a commercial return on its investment.

The EIA can be established in such a manner as to measure the AFOGP profit increase received by each enterprise in Victoria, by examining the value-added multipliers (flow-on effects). This measures the value-added in each industry/company such that it should be possible to estimate the additional profit25 that goes to each industry/company. This additional profit can be reworked to estimate a capital value for the AFOGP-induced profit growth, using the average return on investment26 in each industry. This capital value would appear to represent (all other things being equal) the amount of money that each industry/company would be willing to pay for a share of the AFOGP. In other words, this capital value equates to the value of shares that the enterprise should be willing to buy in the AFOGP co-operative27. The willingness to pay by the beneficiaries should exceed, or at least match, the willingness to sell by the Government - for the sale to go ahead. It is assumed that the Government will only sell on the basis that it gets a proper commercial return for its entrepreneurial effort.

Black and Pape present a similar argument when they point out that every IndyCar race worldwide is supported by private business28. They argue that if the IndyCar race were a sensible business proposition, industry would have supported it and government support would have been superfluous. This argument is somewhat simplistic, as it ignores some of the possible problems that may make government intervention necessary.

However, as has been argued above, once the venture is established, if it is a going concern, it could be privatised - if not in practice, then in theory. A resulting analysis would reveal whether the event was profitable. In the case of the IndyCar race, Black and Pape argue that the $23m in sales would translate into a possible $2.3m profit for industry at large29. This must be offset against the Government deficit on the race of $10.5m.

25. That is, excluding wages and only including returns on capital. 26. Adjusted for the risk of that investment class. 27. The value of the shares should be discounted by time to reflect the time it takes for that company to benefit from the spillover effects emanating from the major event. 28. Black, T. and Pape, A. (1995:26), in Australian Accountant, September 1995 edition. e c o n o m i c t h e o r y o f e c o n o m i c i m p a c t a n a l y s i s

Thus, even though the race generated $23m in sales or visitor expenditures, it was still an economic loser because costs exceeded benefits.

Diagram 2.1. Assessing the Return on Investment of a Major Event

Additional Profit Centres in other industries due to the Event* Industry A Additional Net Profit earned in Industry B other industries as a result of the event Industry C Industry D Net Profit earned Industry E directly from the event Assuming zero additional capital investment by these industries. Capital Cost of the Event Total Net Profit divided by Total Capital Cost

equals Additional capital deployed voluntarily by Return on Investment for the event in d us try to cope with the event

*The profit is equivalent to the value added by the business in the economic impact modelling less wages, ie. the value added due to capital. e c o n o m i c t h e o r y o f e c o n o m i c i m p a c t a n a l y s i s

Diagram 2.2. Necessary conditions for the AFOGP to be good for the economy.

If the AFOGP is economically efficient (i.e. optimal), the beneficiary industries should be willing to buy out the Government ownership of the consortium at a commercially appropriate price.

Beneficiary industries Government willingness willingness to pay to sell some or all of the for shares in the TAGP shares in the AFOGP consortium consortium

The purchase price The sale price will be will be determined determined by the need to by the increase in receive a commercially the profit of the beneficiary appropriate return for this industries based on the risky venture average rate of return in each industry/company - ceteris paribus (all other things being equal)

Conditions of Sale

Purchase price Offer Price The Grand Prix is economically efficient and a good public investment

Purchase price Offer Price The Grand Prix is economically inefficient and a bad public investment

The above procedure has not been cited in any EIA work that has been seen by this consultant, though the logic stands as an arbiter of the value of projects claiming ripple-based benefits30 of the kind cited on behalf of the AFOGP.

The mission of the Corporation is to successfully stage the Australian Formula One Grand Prix at Albert Park ...and thereby stimulate and maximise actual and potential promotional and economic benefits for Melbourne and Victoria.31

30. i.e. net beneficial economic externalities. EIA analyses are particularly used where the underlying project is a poor financial performer, but is supposed to generate lots of spin-off benefits (profits) in other industries e c o n o m i c t h e o r y o f e c o n o m i c i m p a c t a n a l y s i s

In the case of the AFOGP, all benefits translate into dollars and cents sooner or later, and hence should be subject to rate of return analysis. Rate of return analysis is the basis on which economic theory accounts for movement of capital. Capital moves in order to achieve the highest possible return on investment (ceteris paribus32). Investment projects are compared in terms of return on investment. The project with the highest return on investment - all other things being unchanged (ceteris paribus) - should receive the go-ahead, relative to the projects with the lower rate of return. By this means, the economy allocates scarce capital such that it will produce the highest possible level of wealth (and hence income and jobs) for the society. It is for this reason that economists focus on ensuring markets work efficiently. The rate of return approach is at the heart of modern .

Unfortunately, until now, it has been difficult to integrate rate of return analysis into economic impact analysis. As a result, the EIA methodology has relied upon a comparative analysis of the principal project and the 'opportunity cost' project in order to work out that which had the overall greater benefit. While this is a necessary selection procedure, it is not a sufficient procedure to ensure that the winning project is best overall for the economy because the race is limited to only the two projects analysed. Using rate of return analysis within an EIA enables the comparisons to be made against the market benchmark, and hence facilitates comparison on a 'global' (whole population) rather than just 'local' (taking a sample) basis.

Rate of return analysis should be integrated into the EIA and conducted on both the principal project and the 'opportunity cost' project. It is possible that the principal project and the opportunity cost project are both of relatively low value in terms of rate of return. In this case, both projects should be rejected - ceteris paribus - where the aim is purported to stimulate the economy. The investment capital should be redirected towards higher rate of return activities in other sectors.

Black and Pape33 make a similar point, with a slightly different emphasis. They emphasise that the worthwhile economic projects should make a profit where the revenue from operations exceeds costs. The use of rate of return analysis simply implies, in this context, that the level of profit should exceed a certain margin; ie. it should provide a rate of return on investment comparable with industry benchmarks for a given risk. The key point of the Black and Pape analysis is that e c o n o m i c t h e o r y o f e c o n o m i c i m p a c t a n a l y s i s

by taking into account all of the economic benefits of a special event, cost-benefit analysis seeks to ascertain whether the project increases society's net wealth.34

If the AFOGP is to make an economic impact, it must, in effect, increase the wealth of Victorians. The increase in wealth that is generated must also exceed that which could have been achieved from comparable investments.

The rate of return analysis has the added benefit of providing a fair comparison between a high rate of return activity and a low rate of return activity. The Grand Prix investment (which is low return or negative on the direct activity, and possibly high return on the ripple activity) can be compared against a commercial opportunity cost project such as investing in a new cannery (which is high return on both the direct and indirect activity).

In order for the AFOGP to achieve the higher overall rate of return,35 the returns on the indirect projects must be higher to more than offset the low return on the direct activity (the AGPC itself). The low return on the direct activity is a major handicap for the AFOGP if it is claimed that the Grand Prix is the best option for the allocated investment capital. The scepticism of economists that the AFOGP is the best stimulation for the economy stems from this handicap. It is unlikely that the flow-on effects of the AFOGP will exclusively enter industries with such a high rate of return that they offset the losses incurred on the primary project.

2 . 3 . B a c k g r o u n d t o E c o n o m i c I m p a c t A n a l y s i s

Economic impact analysis is a much-neglected part of economic theory. Economic impact assessment is heavily subscribed to by politicians, but academic economists often treat it with derision. This is chiefly because late 20th century economic analysis is dominated by a neo-classical approach (economic rationalism in crude terms) which is based on the view that the economy is (generally speaking) optimally balanced - with little room for government intervention to promote economic development. The older school of Keynesian economists, who held the opposite view (that sometimes markets function poorly, and therefore require intervention36), has all but vanished, although the economic debate about the role of government intervention is still alive and well - sustained by economic

34 Black T and Pape A (1995:26) in Australian Accountant September 1995 edition e c o n o m i c t h e o r y o f e c o n o m i c i m p a c t a n a l y s i s

policy activities like the Victorian Government support of the AFOGP - as well as the political urge to reduce .

Some of the Keynesian approaches are beginning to reappear in the guise of 'complexity' analysis as established by at the Santa Fe Institute37. This latter development has not made an appearance in the debate over major event economics. The economic impact of major events is being analysed within the context of the old-fashioned neo-classical- Keynesian continuum.

In theory at least, the Industry Commission analysis,38 which imputes a low benefit to the event, belongs to the neo-classical realm; while the AFOGP analysis,39 which promotes a high economic value for the event, is at the Keynesian end of the spectrum. The differences in these intellectual traditions are generally reflected in the choice and scale of parameters built into the model. In order to evaluate the AFOGP EIA, it must be set within the context of the intellectual framework established by economic theory.

Economic theory provides a framework for examining an economy/society in a ‘backcasting’ mode or a ‘forecasting’ mode. In the backcasting mode, the analyst is examining how an economy/society has developed over time. Backcasting can be as simple as taking a 'snapshot' of the existing structure of the economy, or an attempt to detail the change in that structure in a series of interlinked 'snapshots' (a movie). Backcasting explains how or why events transpired as they did, providing an analyst with the opportunity to examine different policy options and their likely outcomes. Thus, in a forecasting mode, the analyst is asking what if questions. That is, out of a range of possible alternative actions, what is the choice that leads to the best economic outcome?

Such examinations are conducted using economic models or other (generally poorer) substitutes that represent the economy in the same way that a 'movie' represents 'real life'. Unlike movies, however (where as a rule, we don’t expect “real life”), economic models are better regarded the more closely they are able to mimic the real economy. In economic analysis, this leads to three areas of debate:

 debate about the chosen policy option and its intended outcome;

37. See Waldrop, M., Complexity, Viking (Penguin-Simon Schuster USA), 1992. 38 PC (July 1996) formerly the Industry Commission Report on State Territory and Local Government e c o n o m i c t h e o r y o f e c o n o m i c i m p a c t a n a l y s i s

 debate about the efficacy of the model (or substitute); and

 debate about the real nature of the economy.

Given the complexity of the real economy, the complexity of any attempt to model the economy and the necessary complexity of various policy options, it is not surprising that economic modelling and policy analysis is more an art than a science; though one that requires, nonetheless, a rigorous scientific approach where hypotheses are advanced and dissected according to the evidence. Where evidence is weak, then model outcomes should be tested for sensitivity to variations in the input data. Sensitivities, and their significance, should be discussed in the report. Outcomes will then be represented as a range of possibilities rather than a single datum, and the results will be suitably qualified. Not the least of the qualifications will be the reassurance that the hypothesis has not been disproved - yet.

Economic analysis is normally described as cost-benefit analysis. Cost- benefit analysis is broadly applied to any project to determine the quantity of the total net benefits (including private and public) generated by a project. Cost-benefit analysis is directed at achieving three goals:

 identify the best social outcome (social welfare analysis);

 identify the best outcome for the economy (economic impact analysis);

 identify the best capital investment option (project analysis).

In the first example, the economic analyst derives techniques to demonstrate the best option for society as a whole, which may imply the best outcome for the economy - or it may imply that reduced economic performance is accepted as a -off for improved social outcomes. In the second case, the economic analyst seeks to determine, from amongst a range of options, which is the best for the economy as a whole. In the third instance, the analyst scrutinises projects to identify which project provides the greatest return on investment for a given risk. Each of the above types of analysis can be mixed in differing combinations to meet differing requirements.

The first category of analysis (social welfare analysis) is for projects that provide 'public goods' as well as 'private' goods. That is, projects that provide large net public benefits which could not be provided by a free market - possibly including some net private benefits. e c o n o m i c t h e o r y o f e c o n o m i c i m p a c t a n a l y s i s

The second category is used for analysing any project for its impact on the economy. This analysis could be applied to a private project like a factory, or it could be applied to a project like expenditure on education. This second category of analysis is generally used alongside either social welfare analysis or alongside project analysis. This occurs because any cost-benefit analysis should normally take into account any subsequent impacts on the economy.

The third style - called project analysis - is normally applied by a private company when analysing its own investment opportunities. This third type of analysis would use social welfare analysis and/or economic impact analysis when the private project was perceived to generate negative or positive externalities.

At this point, the reason why economists are disrespectful towards economic impact analysis emerges. Efficient projects, by definition, do not generate negative or positive externalities - either economic or social. Private investment projects, run by rational economic agents, operating in an efficient economy will not generate (by definition) any positive or negative impacts. Most importantly, they will not generate an economic impact worth assessing, because such projects simply redirect resources that would have been used elsewhere. The net gain to the economy from one efficient private project versus another efficient private project, given an equivalent risk profile, will only be the marginal increment in investment return accrued by the more profitable project.

Economic purists would then argue that such an additional return (known as pure profit), given equivalent risks, will be competed away, and each project is likely to result in the same return to investment. Even if the pure profit is not competed away (and assuming this does not undermine the assumptions already made about efficiency), any marginal difference is likely to be in the order of only a few per cent return on capital - and hence is too small to be worth investigating. For this reason, it is very rare to conduct economic impact analyses on private investment projects.

Economic impact analysis is normally reserved for areas where government and/or significant ‘public goods’ (or ‘bads’, in the example of pollution) are involved. In this instance, where a project may generate large public goods such as mass transport, and yet requires subsidies, it can be useful to determine the scale of associated economic impact. Conversely, if a factory generates significant ‘public bads’, such as pollution, it can also be e c o n o m i c t h e o r y o f e c o n o m i c i m p a c t a n a l y s i s

In these examples, the economic impact may provide an offset to the public bad or a complement to a subsidised ‘public good’, altering the cost- benefit equation. The economic impact that is measured, however, is not the 'gross impact'40 of the intended project. Rather, it is the gross impact of the intended project minus the gross impact of the project(s) that are forgone (opportunity cost) which provides a measure of the net economic impact. The net economic impact is the true measure of the worth of the intended project.

The above approach is only necessary in a forecasting mode, where the analysis is intended to answer 'what if' questions about choosing the best project for the future. In a 'backcasting' mode where an analysis describes a pre-existing situation, it can be sufficient to measure and describe the existing flows of income and expenditure without reference to an alternative project. This is because, depending on the policy process, there may be no for the resources commanded by such a project. Where a comparison is being required, however, then it is necessary to consider the opportunity cost and estimate the net gain from a project. Such measurements in the absence of a competing project are very similar, if not identical, to the work performed by the central government statistical bureaus - except that the analysis is reduced to a single project rather than a whole industry.

Economic impact assessment is at its most interesting when it is used to assess 'what if' questions. In such analysis, the work must be rigorously conducted to ensure that resources (including financial and environmental) are not wasted by virtue of an ill-chosen option. To ensure that the correct option (if any) is chosen, some criteria need to be fulfilled.

The rules that ensure rigorous and scientific analysis can be loosely described in the following manner:

1. Ensure the analysis is properly set within an appropriate economic analytical context;

2. Choose an appropriate foregone project(s);

3. Ensure the measurement of the economic ‘ripples’ caused by a project is rigorously conducted;

4. Ensure that the opportunity cost (foregone project) of the proposed project is properly identified; e c o n o m i c t h e o r y o f e c o n o m i c i m p a c t a n a l y s i s

5. Carefully assess the net benefits for both the proposed and foregone project by applying the ‘vanishing’ rule. The rule requires that if the project, once completed, was then to mysteriously ‘vanish’, releasing all resources (both environmental, social and economic) for other activities, then the economic impact assessment should only accrue to the project the changes in benefits and costs attributable to the vanishing;

6. Appropriately evaluate the net benefit between the proposed project and the foregone project;

7. Calculate an overall rate of return for each project, including the direct and ripple effects. a n a l y t i c a l c o n t e x t o f t h e A F O G P E I A

3 . T h e A n a l y t i c a l C o n t e x t o f t h e A u s t r a l i a n F o r m u l a O n e G r a n d P r i x E I A

The Australian Formula One Grand Prix (AFOGP) economic impact analysis seeks to provide a measure of the economic impact of the motor racing event. The analysts have not provided, and were probably not required to provide, an analytical context for their work. That is, the EIA was not required to explain the Government AFOGP expenditure in terms of net utility gain. The implication within all economic theory (whether Keynesian or neo-classical) is that all actions are undertaken as part of rational utility maximising process. Thus for any expenditure analysis to be set properly in context, it needs to explain the utility maximisation objective and rationale of the expenditure. This is normally done by the use of full cost-benefit analysis (described in the theory section).

The current Victorian Government has adopted an explicitly business- oriented approach to managing Victoria. By implication, therefore, the Victorian Government has claimed that it is an efficient government. Such a premise would require any government activity to earn a commercially viable rate of return on capital (for business-like projects - hence the privatisation of the State Electricity Commission), or to demonstrate a 'net utility gain' for Victorians compared with alternative options.

The AFOGP is run by the Australian Grand Prix Corporation (AGPC), and is expected by the Government to be a poor financial performer (see the section on Return on Investment). For this reason, it would seem fair to conclude that the AFOGP is considered a vehicle for delivering 'public goods'41 to the community. This requires a full scale cost-benefit analysis to justify the expenditure program in terms of the expected net gain in utility. The Government has not provided a measurement of net utility

41 Public goods were mentioned briefly in Section 2 3 Public goods are those goods and services which a n a l y t i c a l c o n t e x t o f t h e A F O G P E I A from the AFOGP, leading to the conclusion that either it believes that it 'knows' that this is the best outcome (and hence does not need specialist assessment to confirm its own unique insight), or it believes that an analysis of the 'utility benefits' would not stand scrutiny.

Assuming that the Government believes that it has a unique insight into the needs of Victorians, this begs the question as to the intended utility benefit that offsets the loss of income caused by the non-business-like financial performance of the AFOGP. Two aspects have been particularly significant in Government discussions of the event: firstly, an advertising impact that encourages more non-Victorians to visit or do business in Melbourne; and secondly, the economic impact of the event. The AGPC mission statement is clear:

The mission of the Corporation is to successfully stage the Australian Formula One Grand Prix at Albert Park ...... and thereby stimulate and maximise actual and potential promotional and economic benefits for Melbourne and Victoria.42

The resulting Government perspective is likewise clear. The AFOGP's expected poor financial performance as a business enterprise is supposed to be offset by promotional and economic benefits to Melbourne. Surprisingly, it was expected that the Government would claim a 'circus' benefit - that the citizens of Melbourne would gain a utility boost by having the motor race in Melbourne. This was not discussed by the Government, leading to the conclusion that they did not believe that providing this particular style of sporting event was likely to provide any net utility gains to the Melbourne community.

On this basis, we can conclude that the only 'public good' benefits the Government expected to be provided were those described in the mission statement. Accordingly, the public balance sheet for the AFOGP - expected to be achieved by the Government - has the following features: a n a l y t i c a l c o n t e x t o f t h e A F O G P E I A

Diagram 3.1. The Public Balance Sheet for the AFOGP

Expected Public Balance Sheet for the TAGP

The Albert Park Grand Prix development has been predicated on the following hypothesis: the benefits will exceed the costs.

Both these two elements need testing

Net relative financial Net gain of promotion for Melbourne losses of the AGPC (an increase in goodwill) and economic benefits

The net relative financial losses refer to true financial performance of the AGPC: the vehicle via which taxpayers' funds are funnelled to stage the event, relative to what those funds could have achieved in another role. The AGPC is expected to be a poor financial performer both in its own right, and on a comparative basis - which is the appropriate economic measure. This, according to the Government, is justified by the ‘public goods’ that are provided in return.

