THE REALISED ECONOMIC IMPACT OF THE 2011 RUGBY WORLD CUP – A HOST CITY ANALYSIS
Sam Richardson1 School of Economics and Finance College of Business Massey University Palmerston North New Zealand
Brown Bag Seminar, December 2012 (Work in Progress)
Abstract
The 2011 Rugby World Cup, hosted by New Zealand, was projected to make an operational loss of NZ$39.3 million, of which taxpayers were to foot two‐thirds of the bill. This was in contrast to profits of A$48 million for the 2003 tournament in Australia and €30 million for the 2007 tournament in France. Part of the justification for incurring these losses was an expectation of significant economic benefits arising from the hosting of the tournament. This paper estimates the realised economic impact on host cities during the 2011 tournament. Estimates show that the aggregated realised impact was approximately 25% of pre‐event projections and the impacts were unevenly distributed across host cities.
1 E‐Mail: [email protected]; Telephone: +64 6 3569099 ext. 4583; Fax: +64 6 350 5660.
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1. INTRODUCTION
The 2011 Rugby World Cup (RWC) was hosted in New Zealand, and is the largest sporting event held in this country to date. One of the selling points of the successful bid for the tournament in 2005 was that the country was described as a “stadium of four million”, which subsequently became the catchphrase synonymous with the event. In all, 48 matches were played in 12 cities during September and October 2011, while other cities also acted as bases for the 20 competing teams throughout their stay.
Despite previous tournaments making operational profits, the 2011 tournament was always likely to make a loss. The 2003 tournament in Australia made an A$48 million profit, while the 2007 tournament in France resulted in a €30m profit. Arguably the major reason for the poor financial projections was the significant hosting fee of in excess of £50 million that was paid to the International Rugby Board (IRB). The tournament was initially forecast to run a loss of NZ$39.3 million, of which the New Zealand Government would pay 67%, and the New Zealand Rugby Union (NZRU) would pay 33%, although the NZRU’s contribution was capped at NZ$10 million.
The event itself was widely acclaimed as a success, both on and off the field (nzherald.co.nz, 2012). The host country won the William Webb‐Ellis trophy for the second time, with the first victory achieved in 1987 when the event was last held in New Zealand. There were several significant off‐field impacts associated with the tournament. These included over 133,000 visitors arriving in the country expressly for the Rugby World Cup (Statistics New Zealand, 2011), a significantly greater number than what was initially forecast2. These tourists were estimated to have spent in the order of NZ$390 million whilst in the country for the event (Ministry of Economic Development, 2012). Ticket sales also exceeded forecasts of NZ$268.5 million (International Rugby Board, 2012), which resulted in a smaller than expected operational loss of NZ$31.3 million (International Rugby Board, 2012).
While the operational performance of the tournament has been publicised and is generally well known, the tournament’s impact on the wider New Zealand economy and host cities is less well‐known. Rugby New Zealand 2011 chief executive officer Martin Snedden wrote “... New Zealand derived significant economic benefits, unprecedented (and very positive) international exposure, and a very timely nationwide boost of our morale” (Snedden, 2012, p.83). Media estimates of the costs of hosting the event were as much as NZ$1.2 billion (Ihaka, Dickison, Jones, and Vass, 2011), although the size of these estimates were refuted by tournament officials (Snedden, 2011). In addition to contributing to the likely operational loss, government spending that can be attributed to the tournament included a major contribution towards the upgrade of Eden Park of NZ$190 million and smaller contributions towards upgrades of regional stadiums.
Post‐tournament reports of impacts on tourism‐related sectors and cities were somewhat mixed. The Tourism Industry Association of New Zealand surveyed its members in November, 2011 to gauge the impact of the tournament on their business. 46.3% of survey respondents felt that the RWC period was
2 Preliminary forecasts of visitor numbers in 2006 were 60,000 (Snedden, 2012), 85,000 visitors in May 2010 (Ministry of Economic Development, 2010), while the Reserve Bank projected 95,000 visitors in August 2011 (Richardson, 2011).
2 an improvement on the same time in 2010, 33.9% felt that it was worse, while 18.2% reported no change (3 News, 2012). Media reports in the months following the event suggested that while some host cities felt that the tournament was beneficial to their economies, others were no better off, and at least one city felt that the tournament may have even have made them worse off (Rankin, 2012).