Since it is likely that the AGPC will run at a relative net loss, then the only public justification is the provision of the ‘public goods’ described as the promotional benefits and the economic impact. In this sense, the AFOGP EIA can be seen, at least, as an effort to quantify the second public benefit. The EIA study seeks to take the promotional benefit into account by assuming an 'induced tourism effect'. This issue is dealt with in Section 5.7. Broadly speaking, even though the claimed benefits of the AFOGP are ‘public goods’, they are of such a nature that, in theory at least, their extent should be measurable in dollar terms familiar to economic impact assessment. On this basis, it is reasonable to expect a study of this nature to take into account the measurement of both the claimed ‘public goods’ and to set out the analysis accordingly.

In crude terms, the task presented to the economic analysts by the a n a l y t i c a l c o n t e x t o f t h e A F O G P E I A

the cost of the AFOGP justified by the benefits derived from the promotion of Melbourne and the economic flow-on effects

In part, however, with respect to the promotional benefits, the EIA has claimed that no data could be provided43, and hence the Government's own hypothesis could not be proven. It was bad analytical practice to fail to provide a dedicated study on the promotional benefits of the AFOGP - given the significance of this data to the overall outcome. It was also significant that there appear to be credible differences of opinion about the value of the promotional benefits from major events44. It is not self- evident that there are any promotional benefits, nor is it self-evident that the promotional benefits exceed the costs. If the AFOGP study had been properly structured to address the Government's hypothesis, then the consultants would have had a better chance to address the issue of the promotional benefits. This is not the fault of the consultants, but lies in the manner in which the study was framed. This is critical to the outcome of the study, since it is clear that the AGPC is not commercially viable (nor is it expected to be), and the expense of such an operation must be offset/exceeded by benefits to make it a worthwhile government activity.

The failure of the sponsors of the AFOGP economic impact assessment to request a cost-benefit analysis of the key assumption about the promotional (induced tourism/business) benefits of the event has made it difficult for the study to achieve its central objective. The consultants are forced to rely on a set of assumptions about the expected promotional benefits which remain untested - and are subject to dispute. While this is not a fatal failure in the study, it must come close to significantly undermining the analytical approach taken in this report. Since this assumption could be easily tested (but wasn't) through an analysis of the promotional benefits of major events and through a sensitivity analysis of the EIA itself, it leaves the objective observer, at the very least, unconvinced of the claimed outcome. It also gets the proof of the proposed hypothesis off to a very shaky start.

In economic terms, it is likewise a poor scientific method to fail to analyse the overall utility output of a project that meets many private needs (motor racing fans), but which is subject to public subsidy. While the claimed public benefits are discussed (one is discussed and the other is the

43 See Page 45 Section 5 5 First sentence EIA report July 1996 a n a l y t i c a l c o n t e x t o f t h e A F O G P E I A subject of the study itself) in the case of the AFOGP, the overall utility benefit remains undiscussed. This may be because the Government does not seek to claim any benefit in terms of an overall utility gain for Victoria. An analysis is necessary, however, because in order to provide appropriate data for decision-making, it is necessary to consider the possibility that the Grand Prix has generated a net overall loss of utility among Victorians which outweighs the claimed net benefits of the race. While the Government has not sought to enter this debate, it is clear that this issue needed addressing from the point of view of good economic method, and subsequently as part of the context of the EIA study. s u r v e y q u e s t i o n s

4 . S u r v e y Q u e s t i o n s

The AFOGP is critically dependent on visitors for its direct financial survival, and to create the expected economic impact. The assessment of the economic impact is also critically dependent on visitors to supply data in order to measure the scale of the claimed economic impact. If the survey is not done correctly, it can invalidate the resulting EIA.

4 . 1 . P o p u l a t i o n S a m p l i n g M e t h o d o l o g y

The theory of survey questions is a discipline in its own right. When surveys are used in conjunction with economic analysis, a special subset is created. In such circumstances, the survey questions should be phrased, posed and recorded in a manner that meets normal standards for objective, analytical work by the marketing/surveying profession. It is assumed (as this is outside the scope of this analysis) that this was the case for the survey work conducted in support of the EIA. With respect to conducting visitor surveys for inclusion in EIA's, additional rules apply.

These additional rules seek to ensure the measured response is a true economic assessment. That is, the true economic benefit of the event is the number of additional visitor-days created in Melbourne (and the associated daily expenditure rates) that would not have existed if the event did not happen. The number of additional visitor days is a net figure consisting of the additional visitor-days created minus the visitor-days that are eliminated due to 'stay away' and 'go-away' effects. The new visitor-days consist of people who came exclusively for the event plus additional days due to people staying in Melbourne for longer because of the event. The 'stay away' effect is due to people cancelling visits to Melbourne because of the event. The 'go away' effect is caused by people (residents and visitors) who would have spent a visitor-day in Melbourne but who left to s u r v e y q u e s t i o n s

Leiper noted that:

The modern world’s great cities have become its most popular tourist destinations but their inbound tourist flows can be severely disrupted by mega events like Olympics. The explanation is simple and simple research was adequate (for its discovery.) Mega events lasting more than a day or two influence masses of people but in opposite ways. Many people travel to the venue for the event. Simultaneously, many others who otherwise would have visited the city for discretionary purposes (holidays, visiting friends and relatives, conventions, non-urgent business) tend to cancel or postpone their proposed visits. Cancellation or postponement occurs because information about the mega event creates an image of a place that will be temporarily repulsive to discretionary visitors not motivated by the big event. (Many ‘postponed’ visits are really cancelled, not made up over time.) The repulsive image has components of excessive crowds, traffic congestion, long delays, higher than usual prices, lower standards of , inconvenience from security policing, extra risk and uncertainty, and unnecessary stress. Thus there are simultaneous opposite effects affecting different groups: a positive ‘attraction effect’ and a negative ‘repulsion effect’. Sometimes as in Los Angeles in 1984, the combined net impact is dramatically negative, causing a large decrease in tourism compared with normal levels.45

Broadly speaking, the population of Victoria, including visitors and potential visitors, can be divided into two categories. The first category includes the overwhelming proportion of the population whose tourism intentions/actions were completely unaffected by the event. The remainder of the population includes all people whose tourism intentions/actions were affected, whether positively or negatively, by the existence of a Grand Prix race at Albert Park (AFOGP-affected).

The survey of visitors, potential visitors and the resident population should seek to identify all the sub-groups within the category of people whose intentions were AFOGP-affected. The aim is to measure the relative size of each sub-group. Some of these sub-categories will add visitor days, and some will subtract visitor days. All such groups must be identified and surveyed for size, number of visitor days and expenditure in order to provide an idea of the scale of each category. The scale will help determine the relative economic impact created by each sub-group as they cope with the arrival of the AFOGP.

Ideally, there would be a survey of the general population to provide a benchmark against which the survey of race patrons would be assessed. This, however, is likely to be too expensive, and is not expected, although a survey should be designed to benchmark against some other well-known general survey - such as the Australian Bureau of Statistics General Household survey. s u r v e y q u e s t i o n s

The group of people whose tourism intentions are affected by the AFOGP can be divided into a further two groups.

 The first group includes those who would leave Victoria; or, if residing outside the state, who would travel into Victoria, because of the AFOGP. This group has been detailed in Diagram 4.2, where it has been broken down into the appropriate subcategories that need identification.

 The second group includes Victorians and outsiders46 who were planning to spend a fixed number of visitor days in Melbourne - irrespective of the occurrence of the AFOGP. These visitors were influenced to alter the content of their visitor day, hence either swapping a day at the beach for a day at the race, or swapping a day spent shopping in Prahran for a day visiting Phillip Island’s penguin parade or whatever in order to avoid the race. These visitors did not alter the number of days spent in Melbourne; rather, they altered the manner in which their time was spent. This group is not so economically significant, because Victoria was going to get the benefit of their expenditure anyway, and hence they are not considered to be making a net economic contribution because of the AFOGP.

Both of these groups are represented in the following diagram.

46. This group of out-of-state visitors is different from those who were analysed in Diagram 4.2. They comprise those who have not altered the length of their stay but rather may have swapped a day with relatives s u r v e y q u e s t i o n s

Diagram 4.1. Breakdown of Target Survey groups within Australia or intending to visit Australia - the oval circle contains the entire population, while the boxes divide the population into four main categories. The population of interest to the survey is in the shaded grey box.

Visitor days by the population of Australia & intending international visitors can be divided into four main groups

Visitor days by Victorians & out of Non-Victorian Australians and state visitors who are not affected by international visitors whose visitor days the AFOGP are unaffected by the AFOGP

Visitor days by Victorians Victorians and out of state visitors & out of state visitors already who will leave or visit Victoria in or coming to Victoria that because of the AFOGP are influenced by the AFOGP to change the manner in which they See Diagram 4.2 spend their time. (These are considered to be See Diagram 4.3 additional economic impacts that (These are considered to have can be attributed to the AFOGP) no additional economic impact and cannot be counted)

A survey for the AFOGP should seek to estimate the number of people (and visitor-days) who are included in each of the visitor sub-categories in Diagram 4.2. These sub-categories list positive and negative impacts of the AFOGP on Melbourne and Victorian tourism in terms of visitor days, thus providing a comprehensive overview of the event impact. Aggregating each sub-category provides an estimate of the total number of additional visitor days which have been incurred in Victoria by the AFOGP, which would otherwise have been spent outside the state. s u r v e y q u e s t i o n s

Diagram 4. 2. Population/Visitor Survey Categories *Locals include Melburnians Tota l vis itor days gain ed due Total visitor days & rural Victo rians to th e ev ent from local s wh o los t due to t he ev ent from woul d oth erwise g one out o f locals who would otherwise **Out of state includes both state but delay ed t hat t rip gone out of state but brought international & interstate because o f the AFOGP. The forward that trip because o f the visitors number of visitor days should AFOGP. Th e number of v isito r be broken down by the extent days should be broken down to which they hav e been by the extent to which they Category 1 delay ed t o ena ble a dis coun t have been brought forward to Time shifting locals facto r to be ap plied. enable a discount factor to be Target group for surveys: applied. plus 1. AFOGP pat rons 2. Local Population Total visit or days from plus out of state visitors that were brought forward due to the AFOGP. Total visitor days from Category 2 out of state visitors that were Time shifting out of staters Visitor days delayed due to the AFOGP. in this category should be classified Visitor days in this category Target group for surveys: by the extent to which they have should be classified by the extent 1. AFOGP patrons b een b roug ht forward to enab le a to which they have been put back 2. In tern ation al v isito rs lo cated in discount factor to b e ap plied. to en able a di scount factor to be other states at the time of the TAGP appl ied. 3. Potential interstate visitors

plus plus

Category 3 Total visitor days lost due to Event shifting locals Total visitor days gained due to the event from locals who the event from locals who would would otherwise have stayed Target group for surveys: otherwise have gone out of state but have gone interstate 1. AFOGP pat rons 2. Local population plus plus

Category 4 Total visitor days gained due to Total visitor days lost due to the Event shifting out of staters even t fro m out of state visi tors the event from new, out of state Target g roup for surv eys: who would otherwise have visited visitors coming to Melbourne 1. AFOGP patrons but have gone/stayed interstate 2. Interstate & international visitors plus plus Cat egory 5 Tota l vis itor days gai ned due t o Event adjusting out of staters the even t fro m ou t of stat e Total visitor days lost due to the even t fro m out of state visi tors Target group for surveys: visitors extending their stay who would have stayed longer 1. AFOGP patron s 2. Interstate & international visitors plus plus in Victoria at the time of the TAGP Cat egory 6 Total additional visitor days Total induced visitor days lost Visitor days induced by the event from induced tourism due to exposure to the AFOGP Target g roup for s urveys: 1. Inters tate & in ternation al equal equal visitors

Total additional visitor days less Total additional visitor days Total additional visitor days that = would not have been incurredby s u r v e y q u e s t i o n s

Diagram 4.3. Classification of Total Visitor days incurred in Victoria during, though not necessarily related to the AFOGP. This is otherwise known as the ‘Victorian Tourism task’ that was completed on each day of the race as well as in preceding and succeeding days. The Tourism task refers to the total number of visitor days created in Victoria in any specific time period.

Aggregation of Total Visitor Days in Victoria Group 1 Victorians and out of state visitors This is the only who have provided net additional category that visitor days to Victoria - that is accepted as creating would otherwise have been spent an economic impact outside the state. These are in a ‘what if’ analysis listed in Diagram 4.2. such as that being performed here.

Victorians who reduced or increased Victorians & out of state visitors visitor days, w i thin the state of who created visitor days in Victoria V i ctoria , in response to the TAGP that were not additional to what Group 2 would have been created in the absence of the TAGP. Victorians who reduced visitor Group 3 days by staying home rather than visiting the Victorians and out of state visitors Albert Park area who moved from another event to the TAGP Victorians who increased visitor days by leaving the Victorians & out of state visitors Albert Park area & who could have visited the site travelling elsewhere within but went elsewhere the state

Victorians who increased Victorians & out of state visitor days to attend the visitors who made trips to locations TAGP that were not relevant to the TAGP & were not affected

Diagram 4.2 provides a breakdown of the additional visitor days incurred in Victoria by those who left Victoria, or who visited Victoria because of the AFOGP. This does not provide a complete list of all visitor days, or other economic activities that have been displaced or created. Diagram 4.3. provides a breakdown of all visitor days incurred in Victoria at the time of the AFOGP.

In Diagram 4.3., the first category - Group 1 - is already accounted for in the economic impact analysis, and indeed is the only group normally included in 'what if'-style analyses. The third category, Group 3, provides no additional economic impact whether or not the AFOGP is held, and therefore is not included. s u r v e y q u e s t i o n s

The categories listed under Group 2 includes the net visitor days incurred by the locals attending the AFOGP. This category has more complex economic implications. Locals will respond in a range of ways to the arrival of the AFOGP. Some of the responses include activities such as not going to work in order to attend; some will seek out their offices to avoid the race (!); others will give up days at the beach in order to attend the AFOGP; some visitor days will be created in order to avoid the AFOGP as people leave the local area from Port Melbourne through to St Kilda/South Yarra; others will avoid visiting the area of the Port Melbourne/South Yarra/St Kilda triangle because of the event, etc. For instance, it has been estimated that Albert Park received 2.8 million visitor days47 a year prior to the Grand Prix. If this figure is correct, many of these days will be lost, with some consequent economic impact. For this economic impact analysis, this data is excluded, by convention. These changes are not normally included because by convention, and intuition, they are considered to be switching expenditure from one product to another within the state. This is a reasonable interpretation in these circumstances. For this AFOGP EIA analysis, however, the consultants claim that some of the locals have run down their savings, permanently inducing a boost in local economic activity. This argument is not accepted (see Section 5.8). Thus while the local expenditure is considered to be part of the economy, it is assumed48 to be no different from that which would have taken place.

The purpose of examining visitor days is in order to determine the direct economic impact of visitor days. The EIA will need to include all other direct economic impacts. The following Diagram 4.4. seeks to classify all the direct economic impacts created by the AFOGP (including visitor day impacts). For instance, some shopping centres may have lost customers because money was spent at the Grand Prix. Other entertainment areas like cinemas may also have suffered. The event will cause a redirection of expenditure from existing market-driven businesses to other industries. This will cause losses of income to capital and labour. The businesses who lose custom (and some who gain custom) are excluded from this analysis by the convention on local activity. Economic impact analysis provides no guidance on the likely scale of such losses or even how they should be brought to account. We have accepted this convention for this critique, but would expect to see that the development of EIA theory will provide some means of measuring this change.

47. Pers. comm. No reference has been found for this figure. 48 This assumption may be wrong but it is considered to be difficult to measure and is likely to be small s u r v e y q u e s t i o n s s u r v e y q u e s t i o n s

Diagram 4. 4. Direct Economic Impacts from the TAGP * net economic impact refers to the direct net economic impact ** The net additional visitor days calculated in the Type 1 economic impact are not duplicated in subsequent listings of visitor days. ***Each type of visitor day is unique. The total number of visitor days in each type could be added together to estimate the aggregate number of visitor days created or affected by the Grand Prix ****Total visitor days in Victoria would be calculated by adding together the visitor days created by the TAGP and the visitor days affected by the TAGP, plus the category of visitor days which were completely unaffected by the TAGP.

The net economic impact of total additional visitor days Type 1 Economic Impact created by the TAGP as calculated in Diagram 4.2 plus

The net economic impact of total visitor days due to locals Type 2 Economic Impact (Victorians & Melburnians) who would have gone to (excluded by convention other events in Victoria, buthave gone to the TAGP from the EIA ) instead of other events plus Type 3 Economic Impact The net economic impact of total additional visitor days from people who went to the TAGP, but who would have engaged (excluded by convention in some other activity (other than working or touring). from the EIA ) plus The net economic impact of total visitor days due to locals who Type 4 Economic Impact would have gone to work, but have gone to the TAGP instead. (excluded by convention from the EIA ) minus

The net economic impact of total visitor days lost at Albert Park Type 5 Economic Impact due to the installation and operation of the TAGP (excluded by convention from the EIA ) minus The net economic impact of total visitor days lost in the Type 6 Economic Impact area due to the TAGP from shoppers, visitors to St (excluded by convention K ilda, the foreshore etc, who did not undertake any from the EIA ) other touring activities minus

The net economic impact of the cost of the disruption to normal Type 7 Economic Impact business patterns throughout the area around the TAG P (lost (excluded by convention busines s, reduced s ales , delayed bus ines s meetings etc) from the EIA )

plus The net economic impact of people who diverted their touring Type 8 Economic Impact intentions elsewhere in Victoria/Melbourne as a result of the (excluded by convention TAGP from the EIA ) plus

The net economic impact of corporate and other business activities Type 9 Economic Impact such as concession holders and corporate advertising, that are not (excluded by convention directed through the revenue stream of the AGPS from the EIA ) equals s u r v e y q u e s t i o n s

In principle, the winners should be able to compensate the losers and still come out ahead if the project is a net economic winner49. This would not be necessary if the project (the AGPC) was not subsidised by Government, or had some other justifiable public good benefit. The AGPC was established to boost the economy, and yet the primary project is a net economic loss. In such circumstances, greater evidence of performance is required - hence the need for local economic impacts to pass the compensation test principle.

Diagram 4.4 illustrates that virtually all Victorian economic impacts, other than additional visitor days, are excluded from EIA analysis by convention. It is a reasonable assumption that any interstate impacts of the event, other than visitors, will be too small to be noticeable.

While this convention - excluding intrastate impacts - is generally accepted, it is also feasible that there will be some areas inside the state that will feel an effect from the AFOGP, but which are outside of the immediate vicinity of the race itself. These include the local shopping precincts in, for example, Acland St, St Kilda, Clarendon St, South Melbourne, Chapel St, Prahran, etc. In these cases, capital stock can be underutilised resulting in a dip in profits in these areas. A thorough analysis needs to check for these possibilities. Finding the above changes in local activity will not be easy, and even at this stage, we cannot be sure that Diagram 4.4 lists all relevant primary impacts from the event. The use of surveys is a means of pursuing this data. Exclusion of local effects has made the analytical task easier, though it is at the risk of significant economic effects being missed. Given the poor return on the primary impact, any net losses in the local economy may be significant.

Leiper provided some insight into this argument when he noted that the:

Mega events of ancient Greece were located in provincial towns like Ells, not in the capital city. We found the strategic reason in records of political speeches made 2,500 years ago. Greek leaders understood that Athens was the special location of valuable social and economic routines, including a constant flow of tourists, which would be disrupted and harmed if mega events lasting a week or more were staged in the capital. ....in our 1993 paper Michael Hall and I remarked that cities of world rank now avoid hosting the Olympics and that the reason, we presume, is the same one which guided good governance in classical Greece. Opinion leaders in great capitals understand that the cities’ social and economic vitality is sustained by large-scale patterns of behaviour with recreational, cultural and consumption dimensions. Largely discretionary and fragile, these patterns would be damaged by mega-events like Olympics. In those patterns urban tourism is a significant part, and perhaps the most fragile part.50

49 Actual compensation is not necessarily required - the principle is intended to establish whether the s u r v e y q u e s t i o n s

4 . 2 . D e s i g n o f t h e A F O G P S u r v e y

The AFOGP survey needed to cover the visitors (including officials, participants etc), local population, intending visitors to Victoria and local businesses through out Victoria who may experience some impact from the AFOGP.

The visitor survey is particularly important. The aim of the survey, apart from quantifying the levels and type of expenditure, is to identify from amongst the visitors and members of the local population, those whose economic response has been influenced by the AFOGP. The diagrams have indicated the differing segments of the population and visitors whose economic contribution needs to be identified and measured. The questions should seek to identify the economic behaviour of all groups in the population. Those groups whose economic behaviour alters should be addressed by the study. The questioning needs to elicit an explanation of economic behaviour in the presence of the AFOGP, and the likely economic behaviour if the AFOGP had not occurred. Such questioning should probably target the behaviour patterns of differing segments of the population in the period leading up to, during, and after the event.

The survey should begin with a general population survey to distinguish the relative sizes of all target groups both in Victoria and in tourism departure points in other states and overseas. This then needs to be followed up with specific surveys targeted at each group to elicit the 'pattern' of visitor days, expenditure and detailed behavioural data that can produce estimates of visitor-days and expenditure patterns for each type of visitor.

The AFOGP Patron Survey document provided the most useful source of information on the survey methodology. Listed in the back of the Patron Research report,51 Questions 24, 25 and 26 go to the key economic issue: why the visitors are at the Grand Prix. The questions are:

24. From the list below, what were all your reasons for visiting Melbourne?

25. And what was the MAIN52 reason for this trip?

‘Olympics: An Alternative View’ s u r v e y q u e s t i o n s

26. Would you have visited VICTORIA this year (1996) if the Australian Grand Prix were not held in Melbourne?53

The remaining questions were more of a marketing nature, except where expenses, visitor duration and activity were surveyed. The EIA consultants appeared to have used question 26 as the filter for separating visitors who were in Victoria because of the AFOGP, and those who were not in Victoria because of the AFOGP. The consultants admit to excluding visitors who brought forward trips to Victoria because of the AFOGP54. This was a relatively conservative approach, since some discount factor could have been applied instead, which would have increased visitor numbers.

The consultants used questions 25 and 26 to derive a measure of the number of visitors who came to Victoria because of the AFOGP. We felt that the appropriate question was No. 26. This seeks - albeit in a double- barrelled fashion - to identify the people who would not be present if the AFOGP were not occurring. It should have asked where the respondents would have been if the AFOGP had not been held. Question 25 does not address the question of what respondents would have done - had the AFOGP not been held. This was outlined in the theory sections above, where it was specified that the key issue was to identify those who were only in Victoria because of the AFOGP. The secondary reason may have been sufficient for a visit to have taken place anyway. Then, if question 25 and 26 meant the same thing to respondents, we would have expected a similar percentage response rather than the wide variation (see the Tables 3.6 and 3.7 listed in Section 5). For this reason, we have discounted responses to question 25.

The survey theory section also noted the need to identify a range of target groups for surveying. The EIA survey missed out the following groups:

 members of the Victorian population who may have gone away because of the event;

 Visitors who spent an extra day in Melbourne or stayed interstate an extra day because of the event;

 potential visitors who may have delayed or cancelled a visit to Victoria because of the event; and s u r v e y q u e s t i o n s

 Victorians who would have travelled to Adelaide for the Grand Prix but who stayed in Victoria because of the AFOGP.

In the case of Victorian residents (or visitors), the important group is those who left the state, since their economic loss ought to be counted by the EIA. The second group will be more difficult to estimate, but their negative contribution could be bigger since the special event is more likely to have interrupted requirements that were already established. The following example from the Los Angeles Olympics illustrates what may have occurred in the Victorian economy during the long Moomba weekend in 1996.

Thus an economic impact study done after the 1984 Los Angeles Olympic Games, estimated that $163 million of out of the region visitor expenditures did not occur in Southern California during the period of the Games which would have accrued if they had not been held. This was attributed to two major factors (Economist Research Associates, 1986):

 Widespread national media reporting of potential congestion.....

 The 1984 Olympic Games had been known to be scheduled ...... with resultant alternative vacation and visitation planning by out of town tourists and by regional residents, and some postponement of visitor trips

.....the $163 million which would have occurred but which was squeezed out by the games was appropriately deducted from the gross economic impact in order to arrive at the event's net economic impact.55

These 'lost' visitors represent the downside of a special event. They would have taken spending power away, offsetting the gains from having the international and interstate visitors in Victoria. Without an estimate of the number involved, the visitor data must be regarded as inaccurate and, possibly, an overstatement of the benefits of the AFOGP (See section 5).

The EIA consultants, however, did survey some businesses. These included hotels, restaurants, cafes, entertainment, shops, coach, rail and taxi businesses. In this process, it should have been possible to also selectively target areas and businesses who may have been adversely affected by the AFOGP, in order to seek a measurement of the negative effect (if any) on business custom. Such a survey would need to reach out to country centres and regional shopping areas. The actual survey appears to be confined to likely winners from the AFOGP, even though negative responses are reported. While this criticism is a minor consideration and a difficult task to complete, it is a necessary offset to a business survey that

55. Crompton, J.L. and McKay, S.L., (1994:33-43), Festival Management & Event Tourism, Vol 2. p 33-43, Cognisant Comm Corp ‘Measuring the Economic Impact of Festivals and Events: Some Myths s u r v e y q u e s t i o n s

may not have selected its target audience well enough to reflect all trends. Finally, though this data is not relevant to the visitor expenditure calculation, it can be used as a rough check on the overall economic impact caused by visitors and non-visitors alike.

4 . 3 . S u r v e y A d m i n i s t r a t i o n

The manner in which the survey was conducted is outside the brief of an economic review. However, it is clear that the integrity of the entire EIA report rests on the integrity with which the survey was conducted. If the interstate and international visitor figures are lower than recorded, then the event's economic impact also diminishes in a one-to-one relationship. At some point, the economic benefits will dip beneath the economic costs, and the Grand Prix will become a drain on the Victorian economy. The manner in which the survey is conducted is central to ensuring the integrity of the resulting data.

According to survey specialists,56 a survey of this nature should be conducted such that:

 there is a survey team on each gate,

 each surveyor is tasked to approach every nth entrant,

 the survey should be conducted such that the result is an unbiased sample (for instance, were interviewers stationed such that they greeted a representative sample of visitors, or were they stationed such that they were likely to meet a ‘biased’ sample?).

The EIA survey has a very small sample size, which can only be scaled up at great risk. For example, an overestimate of 10%, from the sample, translates into a large overestimate, when applied to 200,000 people. The risk is that, in the absence of a background survey like the Household Expenditure Survey conducted by the Australian Bureau of Statistics, there will be errors in the extrapolation, because there is no representative benchmark for comparison purposes. s u r v e y q u e s t i o n s

The survey could have published standard error estimates for the sample. This would have enabled a range to be provided. Thus, we would know the minimum and maximum estimates of interstate tourists. This enables the calculation of minimum and maximum economic impacts. For example the 1996 Adelaide Festival Economic Impact Study57 provided estimates of standard errors.

The above methodology ensures that a survey conducted along these lines is relatively reliable, random, unbiased and representative. The AFOGP patron survey, however, was conducted in the following manner:

Between the 7 and 10th of March, NIEIR randomly interviewed 1929 visitors at the Grand Prix...... Secondly, during the Sunday of the interviewing schedule, several interviewers surveyed only interstate and overseas visitors at the Grand Prix. However, to maintain the relative Victorian, interstate and overseas visitor proportions, a count was made by each interviewer of Victorian visitors approached but subsequently not interviewed.58

No other explanation is provided. Once again, the report fails to maintain transparency of technique. Without explanation of the random interview methodology and other information, it is impossible to verify the quality of the survey data.

57. 1996 Adelaide Festival: An Economic Study, prepared for the South Australian Tourism Commission, Department for the Arts and Cultural Development and the Australia Council written by Market Equity SA Pty s u r v e y r e s p o n s e s

5 . S u r v e y R e s p o n s e s

The face-to-face patron survey approached 2,431 persons with 1929 visitors interviewed and 24 questionnaires handed out (with 11 returned). Locals were not interviewed, but were recorded - since the survey was the basis of the split between local, interstate and international visitors. The of responses was:

 from Melbourne visitors;

 from intrastate visitors;

 from interstate visitors;

 from overseas visitors.

These results were modified by the hotel survey data from which 17 intrastate responses, 151 interstate responses and 51 overseas responses were received59. The data was used to classify AFOGP visitors (according to their home location) by a procedure that was difficult to interpret. It is suggested that the consultant/s provide a full working of such estimates in the future, to enable replication of their work.

The consultants concluded that the following distribution was appropriate:

 (144,426) were Melbourne visitors;

 (22,186) were intrastate visitors;

 (20,028) were interstate visitors;

 (11,045) were overseas visitors.

The EIA data provided an estimate of 197,686 visitors attending the Grand Prix between 7 and 10 March 199660. s u r v e y r e s p o n s e s

The consultants did not explain the discrepancy between the AGPC claim that the

Grand Prix was a four day festival of motor sport and ancillary activities attended by 401,000 spectators'61

and the EIA claim of 197,686 visitors. What is very important from the point of view of the economic analysis is the number of 'bodies' (bums on seats) who visited the Grand Prix, and how many attendances there were. Attendances imply that a fixed number of 'bodies' visited the AFOGP site on several occasions, creating a number of attendances. The economic analysis uses estimates of ‘bodies’ at the Grand Prix to form a measure of the number of 'bodies' who visited Victoria, and how many days they spent there.

For this critique, we have assumed that the claim of 197,686 relates to 'bodies' and not attendances. The significance of this cannot be underestimated. If 197,686 refers to attendances and not bodies, then the data on interstate and international visitors is overstated - possibly severely. We do not expect the data to reflect attendances, and we have confidence that the 197,686 reflects 'bodies'; yet the overall paucity of information provided makes it impossible to know for certain, when the outside observer must rely on data in the AGPC annual report and the EIA. At the very least, the methodology for calculating 197,686 visitors from 401,000 attendances should be discussed, and exposed, in the EIA report.

In examining ticketing arrangements for the 1997 event, it was clear that ticket numbers alone do not reveal an accurate body count for the event. For instance, it is possible to obtain $27 tickets to Thursday's events, or a four day ticket for $12062. This suggests that some visitors are likely to buy multiple tickets, forcing the event’s management to estimate the body count. It is not simply a matter of counting heads. Thus the failure of the EIA to explain the calculation of the 197,686 figure is a serious flaw in the presentation, if not the substance, of this report. It illustrates the extent to which the information in the EIA is inadequately presented.

This information on actual 'bodies' is central to the findings of this study. The EIA surveyed attendees and estimated the proportion of interstate and international visitors. The EIA multiplied the total number of 'bodies' by the estimated proportions gained from the survey to calculate that 31,073

61 AGPC Annual report (1996:3) s u r v e y r e s p o n s e s interstate (20,028) and international visitors (11,045) arrived for the Grand Prix. If the total number of 'bodies' is wrong, then the entire study is knocked askew. Once again, we are forced to accept data provided without adequate explanation. This data indicates that an additional 31,073 people arrived in Melbourne for the AFOGP around the time of 7-10 March 1996.

Only a proportion of the estimated 31073 out of state visitors are relevant to this study. The EIA used questions 25, 26 and 27 from the visitors survey to estimate the proportion of relevant visitors who only visited Victoria or Australia because of the AFOGP (ie. AFOGP-dependent).

The questions were written as follows: 25. And what was the MAIN reason for this trip? Tick one answer only To visit friends and relatives On holidays On business To attend the Grand Prix as a spectator To attend the Grand Prix as a participant or official Other (Please specify)

26. Would you have visited VICTORIA this year (1996) if the Australian Grand Prix was not held in Melbourne? Yes Probably Unlikely No Don’t know

27. Would you have visited Australia this year (1996) if the Grand Prix was not held in Australia? Yes Probably Unlikely No Don’t know

The consultants estimated AFOGP-dependent visitor numbers for Victoria with questions 25 and 26 The consultants appeared to average between s u r v e y r e s p o n s e s

An estimate of the net additional visitors to Victoria is derived by taking the mid points of the above two estimates.63

The two estimates referred to above are reported in Tables 5.1(3.6) and 5.2(3.7) where 5.1 and 5.2 are the table numbers as allocated in this report and the numbers (3.6) and (3.7) in brackets are the table numbers as used in the EIA report. The relevant rows have been underlined

Table 5.1(3.6)

Proportion (percent) of interstate and overseas corporate and non-corporate visitors nominating the main reason for the current visit to Victoria.

Main reason Corporate ------Non-corporate------for visit Interstate visitors Overseas visitors Interstate visitors Overseas visitors

To visit friends & 2.7 3 3.9 8.4 relatives On holidays 0.0 9.1 1.0 17.5 On business 15.4 45.5 6.8 10.2 To attend the GP as 79.2 39.4 87.1 57.8 spectator To attend the GP as 0.0 0.0 0.0 0.0 official/participant Other 2.6 3.0 1.3 5.0 Source: AFOGP EIA (1996:17)

Table 5.2(3.7)

Proportions (percent) of interstate and overseas corporate and non-corporate visitors who would have visited Victoria in 1996 in the absence of the Australian Grand Prix (percent)

Corporate ------Non-corporate------Interstate visitors Overseas visitors Interstate visitors Overseas visitors

Yes 60.4 63.6 38.9 39.8 Probably 12.1 6.1 7.7 8.4 Unlikely 12.8 0.0 14.8 8.4 No 14.1 30.3 36.0 39.2 Don't know 0.7 0.0 2.6 4.2 Source: AFOGP EIA (1996:18)

The consultants then derived the following averaged results. The data was calculated by averaging between the respective cells in Tables 5.1(3.6) and s u r v e y r e s p o n s e s

5.2(3.7) above, which have been bordered with a double line and underlined. These results indicate the EIA estimate of the percentage of interstate and international visitors who only visited Victoria because of the AFOGP.

Table 5.3. The averaged results from the EIA Corporate ------Non-corporate------Interstate visitors Overseas visitors Interstate visitors Overseas visitors Consultants average 47% 35% 62% 49% Source: AFOGP EIA (1996:18)

The EIA identified 54.4% of all out of state visitors as AFOGP-dependent. This disaggregates into 59% of interstate visitors and 47% of international visitors as being AFOGP-dependent. In raw numbers, according to the EIA, this implies 11,738 (out of 20,028) interstate visitors and 5,178 (out of 11,045)64 international visitors would not have come to Victoria if the AFOGP had not been held.

5 . 1 . S t a y - a w a y s a n d G o - a w a y s

The failure to include the ‘stay-away’ and ‘go-away’ effects in the survey imply that the above figures of 11,738 and 5,178 are likely to be overestimates of the net number of visitors, except in the event that no one left to travel interstate, or avoided travelling to Victoria in that week. Adelaide's advertisements enticing locals to travel for the long weekend is certainly anecdotal evidence of a possible trend which would reduce the size of the economic impact. In addition, the data needs to be netted of those who stayed away for that week, because of congestion, noise, and other factors. The EIA provides evidence for this trend. They noted that attendance at the complementary Australian Automotive Aftermarket Association (AAAA) International Conference was down with respect to interstate visitors.

While the conference was regarded as a success, interstate numbers were down compared to other years, mainly due to a difficulty in obtaining accommodation.65

This may have been due to over-enthusiastic booking caused by excessive predictions of demand from the Grand Prix. It does signal, however, that temporary resource constraints (as identified in the Productivity s u r v e y r e s p o n s e s

Commission model) had begun to erode the economic gains from the AFOGP. As more special events are crammed into one period (eg. Moomba, the Comedy Festival, etc), the congestion will get worse, increasing the size of the stay-away effect, and further eroding the economic impact.

The Australian Bureau of Statistics has collected data for Melbourne City and the Melbourne Statistical Division (broadly speaking, this is considered to be the whole of Melbourne) on revenue by accommodation establishments, guest arrivals, guest nights and room nights. The data is supplied in Table 5.4 below. The data has been graphed in Charts 5.1 to 5.8.

The charts indicate that there is very little change between March 1995 and March 1996 for Melbourne City measures of ‘body’ numbers using hotels. Indeed there is even a decline apparent for room nights. Across Melbourne as a whole, using the statistical division data, the number of rooms being used would seem to rise between March 1995 and March 1996, by a small amount, across all the indicators of guest nights, room nights and guest arrivals. This rise was less than the more substantial rise, visible in the charts 5.4 to 5.6, for the months of January, February, April and May for guest nights, room nights and guest arrivals. In other words, the year on year growth rate for March 1996 is less than the year on year growth rate of January 1996, February 1996, April 1996 and May 1996. Similarly, the year on year growth rate for March 1996 is less than that for March 1995, March 1994 and March 1993 for all three indicators of guest arrivals, guest nights and room nights. This points to a slowing down in the monthly tourism growth trend for Melbourne as a whole and absolute fall in visitor numbers for Melbourne City.

Only the accommodation takings indicator showed a substantial and marked rise above the trend. This was the same for Melbourne City and the Melbourne Statistical Division. Given that absolute numbers fell in the Melbourne City area and the growth rate slowed for the Melbourne Statistical Division, it is likely that room rates must have risen in the same period for takings to have increased strongly. This points to market prices rising, and choking off the demand increase, induced (perceived) as a result of the AFOGP. The neo-classical market response (price rises) to artificial demand stimulation has ‘kicked in’ to cut back the expected surge in growth. It would appear that, in fact, numbers remained unchanged or s u r v e y r e s p o n s e s grew slightly less, but all visitors paid more for visiting - perhaps giving the impression of Melbourne as a more expensive place to visit, perhaps deterring future visits.

The congestion effect should be taken seriously with respect to Melbourne over the Grand Prix week. In addition, it should be noted that the scale of visits revealed in the charts is only of the order of 200, 000 to 250, 000. A increase of, say 30,000, people staying in hotels for four nights translates into 120,000 room nights. If they shared with four people per room, that is still an extra 30,000 room nights for the month. This should cause a serious increase in the overall numbers, unless hotel capacity is stretched in which case prices rise instead, or are not discounted as heavily and other visitors are deterred - creating ‘stay-aways’ and ‘go-aways’.