The basis for claims made by high level officials, including the Minister of the Rugby World Cup, that the tournament would generate sizeable economic impacts (Ihaka, et al., 2011; Snedden, 2011) rested on four studies that were conducted and released prior to or during the tournament. The first study was commissioned by Rugby New Zealand 2011 (RNZ 2011), the second by the International Rugby Board (IRB), the third by tournament sponsor Mastercard, while the fourth was an analytical note written by the Reserve Bank of New Zealand (RBNZ). Each of the aforementioned studies forecasted substantial economic impacts for the New Zealand economy from the tournament. Less consideration was given to the projected impacts of cities outside of Auckland, with some cities commissioning their own research into the expected impacts of the tournament on their local economies. This paper seeks to examine whether the host cities throughout the country actually experienced net economic impacts as a result of the tournament, and whether these impacts matched up to the projections in the four major studies.
2. LITERATURE REVIEW
The 2011 Rugby World Cup (RWC) was the seventh edition of the quadrennial tournament. The inaugural tournament was jointly hosted by New Zealand (as the tournament host) and Australia (as the sub‐host) in 1987 (Davies, 2003). New Zealand was also to jointly host the 2003 tournament with Australia before issues surrounding stadia resulted in the tournament hosting rights being awarded to Australia as sole host. An ex‐post study of the economic impacts of the tournament on the Australian economy was commissioned by the Department of Industry, Tourism and Resources. Conducted by consultants URS, the tournament was estimated to contribute A$289 million in additional GDP (URS Finance and Economics, 2004). Of particular interest in the report was the section on longer term impacts, which were downplayed due to Australia’s geographical isolation and the associated travel costs (URS Finance and Economics, 2004).
The 2007 RWC tournament was hosted in France, although four matches were played in Cardiff, Wales and two were played in Edinburgh, Scotland. An ex‐post study of the economic impacts of the tournament on the French economy was commissioned by the French Ministry of Youth, Sport and the Voluntary Sector. Undertaken by the Centre for the Law and Economics of Sport of the University of Limoges, the study found that although economic impact was €589.9 million, the social benefits (the sum of use and non‐use values placed on the tournament) exceeded the social costs of hosting the tournament, for a social net gain of €113 million (Centre for the Law and Economics of Sport, undated).
In 2008, the International Rugby Board (IRB)’s RWC arm, Rugby World Cup Limited (RWCL) commissioned consultants Deloitte & Touche LLP to analyse potential economic impacts from the hosting of the RWC. The study suggested that potential direct expenditures from visitors into host economies would range from £200 million to £800 million, with a potential impact ranging from £610
3 million to £2.1 billion (Deloitte, 2008). The projected gross value added for the New Zealand economy from future RWCs was £260 million.
The Deloitte (2008) study made extensive use of the pre‐2011 tournament commissioned economic impact study by Horwath Asia Pacific and Market Economics that was updated in 2006. This report estimated that NZ$476 million of direct additional expenditure would flow into the New Zealand economy, and that an increase of GDP of NZ$507 million would result. These estimates were based upon an estimate of 71,000 international visitors to the country for the event (Horwath Asia Pacific Limited & Market Economics, 2006).
In August 2011, an analytical note was released by the RBNZ outlining the anticipated macroeconomic impacts of the tournament. The note estimated that a total of 95,000 international visitors were forecast to spend NZ$700 million (Richardson, 2011). The report pointed out that there were a number of factors that must also be taken into account when calculating the expected increase in the nation’s GDP. As such, an estimate of this effect was not produced.
Shortly after the tournament began, tournament sponsor Mastercard released a commissioned report on the expected economic impact of the 2011 RWC to New Zealand. This report, prepared by academics from the Centre for the International Business of Sport at Coventry University, estimated that the rugby‐ related spend from overseas visitors would total NZ$782.5 million, for a direct economic impact of NZ$411 million (Chadwick, Semens, and Arthur, 2011). It also estimated a longer term economic impact from the tournament of NZ$1.44 billion. This figure is said to incorporate a legacy through increased tourism, civic sponsorship and business development resulting from the event (Chadwick, et al., 2011).