With more accurate data, we could begin to reduce the net additional visitor numbers, recorded in the EIA, by the estimated size of the stay-away's and the go-away's (subject to adjustment for time switching). We have not estimated this trend, but it is necessary that future studies do. Without this additional information, the Government can only guess at the size of the Grand Prix economic impact. s u r v e y r e s p o n s e s

Table 5.4. AUSTRALIAN BUREAU OF STATISTICS Accommodation Data. s u r v e y r e s p o n s e s

Chart 5.1 s u r v e y r e s p o n s e s

Chart 5.2 s u r v e y r e s p o n s e s

Chart 5.3 s u r v e y r e s p o n s e s

Chart 5.4 s u r v e y r e s p o n s e s

Chart 5.5 s u r v e y r e s p o n s e s

Chart 5.6 s u r v e y r e s p o n s e s

Chart 5.7 s u r v e y r e s p o n s e s

Chart 5.8 s u r v e y r e s p o n s e s

5 . 2 . E s t i m a t i n g V i s i t o r N u m b e r s a n d V i s i t o r E x p e n d i t u r e

5 . 2 . 1 . E s t i m a t i n g A F O G P - d e p e n d e n t v i s i t o r s

To the extent that question 26, from the Patron Survey, is well phrased (which we dispute - its double-barrelled phrasing is misleading), we believe the data in Table 5.2(3.7) to be a more accurate estimate of the AFOGP- dependent visitors (in particular the numbers entered in the ‘no’ and ‘unlikely’ rows). We would like to use the lower percentages to recalculate the estimates of visitor numbers, but no data has been located which reveals the absolute numbers of visitors in each category outlined in Tables 5.1(3.6) to 5.3. This data would appear to be commercially sensitive. However, sufficient data was supplied in the report to enable the relevant suppressed data to be reconstructed (see Appendix A for the calculation). The missing data is identified in the following table.

Table 5.5. Missing Visitor Data

Visitor Corporate Non- Total AFOGP AFOGP category visitors corporate visitors dependent dependent visitors visitors visitors % Nos Locals ? ? (Est*) Not Not 166,613 relevant relevant Interstate (Est**) (Est**) 20,028 11,738 59% 4529.067 15498.933 Overseas (Est**) (Est**) 11,045 5,178 47% 1671.785 9373.215 Totals ? ? 197,686 16,916 54.4% Source AFOGP EIA (1996: Table 3.3 Page 13) * 197686 - 20028 -11045= 166,613 ** See Appendix A for calculations that converted supplied data to give a estimate in these categories. ? signifies that we were unable or unwilling to calculate data for these gaps.

The success of the event in economic terms depends on getting as many interstate and overseas visitors to participate who would not have come to Victoria - had the Grand Prix not been held. As can be seen, this data is purely a result of estimation. It is dependent on the quality of the survey and subsequent estimation process. We have applied the percentages in s u r v e y r e s p o n s e s

above. We have also applied a modified percentage including the 'No' data and half the 'unlikely' data from Table 5.2(3.7). The significance of the 'no' data and the 'unlikely' data is that it is only these visitors who can be counted as ‘revenue’ producers for the whole AFOGP enterprise. The EIA consultants used the data in Row 1 of Table 5.5 and Table 5.6 below. The entire economic benefit of the AFOGP depends on the 16, 916 visitors that they claim arrived from overseas or interstate. It is our view that the consultants should have used the data in Row 2, or at most, the data from Row 3 in Tables 5.5 and 5.6. Our preferred Row is 2 in Table 5.5, but we would concede that Row 4 is a plausible compromise. This compromise would not have been necessary if the questions had been better structured to elicit the alternative activity (if the AFOGP had not been held).

Table 5.5. Alternative Visitor Estimates (percentages)

Corporate Corporate Non- Non- corporate corporate Alternative Visitor Interstate Overseas Interstate Overseas Estimate Scenarios visitors visitors visitors visitors 1% provided by EIA 47 35 62 49 consultants* 2 'No' data per centages 14.1 30.3 36.0 39.2 sources Table 3.7 % 3 Unlikely data per centages 12.8 0.0 14.8 8.4 sources Table 3.7 % 4 No & Unlikely data =14.1+.5(12.8) 30.3 =36+.5(14.8) =39.2+.5(8.4) (halved) combined to form a estimate % =20.5 =43.4 =43.4 5 No & Unlikely data =14.1+(12.8) 30.3 =36+(14.8) =39.2+(8.4) combined to form a estimate % =26.9 =50.8 =47.6 * AFOGP EIA (1996:18)

The following table uses worst-case and compromise data.

Table 5.6 Alternative Estimates of AFOGP-dependent visitors (numbers)

Corporate Corporate Non-corporate Non-corporate Interstate Overseas Interstate Overseas Total visitors visitors visitors visitors 1 Estimated data provided .47*4529.07 .35*1671.79 .62 .49*9373.22 O/s 5178.0 by EIA consultants =2128.66 =585.12 *15498.93 =4592.88 I/s 11738 =9609.34 Total 16916.0** 2 'No' data .141*4529.07 .303*1671.79 .36 .392*9373.22 O/s4180.85 Est. & source Table 3.7 =638.6 =506.55 *15498.93 =3674.3 I/s 6218.21 5579 62 Ttl s u r v e y r e s p o n s e s

3 Unlikely data .128*4529.07 0.0*1671.79 .148 .084*9373.22 O/s 787.35 Est. & source Table 3.7 =579.72 =0 *15498.93 =787.35 I/s 2873.56 =2293.84 Total 3660.91 4 No & Unlikely data .205*4529.07 .303*1671.79 .434 .434*9373.22 O/s combined (where unlikely =928.46 =506.55 *15498.93 =4067.98 4574.53 data is halved) =6726.54 I/s 7655.0 Total 12229.52 5 No & Unlikely data .269*4529.07 .303*1671.79 .508 .476*9373.22 O/s 4968.2 combined =1218.32 =506.55 *15498.93 =4461.65 I/s 9091.78 =7873.46 Total 14059.98 * AFOGP EIA (1996:18) **AFOGP EIA page 25 records 11738 + 5178=16916 visitors who were additional to the AFOGP from interstate or overseas.

Based on the 'no' data, it is our contention that only 10,399 visitors can be Row 4 Table 5.6 counted (assuming that the survey is thorough), and possibly up to 12,229 based on our compromise row in Table 5.6. The following table calculates the proportion of interstate and overseas visitors in the 'no' and 'compromise' rows.

Table 5.7.

Proportion (%) of Total O/s and I/s visitors who are AFOGP-dependent, based on estimates from Tables 5.5. & 5.6 above

Interstate Overseas Total Interstate Overseas visitors visitors visitors visitors visitors Nos Nos Nos % % EIA estimates +2128.66 +585.12 +11738.00 11738.00 5178.00 Source AFOGP EIA (1996:25) +9609.34 +4592.88 +5178.00 divided by divided by =11738 =5178.00 =16916.00 20028*100 11045 *100 =59% =47% 'No' data +638.60 +506.55 +6218.21 6218.21 4180.85 +5579.62 +3674.30 +4180.85 divided by divided by =6218.21 =4180.85 =10399.07 20028*100 11045*100 =31.05% =37.85% Compromise data - +928.46 +506.55 +7655.00 7655.00 4574.53 (No’s + half the unlikely’s) +6726.54 +4067.98 +4574.53 divided by divided by =7655.00 =4574.53 =12229.52 20028*100 11045*100 =38.22% =41.42% No + Unlikely data +1218.32 +506.55 +9091.78 9091.78 4968.20 +7873.46 +4461.65 +4968.20 divided by divided by =9091.78 =4968.20 =14059.98 20028*100 11045*100 =45.40% =44.98% The above data translates into the financial impacts outlined in Tables 5.8. (3.14), 5.9, 5.10 and 5.11. s u r v e y r e s p o n s e s

Table 5.8 (3.14).

Total net additional expenditure in Victoria by interstate and overseas visitors as calculated in the EIA.

I/s visitors O/s visitors Total No of Visitors 20028 11045 Net Proportion who are AFOGP dependent(%) 59 47 Net additional visitors 11738 5178 Average expenditure per visitor based on EIA $1140.7 $2079.9 data (AFOGP EIA (1996:25)) Total net additional expenditure ($m) 13.4 10.8 Source: AFOGP EIA (1996:25) Table 5.9

Total net additional expenditure in Victoria by interstate and overseas visitors using the 'no' data.

I/s visitors O/s visitors Total No of Visitors 20028 11045 Net Proportion who are AFOGP dependent(%) 31.05% 38.36% Net additional visitors 6218.21 4180.85 Average expenditure per visitor based on EIA $1140.7 $2079.9 data (AFOGP EIA (1996:25)) Total net additional expenditure ($m) 7.09 8.69

Table 5.10.

Total net additional expenditure in Victoria by interstate and overseas visitors using the 'compromise' data

I/s visitors O/s visitors Total No of Visitors 20028 11045 Net Proportion who are AFOGP dependent(%) 38.19% 41.41% Net additional visitors 7650.4 4573.73 Average expenditure per visitor based on EIA data (AFOGP $1140.7 $2079.9 EIA (1996:25)) Total net additional expenditure ($m) 8.73 9.51 Total net additional expenditure adjusted for airfares See 8.29 9.0345 section 5.2.2. ($m)

Table 5.11.

Total net additional expenditure in Victoria by interstate and overseas visitors using the 'No' and 'unlikely' data

I/s visitors O/s visitors Total No of Visitors 20028 11045 Net Proportion who are AFOGP dependent(%) 45.39% 44.98% Net additional visitors 9091.74 4968.15 Average expenditure per visitor based on EIA $1140.7 $2079.9 data (AFOGP EIA (1996:25)) Total net additional expenditure ($m) 10.37 10.33 s u r v e y r e s p o n s e s

The original data supplied by the EIA suggested that interstate and overseas net additional visitors contributed $13.4 m and $10.8 m respectively. The 'no' data suggests that these numbers could be in the order of $7.09 m and $8.81 m, while the compromise data suggested $8.72 m and $9.51 m respectively. Table 5.11 - using the 'no' and 'unlikely' data, without modification - resulted in the above estimates of $10.37m and $10.33m for interstate and overseas visitors respectively.

The EIA consultants adopted a different methodology for estimating the number of visitors to Australia who were AFOGP-dependent. They simply combined the percentages of those who answered 'no' and ‘unlikely’ to question 27: 'Would you have visited AUSTRALIA this year (1996) if the Grand Prix was not held in Australia?'. This approach is the same as that which we adopted in Table 5.11, confirming - in part at least - the view that this is the appropriate manner for estimating the number of AFOGP-dependent visitors.

We have used the compromise data from Table 5.10 to provide an estimate of the likely size of the direct expenditure impact of the enhanced visitor effect. The overseas visitor expenditure is estimated at $9.0345m and the interstate visitor expenditure is estimated at $8.29m (after allowing for the expenditure results in sub-section 5.2.2.). This data provides a total value for direct expenditure from the enhanced visitor effect of $17.32m. Each of these results is summarised in the Summary table at the end of the Executive Summary.

5 . 2 . 2 . E x p e n d i t u r e R e s u l t s

We have had neither the resources nor the data to conduct a comprehensive review of all components of the AFOGP EIA. The expenditure estimates are critical to the outcome of the survey. If the expenditure estimates per visitor are inaccurate, it will also skew the results. The expenditure data is presumably contained within the survey material that has not been made public.

One of the key points about the expenditure data is the inclusion of airfares. Normally, we would recommend that airfares should be excluded from such studies because the cash follows a very convoluted path which may ensure that the money never ends up in the regional economy under discussion, or even in the national economy. The study should seek to include all direct expenditure which has occurred specifically in Victoria or in Australia The EIA has made the point of including halfthe airfares for s u r v e y r e s p o n s e s interstate visitors and quarter of the airfares for international visitors66. International airfares could have been paid to foreign air carriers, which would have kept all that cash in their own national jurisdiction, with the exception of monies required for refuelling, staff and other costs at Australian destinations. It is the proportion spent in Australian or Victorian destinations that is relevant in these studies. For interstate visitors, it is not clear that the money from airfares is attributed to Victoria at a level of 50%, particularly since some journeys are short-haul, and planes and crews return to Sydney (for example). To accept the data as provided would require further evidence. For interstate visitors, the EIA attributed $1.45m out of $13.39m (about 10%). International visitors were attributed $1.15m out of $10.77m (about 10% again). Given that we do not think the expenditure inclusion is justified, it would seem reasonable to reduce the airfare components by 50%. This reduces the expenditure of the interstate and international visitors by 5%.

With respect to expenditure by interstate and international visitors, we have estimated $8.73m and $9.51m respectively, using compromise scenario data from Table 5.10. Applying the airfare expenditure reduction, these two figures become $8.29m and $9.04m. We have not had the data to conduct a more comprehensive audit. Hence, data that has not been changed may not have been reviewed. Further review may bring to light greater reductions in direct expenditure.

5 . 2 . 3 . S u m m a r y o f E n h a n c e d v i s i t o r e f f e c t d i r e c t e x p e n d i t u r e

Under direct expenditure, we have concluded that the following table provides a closer estimate of the enhanced visitor effect than the EIA results. These results are summarised below. s u r v e y r e s p o n s e s

Table 5.12 (duplication of Table 5.10 with the addition of Column 4).

Total net additional expenditure in Victoria by interstate and overseas visitors using the 'compromise' data

I/s visitors O/s visitors Col 4 Total No of Visitors 20028 11045 Net Proportion who are AFOGP dependent(%) 38.19% 41.41% Net additional visitors 7650.4 4573.73 Average expenditure per visitor based on EIA data (AFOGP $1140.7 $2079.9 Col 4 EIA (1996:25)) Total net additional expenditure ($m) 8.73 9.51 8.73+9.51= 18.24 Total net additional expenditure adjusted for airfares See 8.29 9.035 8.29+9.035 section 5.2.2. ($m) =17.33

Sub-section 5.2. Summary Table 1 - Enhanced Visitor Effect direct expenditures Table 5.12. Estimates expenditure of $17.33m. This is reflected in the summary table below. Categories of Direct Economic Impact EIA67 Modified Relevant Section of the Report Victoria $m $m Enhanced visitor effect 24.2 17.33 Stay-away & go-away effects not included. Section 5.2.1

5 . 3 . E n h a n c e d d u r a t i o n e f f e c t

The EIA claims that Victoria experienced:

The enhanced duration effect for international visitors will be the same as at the national level, namely $2.8 million...... the weighted average additional stay of interstate visitors who would have otherwise come in the absence of the event was 0.7 nights. This indicates a direct expenditure level for the enhanced duration effect for interstate visitors of $1.6 million.68

This effect was not surveyed at the AFOGP. It was estimated from Adelaide data. As previously discussed, the survey questions had missed at least two categories of respondents. It also failed to measure the extra length of stay that some people may have taken in order to visit the s u r v e y r e s p o n s e s

AFOGP - resulting in a lower measured economic impact for Victoria. For this reason, the consultants have relied on Adelaide data to provide an insight as to what the actual number may have been, and thus are claiming that Victoria's direct economic impact should be boosted by $4.4 m. This is difficult to accept. The question is so obvious, and important, that it is difficult to understand why it was not surveyed.

We are also unable to check the format of the Visitor Survey for the Adelaide Grand Prix. Hence, we cannot check the validity of the underlying data or its collection methodology. Further, the expenditure data used to calculate the result for extended stays includes airfares. Such airfares, and other transport expenses, would have been incurred without the AFOGP, and should have been excluded from this analysis. We would be extremely reluctant to accept such data as evidence in support of the Government hypothesis - given that the consultants had the opportunity to survey, but chose not to do so. This data should not be included except as a sensitivity test69 of the final outcome, once it has been adjusted for reduced transport costs.

5 . 3 . 1 . S u m m a r y o f s e c t i o n 5 . 3 .

We concluded that the enhanced duration effect should not be included.

Sub-section 5.3. Summary Table 2 - Enhanced Duration effect Categories of Direct Economic Impact EIA70 Modified Relevant Section of the Report Victoria $m $m Enhanced duration effect 4.4 0 Section 5.3

5 . 4 . R e t a i n e d V i c t o r i a n E x p e n d i t u r e

The Adelaide Grand Prix study estimated that there were 8597 Victorian visitors at the 1992 event. These visitors were estimated to spend $6.9 million by the consultants who completed the AFOGP EIA. The AFOGP EIA lifts this expenditure to $10.6 million, due to inflation and the end of

69. A sensitivity test implies estimating the sensitivity of the output to variations in data which is not considered reliable This helps to provide some reasonable understanding of the likely range in which the s u r v e y r e s p o n s e s

the recession71. This expenditure is credited to Victoria, by the EIA, since it has now been retained in this state - thanks to the relocation of Grand Prix site. Unfortunately, the Adelaide study did not provide a copy of the data, the survey or an estimate of the net additional Victorian visitors to the Grand Prix. Instead, the Adelaide study claimed that 86% of interstate visitors72 came to see the Grand Prix as a special trip. The Adelaide expenditure figure for interstate tourists was not transparently calculated, and we are forced to assume that the 86% figure (implying a 14% reduction in visitor numbers) has been taken into account. Thus, the claimed 8597 visitors would be reduced by 14% and, consequently, so would the level of expenditure.

The EIA also fails to take account of ‘event switching’. It is likely that some Victorians who travelled to the Adelaide Grand Prix would have saved money, given that the event was now in Melbourne. As a result some of these Victorians would then have been free to make another interstate trip, perhaps to the Bathurst 1000 racing event. This ‘event switching’ would have reduced the value of retained expenditure. The level of event switching was not estimated in the EIA.

The AFOGP consultants obtained their figure of $6.9 million by reducing the Adelaide expenditure figure of $13.147 m by 53% reflecting the Victorian share of interstate visitors. No other information is provided which indicates how Grand Prix-dependent visitors are filtered from the data. If the Adelaide measure is correct, and it is true that 86% of Victorians were there only because of the Grand Prix, then the data cited in the EIA (ie. $6.9 million) is a reasonable beginning. If the 86% figure is inaccurate, then it is likely to be a serious overstatement of the economic value of these expatriate Victorians. This is particularly so - given the much lower figures obtained by the EIA consultants for a similar question at the AFOGP (see Tables 5.5 to 5.8). The Adelaide report implies that the consultants addressed whether certain visitors

'...... would have travelled to Adelaide at other times in a period of 12 months either side of the Grand Prix.'73

The Victorian survey produced much lower results. In part, this may be due to Melbourne being a larger city than Adelaide, but 86% is considerably higher than the 59% claimed by the Melbourne consultants, which in turn, we would like to reduce to 31% on a balanced reading of the

71. AFOGP EIA (1996:45) 72 Price Waterhouse (1992:5) The Australian Formula One Grand Prix: Economic Evaluation Economic s u r v e y r e s p o n s e s

data. On this basis, we would seek to measure the Adelaide event at the Melbourne level of 59%. This reduces the $6.9 million to $4.8 m74. The EIA consultants 'bumped up' the $6.9 million by an undisclosed amount and an undisclosed methodology to account for a bounceback from . It is plausible, of course, that there was a bounceback after the recession, but it is good technique to explain the methodology and make the calculations transparent. Using the [GDP(I)] growth rate per year between 1992 and 199675, the $4.8 m was adjusted to reflect the post-recession bounceback and inflation.

The new figure was $5.89m. The same process applied to the $6.9m figure resulted in a measure that was approximately $8.26m in value. It is hard to explain how the EIA achieved $10.6 m.

Table 5.13. Estimating Retained Expenditure in 95/96 dollars allowing for inflation & growth

90/91 91/92 92/93 93/94 94/95 95/96 ABS GDP(I) 378964 387164 405764 430424 455524 486176 original data - $m ABS GDP(I) original data \---- 1.021638 1.048042 1.060774 1.058315 1.06729 - growth rate Retained Victorian \---- 4.8 5.0306 5.336331 5.647517 6.027536 expenditure (adjusted for GDP) - $m Retained Victorian \---- \---- 4.8 5.091716 5.388638 5.751237 expenditure (adjusted for GDP) - $m Average retained \---- \---- 4.9153 5.214024 5.518077 5.889386 Victorian expenditure

Source: ABS National Income, Expenditure & Product Series, Australian National Accounts, September Qtr 1996, Series No 5206.0, Table 64.

5 . 4 . 1 . S u m m a r y o f s e c t i o n 5 . 4 .

We have concluded that direct economic expenditure estimates of retained Victorian expenditure should be reduced to $5.89m.

Sub-section 5.4. Summary Table 3 - Expenditure by retained Victorian tourists Categories of Direct Economic Impact EIA76 Modified Relevant Section of the Report

74. $13.147m is assumed to be 86% of the total interstate visitor expenditure in Adelaide. If 86 = 13.147 then 59 = X. X= 13.147*(59/86). X=$9m. 53% of $9m is $4.8m reflecting Victorian visitors. 75 ABS data supplied by phone GDP average real growth rate data was: 92/93:3 2%; 93/94 4 3%; 94/95 4 1%; s u r v e y r e s p o n s e s

Victoria $m $m Retained Victorian expenditure 10.6 5.89 Section 5.4

5 . 5 . E x p e n d i t u r e b y E v e n t P e r s o n n e l

The EIA77 listed the following sources of expenditure under this category:

 Officials ______$0.54 m

 Teams ______$2.6 m

 Media ______$1.7 m

 Services ______$1.2 m

The report did not make clear which of its sections was dealing with the items listed under the dot-points of 'Services - $1.2m' above. We assumed from our review that the relevant section is Section 4.5. Section 4.5 suggested that expenditure by the caterers was also a direct economic impact, as was merchandising and the Tattersalls tribute.

The Tattersalls tribute appears to have a strong interstate and international visitor component. It appears that this component should have been listed along with other activities in Section 4.6 ‘Complementary events’ but has been accidentally included in Section 4.5. The $0.46m of expenditure claimed to be due to the Tattersall visitors' own expenditure (net of any travel allowances received from their Victorian sponsor) should be counted. We have assumed that $0.46m does not include any sponsorship funds from Victorian sources. We have left the figure of $0.46m untouched, but draw attention to the fact that the report does not provide sufficient information to assess the source of this expenditure.

The remaining categories of merchandising and catering have been excluded because these would appear to be second round, or indirect impacts, caused by visitors spending money, rather than direct impacts. For instance, additional expenditure on the McDonalds restaurant is an investment made by business in response to anticipated expenditure by visitors. To count the visitor expenditure as well as the business investment expenditure is to double-count. When the visitors purchased McDonalds products, the price included the cost of the capital expenditure. To add the capital expenditure to the visitor expenditure s u r v e y r e s p o n s e s

simply results in double counting. Similarly, merchandising would also have been a second round effect from visitors spending money - but relevant visitor expenditure has already been included. On this basis, $0.72m ($1.2m - $0.46m (Tattersalls tribute)) has been eliminated from our assessment of the direct expenditure impacts.

Officials’ and media data included airfares, which are discussed below. We would reduce the media and officials’ airfares by 5% in line with the actions taken for international and interstate visitors in general. This reduces media and officials' expenditure by $0.085 to $1.615, and by $0.027 to $0.513 respectively. Formula One teams' airfares were left untouched as a concession to the probability that they did travel on discounted Qantas air fares, which would have been a net boost to the Australian-based carrier (though not necessarily to Victoria).

Our net adjustments to the expenditure by event personnel include:

 Officials $0.54 m is reduced to $0.513 m.

 Teams $2.6 m remains unchanged at $2.6 m.

 Media $1.7 m is reduced to $1.615 m.

 Services $1.2 m is reduced to $0.46 m.

 Total $6. 04 m is reduced to $5.188 m.

5 . 5 . 1 . S u m m a r y o f s e c t i o n 5 . 5 .

We reduced estimated expenditure by event associated personnel to $5.19m.

Sub-section 5.5. Summary Table 4 - Expenditure by event-associated personnel Categories of Direct Economic Impact EIA78 Modified Relevant Section of the Report Victoria $m $m Expenditure by event associated personnel 65.19Section 5.5 Expenditure by event associated personnel 65.19Section 5.5

5 . 6 . C o m p l e m e n t a r y E v e n t s - G r a n d P r i x R a l l y

The EIA included the Grand Prix rally expenditure in total. That is, Victorian expenditure was included s u r v e y r e s p o n s e s

on the assumption that Victorians' expenditure would have been spent outside Victoria had the Grand Prix been staged in another state79.

The Adelaide Grand Prix rally however, excluded expenditure incurred in Victoria, since a substantial proportion of the race was actually held in Victoria, starting at Geelong. The Adelaide consultants estimated that in 1992, the total expenditure was $3,039,000, while the South Australian component was $1,371,00080. Thus assuming that a 1996 Grand Prix in Adelaide would have resulted in a similar split of rally expenditure, Victoria can only claim expenditure in excess of what would have been spent here anyway. The South Australian component of the rally was 45% of the total. In the Victorian case, this amounts to 45% of $2.5273m,81 implying that the EIA can only claim $1.14 m.

5 . 6 . 1 . S u m m a r y o f s e c t i o n 5 . 6 .

We concluded that the direct economic expenditure estimates for complementary events should be reduced to $1.14m.

Sub-section 5.6. Summary Table 5 - Expenditure by event-associated personnel Categories of Direct Economic Impact EIA82 Modified Relevant Section of the Report Victoria $m $m Complementary events 3.2 1.14 Section 5.6

5 . 7 . I n d u c e d T o u r i s m

The EIA consultants’ opening words sum up the situation:

There is still no firm data available from the tourism research bodies on the impact of international exposure of Australian cities from major sporting events on induced tourism.83

The significant use of the induced tourism effect as a rationale for the motor race, and the considerable government expenditure going into the attraction of major sporting events in Melbourne, should have attracted a review of the likely benefits. Without such a review, it is not possible to benchmark the claims of advertisers that their campaigns are working - and the AFOGP must be seen in one dimension as a vast advertising campaign for Melbourne. The Victorian Government has made a serious effort to

79. AFOGP EIA (1996:38) 80. PW (1992:9), 1992 Formula One Grand Prix: Economic Evaluation, Price Waterhouse Economic Studies and Strategies Unit, Canberra, Australia. 81 AFOGP EIA (1996:38) s u r v e y r e s p o n s e s

provide performance benchmarking for public operations - the same philosophy needs to be applied to the AFOGP. The EIA consultants themselves conclude that, with respect to the hypothesised change in savings behaviour (see Section 5.8 below), evidence was required. Yet, it seems that this is not the case with respect to the ‘induced tourism effect’. It would appear that analytical studies of the economic impact of induced tourism caused by advertising have a lower evidential standard requiring no research, merely assertion. Unfortunately, good economic analysis requires evidence, research and logical deduction from known facts and tested assumptions. In the words of the EIA consultants,

No economists, however, would accept such a result without additional evidence.84

The EIA consultants conclude that the induced tourism effect adds $6m to the direct expenditure effect. That is: $6m worth of tourists have arrived in Melbourne because they saw the Grand Prix on TV. Without evidence of this effect, it cannot be accepted particularly since it would have been possible to conduct such research with some ease. The Grand Prix has been running for many years, and they provide their own television coverage, which is presumably based on market research. The Government is, effectively, a 'joint venture' partner with the Grand Prix franchisor. It would seem to be a question of due diligence that the Government has access to research which ensures the claims behind induced tourism are valid. In the absence of any evidence, we cannot accept the inclusion of this assertion - except, perhaps, as a speculative test of the sensitivity of the report outcomes. The EIA, however, has been very short on discussion of sensitivity testing.

5 . 7 . 1 . S u m m a r y o f s e c t i o n 5 . 7 .

We have concluded that direct economic expenditure estimates due to induced tourism should be reduced to zero.

Sub-section 5.7. Summary Table 6 - Expenditure by event associated personnel Categories of Direct Economic Impact EIA85 Modified Relevant Section of the Report Victoria $m $m Induced Tourism effect 60Section 5.7 s u r v e y r e s p o n s e s

5 . 8 . E n h a n c e d R e s i d e n t E x p e n d i t u r e E f f e c t

The EIA report has also included an enhanced resident expenditure effect - which is due to Victorians dipping into their savings to fund the AFOGP tickets. This has, apparently, a Keynesian pump-priming effect which boosts the economy - an effect which was rejected in the neo-classical86 PC model.

While we are sympathetic to the occasional need for government intervention, we believe it is the responsibility of the proponent to argue the case for the macro-economic impact of this savings reduction. Normally, EIA studies ignore expenditure by locals (Victorians), because it is simply considered to be switched from one product to another. In this case, the consultants claim evidence of savings balances being run down to some degree. This raises a fierce debate in economics about the speed of the capital market adjustment which offsets this benefit. The consultants have not provided their rationale for the macroeconomic dynamic behind this claimed savings effect. While this is a well-worn argument, it is very controversial and is not normally dragged into these analyses. The study should not have included this controversial step as a definitive conclusion, but rather as a sensitivity test87.

Further, the study claims that the reduction in savings is 'sustained'88. Later on, the study makes the claim that the model allows individuals and businesses to readjust the savings/income balance and the investment/expenditure balance flowing from normal increases in activity89. The report seems to imply that there is a permanent (sustained) reduction in savings due to the AFOGP, ie. 'the event changes life style choices'90. In other words, the cost of the event for 20% of patrons is met from savings that are not recovered either later in a savings increase or prior to the event in a savings buildup. Evidence of a permanent change in lifestyle (savings ratio) is not presented - nor is the concept intuitively appealing. On this basis, the claim would appear to be an assertion that is not proven or

86. In this critique, the word neo-classical is used in the same sense as the expression 'new classical' or 'neo-Walrasian' economists. 87. A sensitivity test implies estimating the sensitivity of the output to variations in data which is not considered reliable. This helps to provide some reasonable understanding of the likely range in which the output lies. 88 AFOGP EIA (1996:47) s u r v e y r e s p o n s e s

justified. Exclusion of the enhanced resident expenditure effect leads to an approximate 15% reduction in total direct expenditures.

5 . 8 . 1 . S u m m a r y o f s e c t i o n 5 . 8 .

We have concluded that direct economic expenditure estimates due to enhanced resident expenditure should be reduced to zero.

Sub-section 5.8. Summary Table 7 - Expenditure due to the enhanced resident expenditure effect Categories of Direct Economic Impact EIA91 Modified Relevant Section of the Report Victoria $m $m Enhanced resident expenditure effect 9.9 0 Section 5.8

5 . 9 . S u m m a r y o f D i r e c t E x p e n d i t u r e I m p a c t s

The direct economic impact of the AFOGP was reported by the EIA as being $64.3m. Direct economic impact refers to the total new expenditure injected into the Victorian economy due to the existence of the AFOGP, before we eliminate the lost expenditure due to the crowding out of other projects (this is dealt with in Chapter 6: The Economic Impact of the Foregone Project). The following Summary Table 9 lists our modifications to this estimate. The total value of these modifications is listed in line 9 of the modified column of Summary Table 9 below. This report estimates that the actual direct economic impact was approximately $29.55m once the EIA estimates have been corrected. In addition, if further adjustments listed in this review, but not quantified were applied to the Grand Prix, the direct economic impact would be even smaller. s u r v e y r e s p o n s e s

Sub-section 5.9. Summary Table 8 - Aggregation of direct expenditure impacts into Total Direct Expenditure Direct Economic Impacts (original & adjusted) from the Melbourne 1996 Grand Prix, ($m 1996 dollars). Note that data to the right of the decimal point can be affected by rounding errors.

Categories of Direct Economic Impact EIA92 Modified Relevant Section of the Report Victoria $m $m 1 Enhanced visitor effect 24.20 17.33 Stay away & go-away effects not included. Section 5.2.1 2 Enhanced duration effect 4.40 0 Section 5.3 3 Expenditure by event associated personnel 6.00 5.19 Section 5.5 4 Complementary events 3.20 1.14 Section 5.6 5 Retained Victorian expenditure 10.60 5.89 Section 5.4 6 Induced Tourism effect 6.00 0 Section 5.7 7 Enhanced resident expenditure effect 9.90 0 Section 5.8 8 Direct import content 00Not discussed 9 Total Direct Economic Impact 64.30 29.55 Section 5.9

5 . 1 0 . A p p l i c a t i o n o f t h e M u l t i p l i e r

The direct economic impact of the Grand Prix is only the first step in calculating the overall economic effect. The direct economic impact is increased by the effect of the multiplier. That is, the new expenditure is paid to other businesses for services. In turn, these other businesses respend that new money on wages and suppliers. This continues to ‘ripple’ through the economy - creating ever-diminishing, but new waves of expenditure. The EIA has captured this effect, known as a multiplier, through the use of a model. The multiplier implied by their model was approximately 1.487. Owing to lack of resources, we have refrained from critiquing this multiplier. However, we applied the EIA multiplier to our estimates of the direct economic impact. This provides us with an estimated multiplied, gross economic impact of $43.93m compared with the EIA estimate of $95.6m (See line 10 in summary Table 9 below). The next step in Chapter 6 is to estimate the ‘missing’ impact due to the opportunity cost project. s u r v e y r e s p o n s e s

Sub-section 5.10. Summary Table 9 - Application of the Multiplier to the Total Direct Expenditure

9 Total Direct Economic Impact 64.30 29.55 Section 5.9 10 Total Gross Economic Benefit 95.60 43.93 After applying the EIA consultants ratio of (Increase in GSDP)9394 @ implied @ implied 95.6/64.3 to 29.55, we obtained 43.93. multiplier of 1.487 multiplier of 1.487 Section 6.3. e c o n o m i c i m p a c t o f t h e F o r e g o n e P r o j e c t

6 . E c o n o m i c I m p a c t o f t h e F o r e g o n e P r o j e c t

6 . 1 . T h e s i g n i f i c a n c e o f o p p o r t u n i t y c o s t

An EIA, properly conducted, must have a project that reflects the opportunity cost of going ahead with the Grand Prix. That is, an EIA must identify a project/projects that would most likely have gone ahead if the primary project (eg. the Grand Prix) had not gone ahead. Thus, in the context of the AFOGP, the Grand Prix constitutes the ‘primary’ project, while the projects listed below, such as the Air and Space museum, are the potential investments that were foregone in order to allow the State Government to pay for the Grand Prix corporation. This is an extension of the ‘no free lunches’ principle - the AFOGP had to be paid for, and in doing so, other projects were excluded or delayed from going ahead. These other foregone projects are the ‘opportunity cost’ of the AFOGP.

The EIA adopted the following projects as the 'opportunity cost' of the AFOGP. This package consisted of:

 $20m deferral of park upgrades & sports and recreational facilities (the EIA selected the National Air and Space Museum project as an example of a deferred park upgrade & sport/recreational facility) (AFOGP EIA, Chapter 7);

 $13.2m deferral of roadworks (AFOGP EIA, Chapter 7);

 $14.7m deferral of household tax reductions (AFOGP EIA, Chapter 7).

The opportunity cost project is significant because its economic impact is e c o n o m i c i m p a c t o f t h e f o r e g o n e p r o j e c t

to estimate the net economic impact. In this instance, the AFOGP has been funded from diverted government expenditure. The opportunity cost project should reflect the likely alternative use of those funds. Different alternative uses of the funds would have different economic impacts, resulting in differing net economic impacts when the opportunity cost project is deducted from the primary project. For this reason, the choice of opportunity cost project can have a significant influence on the scale of net economic benefits. For this reason, where funds have a range of plausible alternative uses, it would seem sound practice to model a range of the most likely selections so that the reader is presented with a range of outcomes.

6 . 2 . A l t e r n a t i v e I n v e s t m e n t s t o t h e A F O G P

The following provides a range of alternative projects. The list is not exhaustive and includes:

 Test the economic returns on the event held elsewhere in Victoria.  Test the economic returns on reduced debt and reduced taxation.  Test the economic returns on other government expenditures.  Test the economic return on the expenditures used to promote business, tourism and trade.  Test the economic returns on the option most likely to be chosen by the government if it was faced by an unexpected cash surplus.  Test the economic return on the option(s) most likely to be chosen by Victorians, based on a survey of the preferred use.  Test projects with a similar net utility impact.  Test the benefits of hosting the Davos World Economic forum and other convention activities.

Deciding which of the above projects is the most appropriate alternative activity is difficult. In reality, the chosen project will most likely reflect the Government's expenditure intention. It is clear from the AGPC mission statement that the Government is seeking to boost the Victorian economy with the funds invested in the AFOGP. The AFOGP has not been conducted because of utility benefits for Victorians (see Section 2.1), but purely because this exercise is expected to lift the state income e c o n o m i c i m p a c t o f t h e f o r e g o n e p r o j e c t

(wealth). This suggests that a plausible alternative expenditure for the Grand Prix investment would be a three way split:

1) $17.9m reduction in payroll tax reducing imposts on employers and raising the competitiveness of industry; 2) $15m promotion of Victoria to targeted international tourist markets; 3) $15m reduction in Victoria's debt.

The above package is a truer reflection of the Government's wish to improve the Victorian economy with the $47.9m invested in the AFOGP, than the alternative package put up by the EIA consultants. The EIA package suffered the following flaws:

 the National Air and Space museum was a cultural project with limited international or interstate marketing appeal. The United States and the UK would do this better - a Victorian tourism campaign focused on the state's undeniable appeal, and unique natural charm, would probably do better.

Phillip Styles, Chairman of the Adelaide Tourism and Convention Authority: '3 or 4 conventions are economically equivalent to one Grand Prix'; 'Conventions can fill hotels for 30 days while Grand Prix's fill them only for four or five days'. Source: World Today program, ABC Radio, 6 March 1997. Access Economics’ Geoff Carmody95, focusing on tourism promotion, suggested that $1 in international tourism promotion gives back $10 in export income (gross sales by tourists) to the economy96. Source: World Today program, ABC Radio, 6 March 1997. 'According to the Access study, every increase of $1 million in the ATC's funds for overseas marketing activities could generate an additional $8 million to $10.7 million annually in tourism export income.' Australian Financial Review, 6 March 1997, page 5.

 the road works could be economically beneficial, depending on the accuracy of the underlying investment data, but it is likely that an overall reduction in government costs (ie. payroll tax) on business would be at least comparable if not superior;

95. Pers Comm. Geoff Carmody, Access Economics. The estimate is based on assumptions that can overstate and understate the impact of this ratio. From our perspective, it simply demonstrates that direct marketing overseas is a powerful tool which even at ratios of 1:3 is still capable of making substantial gains for Victoria e c o n o m i c i m p a c t o f t h e f o r e g o n e p r o j e c t

The Industry/Productivity Commission modelling of the Grand Prix attributed a multiplier of 1.85 to changes in payroll tax. On that basis, the reduction in payroll tax of $17.9m is worth $33.15m in increased economic output (real Gross State Domestic Product - effectively increased income and profits). While there may be room for doubt about the absolute scale of the benefit from the tax reduction, due to the assumptions adopted by the IC modellers, it still provides an indication of the options available to Government. Source: Industry Commission Draft Report on State, Territory & Local Government Assistance to Industry pg A7.23

 a reduction in state debt would return capital to the financial markets for re-investment in high return private sector projects. The avoided interest payments could be used to fund on-going tourism promotion in subsequent years.

A reduction in state debt transfers capital back to the private capital market where it could be expected to earn possibly 8% per year in long term government securities or 20% per year (at a higher risk rating) if lent to companies for investment. The 20% includes the return to the financier and the borrowing company, some of which would flow back to government as increased taxes. The 20% figure is very low, since it assumes a five year payback period, at a time when some companies have hurdle rates of investment at even higher levels.

All of the above examples are cited to demonstrate the point that there are real and feasible alternatives if the Government wants to increase economic activity in Victoria. The EIA consultants listed the following methodological approach for evaluating the primary and opportunity cost projects.

 Identifying the funding sources for the infrastructure asset creation necessary to stage the event;

 Determining whether or not the funding involved project substitution/deferral or funding enhancement;

 Calculating the foregone gross benefit from project substitution/deferral; and e c o n o m i c i m p a c t o f t h e f o r e g o n e p r o j e c t

 Subtracting the foregone gross benefit from the gross benefit estimate from the event.97

In considering these alternatives, we have assumed that the funds for the alternative projects were raised from deferring other government activities, as used by the EIA consultants. A sound argument could be mounted that the funds are really raised from additional taxation. Such an approach would tend to increase the costs incurred by the economy due to the event. This would further undermine the economic viability of the event. In this case, we have accepted the consultants' approach since it seems unlikely that this particular government would increase taxes at this time. It seems more plausible that government expenditure was redirected from other activities to the AFOGP.

In essence (the EIA consultants argue), in accordance with EIA orthodoxy, the benefits generated by the primary project should exceed the benefits generated by a plausible alternative use of funds. It is beyond the scope of this review to mimic the modelling performed by the consultants to reach their conclusions. An alternative deployment of funds, as described above, should hint at the possible scale of benefit that may exist - should a Victorian Government wish to pursue increased economic growth. This is the type of scenario that should have been modelled to test the economic credentials of the AFOGP.

At the same time, there is nothing in the above scenario to exclude the Grand Prix. For instance, none of the above alternatives excludes a privately funded and operated Grand Prix occurring somewhere in Victoria, along the lines of IndyCar races in the United States98. A privately-funded Grand Prix would occur only if the project sponsors considered it economically viable. However, in this case, we have assumed that a privately-funded Grand Prix does not occur. Yet another alternative is that part of the funds from the above opportunity cost projects are directed at providing a subsidy to a privately-funded Grand Prix. While this may be feasible, it has also been excluded.

One of the most difficult tasks faced by the EIA consultants in defining the scope of the study would have been to identify an alternative project. As we have demonstrated, it is possible to list a range of plausible alternatives very easily. We think that the Government's predilection for economic e c o n o m i c i m p a c t o f t h e f o r e g o n e p r o j e c t

growth would filter the list appropriately, but other reasonable people may well disagree. For this reason, the appropriate methodological solution to this problem was to model a spread of alternatives and plot the range of possible net benefits to the Victorian economy. In this manner, the report would reveal that the study is likely to be very sensitive to such data, and hence, depending on the option chosen, the outcome could be pre-determined. The wrong option could provide a biased measure of the opportunity cost, and severely overstate the economic benefit of the Grand Prix. By having a spread of alternative options, the consultants would have been able to demonstrate that the chosen option was indeed an indicative measure of the opportunity cost. Rather, they have provided a single option and it is not clear that this is at all plausible or that the economic returns have not been overstated. Some of the alternative scenarios listed above would provide some significant economic benefits as a return on the Government investment. This is, in part, a function of the methodological flaw at the heart of EIA, where there is no focus on return on investment.

6 . 3 . N e t B e n e f i t I m p a c t o f t h e A F O G P

Moreover, simply because we held the race we gained an economic benefit to industry in the state of $95.6 million of extra expenditure.

Jeff Kennett, Victorian Parliamentary Hansard, 14 May 1996, Questions Without Notice, page 23.

A study undertaken in July 1996 at the request of the Department of State Development to assess the impact of the 1996 Grand Prix event on the Victorian economy, concluded that the event provided substantial economic benefits to the State, which were estimated to be in the order of $95.6 million.....The conclusions of this study were not subject to my Office's scrutiny.

Report of the Auditor-General on the Statement of Financial Operations 1995-96. page 150

The analysis, based on detailed surveys of general patrons, team personnel at the event, media, and the business sector, puts the estimated economic benefit (increase in Victorian GSP) at $95.6 million.

Australian Grand Prix Corporation, Annual Report, 1996:3).

Sections of the Victorian Government have stated that the economic benefit from the AFOGP is $95.6 million. The consultants’ report stated that the gross benefit was $95.6 million in the executive summary (page i). The actual benefit (or net benefit) to the Victorian economy is stated in the report on page 62 in the column headed '1996' This is explained below e c o n o m i c i m p a c t o f t h e f o r e g o n e p r o j e c t

The EIA consultants expressed a particular methodology, described above in Sections 6.1 and 6.2, for comparing the AFOGP with an alternative project. Diagram 7.1 in the report (see Diagram 6.1 below) makes it clear that the appropriate conclusion, within the orthodoxy of EIA, is to draw the study towards a net benefit. This net benefit is the true measure of the economic impact of the AFOGP. Yet the Executive Summary of the report, and the AGPC, only addresses the gross economic benefit of the AFOGP which it says is $95.6 m99 in 1996 dollars. The same report lists, on page 62, a net benefit which is considerably lower (see Table 6.3(7.4) below). Unfortunately, this table is difficult to read because it is in 1990 dollars.

In order to calculate the comparable benefit, we adjusted the table to 1996 dollars using the EIA consultants’ own implied deflator. This is now Table 6.4 (7.4) below. The table now provides a measure of the net change in Victorian economic output, once the opportunity cost projects have been netted out - according to the EIA consultants’ own data and modelling. The relevant data is the Net Benefit row where it suggests that the net economic benefit during the 1996 year is $51.49m in 1996 dollars. This is not strictly comparable with $95.6m because it does not reflect economic benefits that flow in 1997 - 1999 from the 1996 event.

In order to provide a fairer basis of comparison, we took the consultants’ total figure for the entire ten year period and calculated the average contribution per year from the AFOGP. This is in Table 6.5, where the consultants’ own data suggest that the net annual average benefit to Victoria is $57.72m. The actual cashflow as in Table 6.4 (7.4) reveals that a little less arrives in 1996 ($51.49m) and a little more arrives in 1997 ($68.76m), with a declining trend (due to discounting) out to 2005.

Thus, the Executive Summary and subsequent public comments have focused on the wrong figure. Rather than provide a gross estimate ($95.6m), the Grand Prix consultants’ methodology and report identify that the average actual net benefit is $57.72100m per year. Unwarranted

99. AFOGP EIA (1996:i) 100. This figure has been calculated based on the consultants’ data on page 62 of their report. This data may not be accurate because it is not clear if they have included the lagged effects from 2006 and 2007. The consultants’ table, however, suggests that this is a cumulative total, implying that later data has not been included. Exclusion of the lagged effects from 2006 and 2007, caused by the race held in 2005, causes the average annual net benefit to be slightly lower or slightly higher depending on the method of calculation. We have included the lagged effect in a manner which makes the net benefit higher. It is also noted that the net change in GSDP in 1999 is negative by .28m in 1996 dollars. This has been excluded from the analysis by the consultants causing the $87 1m annual gross benefit to be overstated thus increasing the net and gross e c o n o m i c i m p a c t o f t h e f o r e g o n e p r o j e c t

focus on the gross figure gives the impression that the AFOGP is considerably more valuable than is actually the case.

Diagram 6.1 (7.1) Methodological phases in the estimation of the net benefit of the AFOGP

Expenditure on alternative projects to the TAGP

Econometric models of national and Victorian economies

Gross benefit of Gross benefit of alternative projects the TAGP

Net benefit of the TAGP

Additional net Victorian tax revenue from TAGP

Source: AFOGP EIA, (1996), Figure 7.1., page 56. e c o n o m i c i m p a c t o f t h e f o r e g o n e p r o j e c t

Table 6.1(6.2) Total Gross Benefits 1990 dollars and Table 6.2(Adjusted 6.2) Total Gross Benefits 1996 dollars e c o n o m i c i m p a c t o f t h e f o r e g o n e p r o j e c t

Table 6.3(7.4) Total net benefits 1990 dollars and Table 6.4(Adjusted 7.4) Total net benefits 1996 dollars. e c o n o m i c i m p a c t o f t h e f o r e g o n e p r o j e c t

Table 6.5 Calculation of the average annual net benefit e c o n o m i c i m p a c t o f t h e f o r e g o n e p r o j e c t

6 . 4 . T h e R e a l O p p o r t u n i t y C o s t

As we stated at the outset, the net economic benefit of the Grand Prix has been misreported. The real economic impact of the Grand Prix according to the consultants’ own tables is in the order of $57.72m per year when compared with the claimed $95.6m, which is a gross impact - and hence the wrong figure to be using. Further, if we apply our adjusted measure of the gross economic impact, which is $43.93m - then the net economic benefit, after deducting the EIA consultants’ chosen opportunity cost project, produces a net benefit for the Melbourne Grand Prix of $23.67m. Taking account of errors in estimation would probably see upper and lower bounds placed on this estimate, which may lead to the actual result being negative.

In addition, if further adjustments listed in this review, but not quantified were applied to the Grand Prix, the net benefit would be smaller. Further, if we applied different opportunity cost projects, from those chosen by the EIA consultants, it is likely that we would achieve a lower or negative net benefit result. These results are summarised in the following table.

9 Total Direct Economic Impact 64.30 29.55 Section 5.9 10 Total Gross Economic Benefit 95.60 43.93 After applying the EIA consultants ratio (Increase in GSDP)101102 @ implied @ implied of 95.6/64.3 to 29.55, we obtained multiplier of multiplier of 1.487 1.487 43.93. Section 6.3. 11 Average annual Net Economic Benefit 57.72 23.67 Section 6.4. The net benefit is likely to (Increase in GSDP) or be smaller if alternative 'opportunity smaller cost projects are chosen

The opportunity cost of the AFOGP is a critical element in determining the economic contribution to the State of Victoria. Since the gross economic impact of the AFOGP EIA has been reduced by our adjusted measures, it is even more likely that a different set of opportunity cost projects could eliminate the net economic benefit claimed from the Grand Prix with considerable ease. If alternative projects such as repaying payroll tax and advertising directly to international tourists provide a e c o n o m i c i m p a c t o f t h e f o r e g o n e p r o j e c t bigger economic benefit, then the Grand Prix can be considered a net economic loser for Victorians.

The EIA has failed to test plausible alternative scenarios for stimulating the Victorian economy. Even a positive economic impact from the AFOGP can leave Victorians economically behind, because a plausible alternative may have had a better economic outcome. It is not sufficient that the AFOGP had a positive economic effect; rather, given the Government rhetoric about maximising the economic impact, it is a question of whether the chosen vehicle is the best possible economic opportunity for a given risk. The entire outcome of the EIA and the Grand Prix depends upon there being no better opportunity. It was critical to the success of the analysis that the correct opportunity cost project was chosen. Failure to transparently test a range of plausible options implies that the Government hypothesis cannot be accepted, because it has not been adequately and reasonably tested.

Using the Industry/Productivity Commission multiplier for payroll tax reduction, it is possible to achieve economic effects that appear large enough to eliminate the gross economic benefits achieved by the AFOGP, as measured by the EIA consultants - and before we introduce adjustments discussed in earlier sections of this report. Using the tourism promotion benefit ratio identified by Access Economics, it could be possible to provide a net economic benefit larger than the AFOGP by direct promotion of Victoria, and all its regions, to an international audience - while still having a privately-funded Grand Prix at a purpose-built track in another Victorian location, other than Albert Park.

Footnote to the Analysis The EIA report Table 7.4 (listed above as Table 6.3(7.4)) included a category known as ‘GP drivers tax reduction’. This category was described by Tourism Victoria (letter to the Save Albert Park Group of 30 April 1997, signed by Dorana Bettiol, Manager Research) as being ‘GP drive n tax reduction’. Tourism Victoria defined this as ‘The figure shows the reduction in required State tax revenue as a result of the increase in tax receipts received by the State Government from the Grand Prix being staged in Melbourne’. e c o n o m i c i m p a c t o f t h e A F O G P

7 . E c o n o m i c I m p a c t o f t h e A F O G P

The economic impact of the AFOGP flows from the net additional expenditures experienced in the Victorian economy. The EIA estimated direct expenditure of $64.3 m, whereas we estimate that a more accurate estimate is in the order of $29 million, if not lower. The direct expenditure estimates provided by the EIA consultants can be reduced by applying plausible and reasonable assumptions. The direct expenditure estimates are fed into a model which then calculates the gross economic benefit. As has already been discussed, the direct economic benefits of the opportunity cost projects are also fed into the model to calculate the gross economic impact that would have existed, if the AFOGP had not been held. The difference between these two figures is the net economic benefit from the AFOGP.

The modelling part of the process is very complex, and subject to the 'black box' effect. No one, except the EIA consultants, is privy to the inner workings of the model. This makes it difficult to critique the outcomes which are merely reported in the economic impact study, rather than discussed. The specifics by which the outcomes are derived are not available, sensitivity tested or explained. This problem would not necessarily be solved, even if the models were made more publicly available, since much of the outcome is dependent on many settings which are put in place by the modeller, as they perform specific analytical steps. The modeller is in a very privileged position as a result, and must essentially be trusted to have adjusted the settings in accordance with the expectations of good economic practice. At the same time, most modellers make no effort to introduce readers to the critical parameters which are controversial, but which also have a significant impact on the outcome. This gives the readers no data on which to either agree or disagree with the modeller, since they do not know what has been done, except by inference. It is expected that modellers seeking understanding will provide more information on critical sensitivities and likely effects than has so far been R e t u r n o n i n v e s t m e n t

In the case of the AFOGP EIA, the modelling was done in traditional Keynesian direct mode103. We would like to have seen the same model run in neo-classical mode and the differing outcomes explained. The parameters responsible for the difference in outcome should be identified, and their measurement discussed and justified with the outcome being subject to sensitivity testing. The former Industry Commission (now the Productivity Commission) uses a variant of the Monash model to estimate the economic impact of policy changes. The Monash model is well-known for taking a neo-classical world view, in direct contrast to the Keynesian approach adopted by the EIA consultants. For this reason, we investigated the Industry Commission/Productivity Commission report for any insight into the economic impact of the Grand Prix. Ideally, the EIA consultants would have run their own model in both Keynesian and neo- classical mode104 to enable the differences in outcome to be seen by the reader, and judged accordingly.

7 . 1 . I n d u s t r y / P r o d u c t i v i t y C o m m i s s i o n m o d e l l i n g

The Industry Commission/Productivity Commission (PC) has conducted some modelling of the Grand Prix for South Australia and Victoria. The modelling is an independent assessment of the economic impacts of the Grand Prix. The PC is independent of both Victorian and South Australian state governments, though it is dependent on a neo-classical view of the economy which is necessarily reflected in its modelling. The following is a brief interpretation of the PC’s modelling and report.

The PC report initially comments on the long term economic impact of the Adelaide Grand Prix. The Adelaide Grand Prix is modelled as having a 'very small'105 impact on Victoria and South Australia, and a 'trivial'106 negative impact on the Australian economy in general. The PC output table for the Adelaide Grand Prix is listed overleaf.

103. AFOGP EIA (1996:50). 104\ It should only be a question of adjusting key parameters R e t u r n o n i n v e s t m e n t

Table 7.1(A7.7.) The Long Term Impact of the Adelaide Grand Prix (%)*

Domestic Foreign State Budget Total Visitors visitors implication s Effect on SA Real GDP .089 .021 .031 0.140 Real per capita GSRP -.031 -.008 -.048 -.087 Effect on Victoria Real GDP -.011 -.001 -.002 -.014 Real per capita GSRP .004 .. .001 .006 Effect on Australia Real GDP -.001 .. -.001 -.001 Real per capita GSRP .001 .. -.003 -.002 * GSDP = Gross State Domestic Product; GSRP = Gross State Resident Product equivalent to GNP at a national level. GDP = Gross Domestic Product; GNP = Gross National Product (Source: Industry Commission Draft Report on State, Territory & Local Government Assistance to Industry, July 1996, pg A7.21)

There is a negative impact on the Australian economy overall, as well as a reduction in output per Australian due to the Adelaide Grand Prix. South Australian output rises, but the per person output falls due to the influx of labour from other states. In the case of Victoria, the output falls - but per head output rises, presumably because labour (assumed to be unemployed) moves to South Australia. The overall fall in Australian output is caused by falls in other states in addition to Victoria, offsetting the rise in SA. The fall in national output is due to increased demand for resources in SA, stretching supply capabilities in other parts of Australia, and resulting in price rises. We assume that the price rises lead to reduced competitiveness in other states causing their overall output to fall. The modelling demonstrates that Australian states have an incentive to overbid for projects relative to other states. The winner does benefit, but the losses of the losing states mean that the Australian economy, and all Australians, lose out - according to the PC economic framework.

The Adelaide GP is modelled on the basis that international and interstate tourists inject money into the SA economy. The government provides financing through ticket sales, increased tax revenue and increased payroll tax. The payroll tax is used to fund the deficit between staging costs and revenue from ticket sales and induced revenue from tax increases. The model is long term in the sense that all effects have been allowed to work through to a 'final' equilibrium position, without any other changes causing shocks to the system. R e t u r n o n i n v e s t m e n t

The PC approach was to estimate visitor numbers from interstate and overseas. Apparently107, they took a relatively simple approach and simply counted all foreign visitors as a net gain to the Victorian economy. The state visitor numbers were based on the estimates at the Adelaide Grand Prix. Stay-away and go-away effects were not modelled in either case. Local expenditure was not counted, due to switching effects whereby the modellers assumed that expenditure by locals would have been spent somewhere else - if not on the Grand Prix. This is contrary to the AFOGP consultants who assumed that there would be a run down of savings which would have additional benefits, in a Keynesian manner, in pump-priming the Victorian economy. The PC model would assume that this effect is short term, and hence rapidly offset by some other change in the economy108. This leaves international and interstate visitors to provide the revenue stream to provide the 'profit' for this activity. For this reason, the estimates of visitor numbers are crucial to the outcome of the study.

The PC model relies on resource constraints (limited supplies of hotel rooms and other resources) to cause price rises that lead to a crowding out effect, whereby growth from the AFOGP crowds out growth in other areas leading to an overall slight fall in economic output across Australia. The Melbourne Age newspaper reported for the 1997 Grand Prix that:

Inner city hotels are bursting at the seams, with most reporting 100% occupancy. This follows the capacity weekend with the Three Tenors concert a week ago.109

The Age story lends some credence to the concept of resource constraints reducing demand. The PC modelling may not capture the extent of hotel demand reduction because it relies solely on pricing to ration demand. It is likely that room prices will be relatively sticky, and some room demand will vanish (of its own accord because people think that it will be too difficult to get and hence ‘stay-away’) because of anticipated from well advertised events. This results in accommodation demand not being brought to market, and a reduction in the volume of transactions. Thus, it is not wise to rely solely on pricing effects to reduce demand, indeed, the PC modelling may well understate the level of 'lost' business in the hotel sector when demand reaches capacity.

107. The PC data was not available except in aggregate. The interpretation is based on our interpolation and personal comments from PC staff. The above represents our efforts at interpretation which are necessarily crude, and for which Economist At Large & Associates takes responsibility. 108 The obvious possibility is that running down savings balances induces greater pressure on interest rates R e t u r n o n i n v e s t m e n t

The PC model also has other effects operating to reduce the scale of the economic benefit. The model suggests that increasing payroll taxes to cover the funding deficit must lead to greater economic losses than gains because the payroll taxation approach is fundamentally inefficient at the state level at least. These types of losses are labelled 'efficiency' losses. It would appear that the Victorian Grand Prix has been created with diverted Government expenditure. However, that Government expenditure could have been returned to business as a reduction in payroll tax thus capturing some gains in efficiency.

The PC conceptualisation of the economic dynamic at work with the Grand Prix can be summarised. The Victorian Government is effectively spending money in order to attract interstate and overseas visitors to Victoria to capture their spending capacity. The Victorian Government's strategy is that by spending a little money, a lot more money will be poured into the Victorian economy by 'outsiders' (including stay-at-home Victorians). If the event is over-capitalised, has expenses that run too high relative to revenue, causes efficiency losses and runs into resource constraints - then the positive economic impact from interstate and international tourists will be reduced. The above table shows that the PC view is that the increase in GSDP from staging expenditure is eaten up by the decrease in GSDP caused by the increased payroll taxes necessary to part fund the expenditure increase. The net gain in the GSDP is entirely due to the interstate visitors and the international visitors.

The following table summarises the PC data relevant to the Melbourne Grand Prix. The model was run on the assumption that the event would have been held in Adelaide if it had not been held in Melbourne. The changes listed in the table are in addition to changes already incurred from hosting the race in Adelaide. The data used in this table is not identical to the data used by the AFOGP EIA , although it is relatively close. The AFOGP EIA data differs in that we would not expect any staging costs or payroll tax effects. These would be zero since the AFOGP EIA consultants have relied upon the Government to defer existing expenditure plans to fund the full cost of the AFOGP not covered by revenue or induced taxation. Visitor expenditure estimates also vary. R e t u r n o n i n v e s t m e n t

Table 7.2.

Impact of the Victorian Grand Prix on Victoria: actual ($millions in 90/91 dollars), (relative to having the race in Adelaide)*

Interstate Foreign Staging Payroll tax Grand total visitors visitors costs $m $m $m $m $m Real GSDP 35.42 9.06 27.41 -27.55 44.34 growth** Direct expenses 20.30 10.22 33.48 -14.91 49.09 *** Multiplier (ratio) 1.74 0.89 0.82 1.85 0.90 (Source: Industry Commission Draft Report on State, Territory & Local Government Assistance to Industry, July 1996, pg A7.23)

* This implies that the table represents the changes in the Victorian economy as a result of switching the Grand Prix to Melbourne from Adelaide and holding a larger event. The change represents the difference between what the Victorian economy would have been like if the status quo had continued and what the Victorian economy looks like now that it is hosting a larger racing occasion. **GSDP = Gross State Domestic Product - this is a measure of gross economic output by the State of Victoria. *** Direct expenses are the initial, or first round impacts of the net expenditures, which affect the economy. We would like to see the PC re-run its model with up-to-date data - in both Keynesian and neo-classical modes. The PC modellers also have a habit of burying their modelling parameters, hence making informed criticism difficult. The public debate would benefit from modellers making a greater effort to expose and communicate the key parameters in modelling exercises.

7 . 2 . K e y n e s i a n v e r s u s n e o - c l a s s i c a l c o n t r o v e r s i e s

The review of the PC modelling has identified resource constraints and efficiency losses as being two key issues. On these two points, the EIA consultants and the PC are likely to disagree. The consultants’ model operates in a Keynesian mode,110 and hence the modelling reflects the belief that resource constraints are less because there is, to some extent, excess capacity. In addition, it is likely to reflect the belief that the impact of taxation is not as negative as the PC model has described it. Most economists would agree that there are limits on capacity and the ability to bear taxes, eventually, but the disagreement is about where those constraints cut in. Methodologically, the issue could be dealt with by R e t u r n o n i n v e s t m e n t running both models in both Keynesian and neo-classical modes, and comparing the results. If necessary, the difference between the two positions could be averaged until more research justifies one position or another.

The enhanced resident expenditure effect will also be the subject of disagreement between the models. The EIA consultants have relied on permanent reductions in savings by Victorian residents to fund a $10.6m additional direct impact from the AFOGP111. The PC model is likely to see such behaviour as extremely short lived, and virtually not worth considering, even if such phenomena can be proved to exist. This review is inclined to agree with the PC position and hence discount any permanent effect on the savings ratio due to 'the event changes lifestyle choices'112 as considered by the EIA consultants.

The modelling part of the EIA, like most modelling in support of government policy, is largely a black box exercise. The reader is asked to take on trust that $x million is turned into $y million in output. It is possible to estimate the multiplier created, but it is not possible to double- check the equations and parameters that provide this output. Moreover, the modellers, in the case of the AFOGP EIA, have made no effort to document sensitive parametric issues - let alone provide sensitivity testing. In a situation where the underlying project is inherently profitable the issue of sensitivity testing is minor. Where, as in the case of the AFOGP, the net benefit of the proposed project may only be 'lineball' - if not negative - the matter of sensitivity testing becomes relatively more important, perhaps even critical to the outcome. For this review, the significance of the resource constraints and efficiency losses is that they further erode the net economic benefits created by this project. R e t u r n o n I n v e s t m e n t

8 . R e t u r n o n I n v e s t m e n t

The AFOGP (or more explicitly, its business vehicle the Australian Grand Prix Corporation) is not required to earn a commercially viable, risk- adjusted rate of return on its assets. The AGPC is charged to make a 'cash surplus each financial year,'113 rather than a commercially viable return on assets and dividend to shareholders (the Victorian public). The key point to be drawn here is that the Victorian Government has set up the AFOGP; and yet the operating vehicle, the AGPC, is not considered a 'normal' government business enterprise (GBE) and is therefore not required to make an efficient private sector style return on capital. On this basis, it can be concluded that the Victorian Government, by implication, expects the Grand Prix to provide some other return to the Victorian community to compensate for the financial loss. This other return is the net economic benefit as calculated in the EIA.

8 . 1 . T h e A F O G P B u s i n e s s S t r u c t u r e

The Grand Prix is a business with customers, suppliers, cashflows, investment requirements, profits and risks. The following diagram indicates how the business is structured. The broad principles of business structuring require that those who provide the capital, and hence bear the risks, should receive the greatest return. In this case, the 'promoter' is the AGPC, which has the Victorian public as its shareholders. The Grand Prix business appears to operate on the basis that the AGPC puts up the capital to develop a race track. Their reward from that entrepreneurial activity is, in effect, the ticket sales to the event. The Victorian Grand Prix has been conducted on the basis that there are also net economic benefits to the State of Victoria from tourism. R e t u r n o n i n v e s t m e n t

The nature of the present structure is clear from Diagram 8.1. The AGPC is a franchisee, risking capital to fund a race. The TV rights, race fees and hospitality/trackside advertising would appear to be sent to the franchisor. The sponsor/franchisee sees none of this money. Broadly speaking, the major cashflows seem to be received by the Grand Prix franchisor, with the AGPC being left to pick up what it can from ticket sales and possibly some local sponsorship. The major capital investments in Grand Prix racing would appear to be the circuits and the racing teams. These franchisees are, effectively, sub-contracting the race operation and the racing tasks. The franchisor is guaranteed to get a race and TV licence fees. The franchisor puts in no capital investment, and yet receives trackside advertising and hospitality rights. The AGPC takes the commercial risk because it risks capital losses if revenue streams from ticket sales/local sponsorship are insufficient.

Diagram 8.1. The Structure and Cashflows of the Grand Prix business

' 40 billion' viewers in 1996 Ticket Interstate & sales/ international tourists International Trackside Operating Spons Trackside orship TV licence fees Signage catering Expenses advertising franchise Net Economic $500m benefit for per year Victoria. Associated See EIA. company Est. $58m but actually much Grand Prix AGPC: less. franchisor Staging Fee: race promoter $10-$20 m est.

Includes all associated parties that participate $1m - $10m est. pa in this structure $47.9 m - $60m Shareholders Government Capital subsidy to cover investment operating Bernie Ecclestone loss $92 m received in 1994 Source: Australian Financial Review, 7 March 1997, Page 1. AGPC annual report.

On the other side of the coin, the franchisee will know the local market for Formula One racing better than the franchisor, and hence is in a better R e t u r n o n i n v e s t m e n t

goodwill provided by the franchisor through the well-known brand name 'Grand Prix'. For this reason, it makes sense for the franchisor to pass some of the commercial risk to the franchisee. The franchisee needs to have a clear view of the acceptable return, given the risk of the Grand Prix. If there was money to be made in the trade-off offered by the franchisor, private industry would be queuing to join up.

The danger is that previous franchisees may have overbid for the event. In this instance, the overbidding takes the form of race fees that are too high, inadequate sharing of the revenue from global TV rights, and the loss of hospitality rights around the track. The trackside advertising should be regarded as a package in combination with the TV rights. The ticket sales for the sporting event are less important in this age of 'Superleague' and global television. High quality sporting activity is an extension of the entertainment industry, with an expanding global market as the reach of TV widens. At the same time, the local market for sporting attendance is fragmenting as locals obtain a wider and wider range of sporting and entertainment options. The difficulties of falling attendances faced by the Australian Football League are identical to those that the Grand Prix would face if it had not been successfully globalised - except that the TV revenue goes to the franchisor and the ticket sales to the promoter.

Thus the franchisee Grand Prix promoter buys into the toughest - possibly declining - end of the business, risks the most capital, does the hardest work, creates goodwill for the franchisor and makes the lowest return on investment - unless there is a significant economic impact. In this case, the franchisor is the Victorian public. The financial weakness of the Victorian public investment in the AGPC undermines the economic benefits of the Grand Prix.

8 . 2 . T h e R e a l C o s t o f t h e A G P C

The economic paradigm that underlies the modern economy is based on the view that greatest level of wealth creation requires that capital must be diverted to its most valuable uses. The value of capital, as previously discussed, is determined by the return on investment. The more valued investments carry a higher rate of return for a given risk than lesser valued investments. Different enterprises can be compared by estimating the return on invested capital Project analysis seeks to obtain a measure of R e t u r n o n i n v e s t m e n t

the invested capital and a measure of the net profit after operating expenses (sometimes including and sometimes excluding depreciation, interest and tax).

The AGPC capital investment is described in Table 8.1. Two columns are provided to demonstrate the AGPC data and the data calculated by this critique. Tables 8.2 and 8.3 provide a list of the operating revenues and operating costs of the AGPC. The net difference between these two tables is Table 8.4. This shows the net profit (or loss) on the AGPC operation.

As a final note on Table 8.4, we would like to draw attention to the cost contingency line in the EIA report114. The resource costs of the AFOGP are increased by a provision in this table for unexpected costs equivalent to about $5.5m per annum (1996 dollars). We have assumed that the $5.5m includes the ‘unexpected cost’, plus the multiplier impact of that unexpected expenditure. In order to obtain an estimate of what the EIA considered to be the likely scale of the ‘unexpected’ cost, we have provided the following procedure. The multiplier on the opportunity cost projects is of the order of 1.39115. This suggests that the EIA consultants have allowed for an ongoing operating deficit of about $4m per year (1996 dollars) on the AFOGP. It would tend to suggest that the AGPC was forecast to run a net deficit of approximately $4m per year by the EIA consultants - before the controversy surrounding the 1997 Grand Prix began.

Table 8.5 estimates the depreciation required to ensure that the capital invested in Albert Park is recovered at the end of the 10 year period. Since certain items are transferred to Parks Victoria, their depreciation will not appear in the accounts of the AGPC. These capital items, which are solely the result of the Grand Prix, need to be financially recovered by the revenues from the Grand Prix. As a result, they should be netted from the revenue figures as are any other costs. Revenue put aside for depreciation

114. See Tables 6.3(7.4) and 6.4(7.4) in this report or Table 7.4, AFOGP EIA page 62. 115. This is calculated by totalling the economic impact of the AFOGP opportunity cost projects in 1996 dollars in 2005. This data is sourced from Table 7.4 page 62 of EIA report. We totalled the cumulative cost of each of the opportunity cost projects in 2005. The resulting aggregate ($66.7m) is then divided by the capital cost of the opportunity cost projects ($47.9m) to obtain a ratio of 1.39. The 1.39 is divided into the aggregate deficit figure for 2005 ($55m) which is then divided by ten to obtain annual estimate of the operating deficit. We could take a less generous view and use the results of Table 6.4(7.4)-sub-table 1. This table shows, that if we discounted the economic impacts from the opportunity cost projects such that we obtained a net present value of the economic impacts in 1996, the $47.9m invested in the opportunity cost projects has only produced a economic impact of $48.02m. This implies a multiplier of 1 compared with that apparently applied to the AFOGP of 1.47 (See summary table after the executive summary). This imbalance suggests that the AFOGP EIA has further overstated the benefits of the race by undervaluing the multiplier effects of the foregone projects to some degree. Whilst it is not inconceivable that the AFOGP would have a bigger multiplier (because it leverages additional inputs by attracting out state visitors) we would expect to see this discussed R e t u r n o n i n v e s t m e n t will, however, provide interest income to the AGPC as funds accumulate. This interest income has not been accounted for. This gain in income is offset by the cost of covering the operating deficit listed in the line called 'Net pre-tax Cashflow for distribution'. Such a deficit would have to be financed at a cost that is likely to be equivalent to, if not higher than, the interest rates paid on deposits of depreciation funds. For this reason, neither figure has been calculated, and it is assumed that they have a net effect of zero.

Table 8.6 seeks to provide a list of additions and deductions to the net profit, that have not been brought to 'book' in Tables 8.1 to 8.5. Firstly, the total amount of revenue required to provide depreciation is deducted. This figure ensures that the shareholders receive back the capital that was invested (zero inflation is assumed for this ten year period to simplify calculations with interest rates being in real terms). Secondly, we would like to add back in all the government taxes that the AGPC would be liable for if it were a private corporation, but which it avoids because it is a government entity. It is not known what its tax status is at this stage, and hence we can only assume a tax provision of $.5m. The next line accounts for the cost of renting the land at Albert Park.

The AGPC is currently required under the AGPC Act to pay a maximum license fee of $100, 000116 for the use of land at Albert Park. If the AGPC were a private organisation, they would pay the market rent for such land. One of the many attractions of using Albert Park, for financially-straitened organisations like the AGPC, would be the 'cheapness' of the land. This, of course, denies the agency of the local community, who bought properties in part because of the setting which includes Albert Park. To some extent, the park itself is likely to be included in the land values of the adjacent properties.

The traditional economic question would be to ask: if the Park had an economically rational owner who embodies the preferences of the local community, what would the owner charge the AGPC to use the park as a race track? The owner must embody the preferences of the community since the preferences of any one individual may lead to either property development or complete exclusion of human access. For example, what payments would the community want from a corporation seeking to use the site for driver training? In a sense, the community could see Albert Park as an extension of their front yards, which they happen to share. A R e t u r n o n i n v e s t m e n t reasonable rental rate for an acre of front yard in the Albert Park/Middle Park area, for four months per year plus on-going activities at other times of the year, is estimated to be equivalent to 3% of the estimated land value ($137m117) This translates into $4m per year which has been entered in Table 8.6.

Table 8.6 continues by calculating the annual net pre-tax cashflow for distribution. This is the net profit, generated by the AGPC, that remains to be distributed to shareholders. The net profit can be compared against other investments by dividing by the capital cost. This provides a rate of return which can be compared against other investments - assuming that the risk is identical. For comparative purposes, the investor can expect to receive per annum reward of about +8%, relatively risk free, in nominal terms on 10 year Commonwealth bonds. A commercial investment with a five year pay back period, which is relatively low in commercial terms, provides a positive 20% return on investment. This is likely to be of equivalent or lesser risk than the Grand Prix. The AFOGP, meanwhile, provides a return of negative 20% per annum, according to our estimates.

Table 8.7. provides an indication of the net financial position of the AGPC after 10 years. The table reveals that the AGPC will accrue losses of around $100m at the end of 2005, on trends existing before the 1997 Grand Prix, based on their own data or that of their consultant. This critique estimates that the loss, based on their data, could be in the order of $106m by the end of 2005.

Table 8.8. seeks to estimate the net investment position of the Victorian community at the end of 2005, given three investment scenarios. The AFOGP, as previously argued, was established in order to provide a economic benefit to Victoria. The three scenarios seek to estimate the net financial position of Victorians in 2005. The scenarios seek to show what Victorians could have achieved financially if they had invested in something other than the AFOGP; and what they did achieve through the AFOGP.

Each scenario is designed to accumulate the direct profit benefit from the enterprise, the financial value of the remaining assets after 10 years and the profit component in the net economic impact. This latter figure is estimated by estimating the gross economic benefit of the chosen project (either AFOGP, C/W government bonds or a commercial investment project). The gross economic benefit of the chosen project is reduced by R e t u r n o n i n v e s t m e n t the gross economic benefit value of the foregone (opportunity cost) project. The remaining figure is then subject to an estimate of the proportion which flows into profit. In this instance, we have assumed that 50% of the net economic benefit is profit - therefore 50% of the net economic benefit is part of the measure of the net asset position. The combination of these elements should provide a measure of the change in wealth experienced by Victorians, as a result of the different investment choices that were open to a government seeking to boost economic activity.

The AFOGP investment (the AGPC) returns a large loss based on the AFOGP data and the data provided by this critique. The net economic benefit claimed by the AFOGP EIA offsets this loss, which is further offset by the inclusion of the remaining assets (ie. the depreciation fund). The ultimate conclusion is that the AFOGP EIA is, in effect, claiming to boost the wealth of Victorians by $239.28m (Table 8.8. ‘AFOGP Investment’ scenario & Summary Table line 22). The critique data suggests that the boost is only in the order of $21.87m (Table 8.8. and Summary Table line 22). This latter figure could be reduced further, depending on effects that have not been included, but were discussed previously. The net asset value figure is highly dependent on the estimated share of the net economic benefit which is accrued to profits. We have assumed that 50% of the net economic benefit is accrued as profits. The actual figure is considerably lower. If the actual result is that a lesser profit share is more accurate, then these numbers should be reduced.

The ‘Commonwealth Government bonds’ scenario in Table 8.8. (Summary Table, line 23) sees, for the sake of illustration, the Victorian Government buy 10 year bonds with a 8% nominal and 5% real rate of return. The Commonwealth Government reinvests the money in Victoria in the same opportunity cost projects (space museum, road works etc) that the Victorian Government would have undertaken. This step is necessary because we do not have access to the EIA consultants’ model to re-run the data. By this means, we estimate that this procedure nets the Victorian community a net asset position of $78.02m from the interest on the bonds over a 10 year period using the EIA data (Summary Table line 23 & Table 8.8. ‘Commonwealth Govt. Bond’ scenario). Thus in this scenario the Victorian community has $78m in the ‘pocket’ - the AGPC would leave them out of pocket waiting for the economic multiplier effects to occur. R e t u r n o n i n v e s t m e n t

Commonwealth bonds is a better investment for Victorians than the Grand Prix. The EAL alternative scenario created a net asset position of $127.10m (Summary Table line 23 & Table 8.8 ‘Commonwealth Govt. Bond’ scenario). In the EAL scenario the Commonwealth bonds funds were used in an international tourist promotion exercise that presented Victoria directly to the international tourism market.

The advertising funds were assumed to produce $2 of direct expenditure for every $1 of advertising. The funds were invested in a trust fund that only spent the interest earned on annual advertising campaigns.

The next scenario (Table 8.8. ‘Commercial project investment’ scenario & Summary Table line 24 & line 25) considered a commercial project investment for the funds. The Victorian Government invested the funds directly in a commercial project that returned 20% nominal and 17% real. This returns a net asset position of $230.25m for the AFOGP scenario and $260.77m for the critique scenario (Table 8.8. ‘Commercial project investment’ scenario & Summary Table line 24 & line 25).

These figures are understated because they do not include an estimate for the net economic benefits from such commercial projects. These are likely to be substantial, creating significant multipliers. This ‘Commercial investment’ scenario currently demonstrates an economic equivalence with the unadjusted AFOGP scenario. The unadjusted AFOGP scenario asset position is unlikely to rise any higher, but the AFOGP commercial project option could rise higher as multiplier benefits are included. If, for instance, the commercial project produces multiplier based profits equivalent to the AFOGP (ie. $288.58m - Summary Table, line 25), then the commercial project could have earned Victorians over $500m in ten years. This latter commercial option demonstrates clear superiority as a wealth-creating (and economy-enhancing) option for Victorians.

In conclusion, the money that was spent on the Grand Prix could have been left, inter alia118, in the hands of the community via lower taxation, or it could have been spent by the Government to reduce its outstanding stock of debt. Given the Government's oft-stated aim - that it seeks to reduce Victoria's debt - then it would be useful to view the money as being used to retire debt in the absence of any other more useful (ie. utility-maximising) purpose. The net relative financial losses (or missed opportunities) are outlined in Diagram 8.1. R e t u r n o n i n v e s t m e n t

Diagram 8.1. The net benefits of a proper commercial arrangement are likely to outweigh an investment in the AFOGP.

Commercial investment is likely to outweigh the TAGP investment in terms of performance Commercial Return on the capital intermediated* in the financial market. The TAGP return is shared between the investor, Net operating surplus financier and the from the AGPC which borrower. is beneath what would be expected of a normal plus commercial entity

Avoided interest payments saved by the government

It is likely that the creation of the AGPC will lead to a net financial shortfall relative to other opportunities. The hypothesized relative net financial loss caused by the creation of the AGPC is based on the assumption the financial markets could provide a better return either on an equivalent risk basis or on a different risk basis (ie assuming the private sector has a comparative advantage in managing risk). The hypothesised net relative financial loss is caused because the net operating surplus of the AGPC is likely to be smaller than the gains that would have been received by the government, investors, financiers and borrowers if the government debt had been retired and the capital reinvested in productive enterprises.

*intermediated implies returned to the financial markets in this instance R e t u r n o n i n v e s t m e n t

Table 8.1 to table 8.4 R e t u r n o n i n v e s t m e n t

Table 8.5 and Table 8.6 R e t u r n o n i n v e s t m e n t

Table 8.7 and Table 8.8 R e t u r n o n i n v e s t m e n t

Notes to Table 8.7 and 8.8 R e t u r n o n i n v e s t m e n t

8 . 3 . M a n a g e m e n t I n c e n t i v e s & C o s t C o n t r o l

The net losses of the AFOGP could be reduced if the event were not so heavily capitalised. Given the realised revenue stream from the AFOGP, the scale of investment at Albert Park can only be described as excessive. The only justification for the additional capital investment is the expected increase in profits in other industries such as accommodation. This logically reduces to an increase in ticket sales because there is no evidence linking TV promotion to increased tourism (according to the EIA consultants119). Therefore, the only benefit to Victoria comes from interstate and international visitors who are attending the AFOGP as ticketholders. Thus investment decisions by AGPC management must be guided, if they are economically rational profit maximisers (ie. looking after their 'shareholders'), by the profit-driven aim of expanded ticket sales revenue subject to their contractual obligations. On this basis, given the operating deficit of the AGPC, the capital cost is excessive.

Investments by the AGPC should be benchmarked in the light of their contribution to ticket sales revenue and the requirements of contractual obligations. The productivity of each investment decision can be measured by increased ticket sales or the satisfaction of contractual obligations. Overly onerous contractual obligations will show up in excessive investment that does not increase ticket sales revenue and hence reduces the profitability of the AGPC. One such investment may be the cost of having the 'best' track in the world, when a lower quality track would have been sufficient to ensure a profitable event from the point of view of Victorian shareholders. From a commercial perspective - given their poor financial performance - the AGPC should not undertake, or contract itself to undertake, activities that do not increase ticket sales revenue or the profit margin.

In this light, community service obligations to protect and 'improve' Albert Park are necessary contractual arrangements required to compensate pre- existing property rights-holders, such as the residents surrounding Albert Park. Contracts with the franchisors and other suppliers, however, should not strip the AGPC of its ability to make a profit. The Board and R e t u r n o n i n v e s t m e n t management of the AGPC have only one task in front of them (maximising profit from ticket sales and hence visitor benefits) if they wish to satisfy their responsibilities to 'shareholders' - the Victorian community. Trade- offs, where they exist, between television rights and ticketholders should be satisfied in favour of the ticketholder if the AGPC management is doing its job and looking after shareholders. Likewise, all investments in the track should be evaluated with respect to the expected marginal increase in profits due to ticket sales, and not on any other criteria.

Ultimately, the compensation test can be applied to the Grand Prix. If it is so valuable to Victorian industries, then they will be willing to privatise the event and fully refund the Government's capital (with interest). R e t u r n o n i n v e s t m e n t

9 . C o n c l u s i o n : H y p o t h e s i s U n s u p p o r t e d

The Victorian Government has embarked on the Grand Prix as part of a strategy to revitalise the Victorian economy. The Government holds the view that the Grand Prix brings significant economic benefits. The proof of the “puddin'“ was supposed to be the economic assessment; yet the economic impact assessment fails to mount a convincing argument.

The economic analysis rests on a visitor survey to identify the number of 'bodies' attending the race and their spending patterns. Yet review of the survey did not provide a confident explanation of how the data had been gathered, nor how data quality had been maintained. This lack of transparency requires us to take the EIA report on trust.

The survey also failed to cover key target groups in the population. This reduced the available data and potentially missed some of the negative effects of the AFOGP on visitor numbers. This failure to survey key groups also meant that key data had to be estimated - when it could have just as easily been surveyed. Once again, these choices were not discussed, requiring the reader to trust the EIA, rather than be convinced by the EIA. The EIA did not try to discuss standard error estimates in the survey and hence failed to convince us that the methodology was sufficiently robust, once again undermining confidence in the finished product. The methodology for calculating the number of 'bodies' that attended the AFOGP is not discussed leaving the reader no choice but either to distrust or trust the EIA.

The outcome of the report is critically dependent on these and many other assumptions. Variations in these figures would cause significant change in the reported outcomes. These variations in the data are not discussed nor are they subject to sensitivity testing. The lack of information provides the reader with very little information with which to evaluate the likely error range around the single datum points that have been provided. R e t u r n o n i n v e s t m e n t

The EIA provided sufficient data to allow a partial reconstruction of its analytical approach. In the absence of significant discussion of the adopted methodology and its weaknesses, the reconstruction demonstrated that a range of alternative outcomes could feasibly provide a better economic outcome. For the EIA to have proven its hypothesis, such options need to be properly ‘covered off’ such that they had been demonstrated to be unfeasible by sensitivity testing, for example.

The best example of the failure to cover reasonable alternatives was the failure to model different ‘opportunity cost’ projects. The modelled outcome supplied by the AFOGP EIA consultants is not necessarily the optimal outcome. Given the Government’s aim to increase economic activity, the study has not provided an analysis which says that this is the optimal solution. Rather, the study is another example of a 'one horse race' where there is only one result, because there is only the one entry, ie. they only tested the analysis against one set of alternative projects when it was quite feasible to believe in several different sets of alternatives. The readers could then have drawn their own conclusion, based on the arguments presented in the EIA, about the most likely alternative.

Finally, the study asks us to believe, at least by implication, that this is the means to increase economic activity in Victoria. However, there is a range of feasible alternative measures that the Victorian Government could be undertaking to realise its goal of increased economic activity. The most promising would be to apply the Grand Prix money as a cut in payroll tax to stimulate local industry and improve international competitiveness. In any model, this should lead to a reasonable and sustainable boost in Victorian and Australian net wealth and employment. This may well rival the claimed benefits of the AFOGP, if not overshadow those benefits. The question that should be asked of the AFOGP is not whether this is a good outcome, or even a good enough outcome, but was it the best outcome for the Victorian economy?

Finally, this critique has described this event as a sort of 'magic pudding' whereby the Government can expend more taxes to attract more international visitors to spend their money in Victoria. Interstate visitors are excluded here, but the same applies to attracting fellow Australians to Victoria. The obvious question is: what are the limits to this strategy? Is this 'magic pudding' going to expand forever on the back of taxpayers' funds? The answer in economics is - no. R e t u r n o n i n v e s t m e n t

There is a limit to this activity which is determined by each event itself. It is safe to assume that each event will attract only a fixed size international audience at any one time. There will be a limit on the number of people who will wish to come to Victoria for such a event. This implies that there is an upper limit to the ultimate size of the economic benefit which will reveal itself on the . If governments seek to push funding for any single event above a certain optimal size, the international benefit will decline as the pump-priming impact of such expenditure begins to run up against constraints such as leakages into imports, upward movements in exchange rates, rising prices, resource constraints, etc. In particular, under a balance of payments constraint, the spillover impact of excessive government expenditure - without a countervailing increase in 'exports' - will begin to reduce whatever net benefits are available.

The AFOGP EIA consultants were, apparently, not briefed to consider this issue of determining the optimal size of government investment in the Grand Prix for the purposes of maximising economic impacts. It is an interesting question whether anyone in government has done the work to justify the scale of the AFOGP. The current EIA report provides no such justification. Indeed, it reveals a possible on-going loss which seriously undermines the economic benefit provided (increased wealth for Victorians being the normal quantitative measure). It suggests that the present arrangement of the Grand Prix sends too much revenue off shore, and that the event has been over-capitalised, relative to its likely returns, either directly to the AGPC or perhaps even to the Victorian community via economic benefits. After all, it seems fair to ask: would the event have had the same economic impact via visitor numbers if the capital expenditure had been halved - or even if it had been at a different location? If the number of visitors would have been the same at another location with half the capital expenditure - then by definition, the existing event is overly capitalised both in a financial and environmental sense.

EIA consultants do not normally provide a rate of return analysis on the activities that are being studied. It is theoretically possible to provide an assessment of the rate of return (or capital efficiency of the project). In theory, the winning businesses could compensate the Government for its efforts and still come out ahead if the AFOGP were a net winner for the Victorian economy. It should be possible for the model to provide this data. The AFOGP has cost $47.9 million in capital120 and raised GSDP by a claimed $57.72 million using the EIA figures and possibly $23.67m, or R e t u r n o n i n v e s t m e n t lower, on our estimates (Summary Table line 11). A certain proportion of this is profit to the 'beneficiary' business enterprises who could buy capital stakes in the AGPC, thus compensating the Government for its entrepreneurial efforts. Of course, if the AGPC is not worth purchasing because the benefits to Victorian businesses are so low, then the claimed economic benefits would be seen to be non-existent.

The choice of the opportunity cost project is also dubious. It is not clear that the chosen projects were sufficiently representative of what would have happened to the economy in the absence of the AFOGP. Further, since the AFOGP is directed at improving the economy, it is possible that the best choice would have been to cut taxes and boost advertising overseas for tourism in Victoria.

Any of a range of possibilities could have been tested, and a range of outcomes presented. For example, the entire Australian Grand Prix Corporation (AGPC) expenditure could have been used to retire debt which would have been freed up to go to other activities where a commercial rate of return could have been earned - supplemented by ripple effects likely to be as efficacious as those associated with the AFOGP. It is difficult to believe that such an option would be much worse than the AFOGP in creating income for Victorians.

Combined, the above concerns point to a trend for the economic benefits to appear less robust when subject to scrutiny. In particular, the benefits seem overstated, while there has been a basic failure to test a range of different opportunity cost projects. This would have indicated the sensitivity of the data output to different scenarios. Reasonable people will disagree about the likely scenario, but reasonable people will also agree that they would like to see a range of possibilities tested. Such sensitivity testing is normal procedure. Failing to provide it gives no comfort to the reviewer, and makes it difficult to accept the modelling outcomes.

In summary, Kenichi Ohmae’s observation (quoted earlier in this document) appears correct: the AFOGP may be fun for politicians, but it is the day-to-day work of taking care of business which brings home the ‘bacon’. We recommend that the outcome of the AFOGP EIA be set aside until further data is forthcoming. The Government’s hypothesis - that the Grand Prix is an economic winner for Victoria - is simply not sustained on the evidence and numbers provided in this review. R e t u r n o n i n v e s t m e n t

A p p e n d i x A - E s t i m a t e s o f C o r p o r a t e & N o n - c o r p o r a t e o v e r s e a s & i n t e r s t a t e v i s i t o r s

Table 5.1. Missing Visitor Data

Visitor Corporate visitors Non-corporate visitors Total AFOGP AFOGP category visitors dependent dependent visitors visitors Nos %**** Locals ***? ***? (Est*) Not Not 166,613 relevant relevant Interstate (Est**)4529.067 (Est**)15498.933 20,028 11,738 59% Overseas (Est**)1671.785 (Est**)9373.215 11,045 5,178 47% Totals ***? ***? 197,686 16,916 54.4% Source AFOGP EIA (1996) * 197686 - 20028 -11045= ** See Appendix A for calculations that converted supplied data to give an estimate in these categories. *** Data not supplied or calculated for this analysis ****AFOGP dependent visitors implies those who, it is assumed, would not have visited if the AFOGP had not been held. The consultants did not supply data for the cells with bolded numbers. These had to be calculated by the process outlined below. The process indicated that the data had the following values:

w = 4529.067

v = 15498.933

x = 1671.785

y = 9373.215

The consultants had calculated that 59% of 20,028 interstate visitors was equal to 11738, whereas we calculated it to be 11816. Similarly, the consultants calculated that 47% of the 11045 overseas visitors was 5178 whereas we calculate it to be 5191. We could not explain these differences, but worked with the raw numbers of 11738 and 5178 to maintain a similar R e t u r n o n i n v e s t m e n t

Calculating W & V Visitor Corporate Non-corporate Total visitors AFOGP AFOGP category visitors visitors dependent dependent visitors visitors % Nos Locals ***? ***? (Est*) Not Not 166,613 relevant relevant Interstate wv20,028 11,738 59% Overseas x y 11,045 5,178 47% Totals ***? ***? 197,686 16,916 54.4%

w + v = 20028 (1) 0.47w + 0.62v = 11738 (2)

where 47% of w plus 62% of v equals 59% of 20,028 (ie 11,738). Source: AFOGP EIA (1996:18 & 19)

Therefore,

.47w + 0.62(20028 - w) =11738 .47w + 12417.36 - 0.62w =11738 -.15w =11738-12417.36 w =679.36/.15 = 4529.067 (3)

As a result, it follows that substituting (3) into (1) provides:

(4529.067)+v =20028 v =15498.933

Also, it follows that:

.47 * 4529.067 =2128.66149 AFOGP-dependent corporate interstate visitors; and

.62 * 15498.933 =9609.33846 AFOGP-dependent non-corporate interstate visitors * implies ‘multiplied by’ in this case. R e t u r n o n i n v e s t m e n t

Calculating X & Y Visitor Corporate Non-corporate Total visitors AFOGP AFOGP category visitors visitors dependent dependent visitors visitors % Nos Locals ***? ***? (Est*) Not Not 166,613 relevant relevant Interstate wv20,028 11,738 59% Overseas x y 11,045 5,178 47% Totals ***? ***? 197,686 16,916 54.4%

x + y = 11045 (1) 0.35x + 0.49y = 5178 (2)

where 35% of X plus 49% of Y equals 47% of 11,045 (ie. 5,178) Source: AFOGP EIA (1996:18 & 19)

Therefore, y =11045 - x .35x+.49(11045-x) =5178 .35x+5412.05 -.49x =5178 -.14x =5178-5412.05 x =234.05/.14 = 1671.785 (3)

As a result, it follows that substituting (3) into (1) provides: (1671.785)+y =11045 y =9373.215

Also, it follows that: .35 * 1671.785 = 585.12475 AFOGP-dependent corporate overseas visitors and .49 * 9373.215 = 4592.785 AFOGP dependent non- corporate overseas visitors R e t u r n o n i n v e s t m e n t

Summary of Estimates & Data Check

Corporate Corporate Non- Non- corporate corporate Interstate Overseas Interstate Overseas Total visitors visitors visitors visitors Estimates calculated from 4529.1 1671.8 15498.9 9373.2 31073 EIA data above Proportion who are 47% of 35% of 62% of 49% of 16916.9 or calculated to be AFOGP- 4529.1= 1671.8= 15498.9= 9373.2= 54.4% of the total dependent according to2129.7 585.1 9609.3 4592.8 overseas & EIA interstate visitors Proportion of overseas AFOGP- Proportion AFOGP- Proportion Total overseas and interstate visitors who dependent of AFOGP- dependent of AFOGP- visitors = are AFOGP dependent. interstate dependent overseas dependent 9373.2+1671.8= visitors: interstate visitors: overseas 11045 2129.7+ visitors = 585.1+ visitors = 9609.3= 11739 4592.8= 5177.9 Total interstate 11739 divided by 5177.9 divided by visitors = 20028*100 11045*100 4529.1+15498.9= =58.6% =46.8% 20028

The data in the above table reveals that 54.4% of total overseas and interstate visitors would not have come, according to the EIA, if the AFOGP were not held. This figure lines up with the 54.4% figure provided in the AFOGP EIA report (page 19). The data also reveals that 58.6% of interstate visitors and 46.8% of overseas visitors would not have come, according to the EIA. This also lines up with data provided by the EIA consultants on page 19. This would seem to be independent confirmation that the estimates of corporate, non-corporate, overseas and interstate visitors are reasonably accurate.