Although the abovementioned studies all projected substantial economic impacts accruing to the New Zealand economy, caution is required when extrapolating these projections to obtain a measure of realised economic impact. No study highlights this caution more explicitly than Robert Baade and Victor Matheson’s independent 2004 study of the impact of the 1994 FIFA Football World Cup on host cities in the United States (US). Event boosters projected an economic impact of US$4 billion on the US economy. Baade and Matheson found that the actual economic impact on host cities totalled a loss amounting to in excess of US$9 billion. They demonstrated that the likelihood of a positive realised economic impact (that is, an impact greater than zero) was associated with a probability of a mere 6.4 percent (Baade and Matheson, 2004). Other studies of major events have also found that estimates of benefits tend to be overstated (Kasimati, 2003) and that caution is therefore required when interpreting the values generated by commissioned studies such as those identified above.
3. METHODOLOGY
In order to examine the realised economic impacts of a major event such as the Rugby World Cup on a host economy, one can use several methods, including methods utilised in the commissioned studies identified above. The method typically utilised in commissioned studies is economic impact analysis, which is based upon the input‐output (I‐O) technique pioneered by Leontief. The I‐O method essentially examines the impact of any increase in final demand expenditure on the level of output in each sector of the economy (Campbell and Brown, 2003). The measured impacts are the size and direction of the
4 effect in each industry of the increase in final demand. As Burgan and Mules (1992) explained, firms hire workers, purchase intermediate inputs, and produce output, which are decisions influenced by the demand for the output. This demand expenditure, in turn, creates incomes, which provides the basis for a multiplier effect to take place (Burgan and Mules, 1992).
Economic impact studies are used to measure the economic return of an event or investment to a community, often as a measure of benefit alongside supplementary financial cost data provided to local councils (Crompton, Lee, and Shuster, 2001). These studies can be undertaken at a city, regional and national level. The economic impact study is typically conducted by measuring three areas of impact: the direct, indirect, and induced impact. The direct impact is the initial, or first round, effect of visitor spending. The indirect impact is the “ripple effect” of the first round spending through the local economy. The induced impact is the impact of spending by those who have increased incomes as a result of the increased spending then generating further ripple effects (Crompton, 1995).
Multipliers are used within the I‐O framework to estimate short‐term economic impacts. These impacts play an important role in informing public decision‐making (Burgan and Mules, 2001; Schumacher and Spoonley, 2008). There are several issues that should be recognised with the technique. The presence (or absence) of supply constraints has important implications for the use of multiplier analysis. The input coefficients measuring inter‐industry flows between sectors are assumed constant in I‐O models. This assumption is not an assumption of constant technology but an assumption regarding the steadiness of the purchasing patterns between sectors (West, 1992). If excess productive capacity exists in an economy, then this may be a reasonable assumption. If the initial impact is small relative to the size of the industry or the wider economy, then the assumption would not be that restrictive (West, 1992). In the case of full employment, however, the multiplier effect of an investment would be ineffective, with factor prices being pushed up as a direct result (Cowen, 1999). As a result, some have argued that ignoring resource limitations renders economic impact analysis incomplete (Dwyer, Forsyth, and Spurr, 2004). Long‐term adjustments will influence the value of the multiplier over time (Coughlin and Mandelbaum, 1991). West (1992) pointed out that the main use of the I‐O analysis is in short run applications and, as such, the dynamic long‐run aspects of activities would be of less significance. Indeed, the transitory and localised nature of many events meant that there was unlikely to be substantial impacts on input costs (Burgan and Mules, 1992). Whether or not to take the multiplier effects into account is, according to Campbell and Brown (2003), dependent upon whether or not similar effects take place without the project in question. Indeed, some have cautioned against using multipliers altogether in the analysis of sporting events (Gratton, Shibli, and Coleman, 2006).
There is also a growing school of thought that considers economic impact studies as serving the purpose of legitimising the positions of those commissioning the studies rather than providing accurate evaluations of economic impact (Crompton, 2006; Delaney and Eckstein, 2003; Mondello and Rishe, 2004; Noll and Zimbalist, 1997). The impact of assumptions made by economic impact studies when measuring the economic impact of events and sports franchises has been examined in two studies. Crompton (1995) identified 11 separate sources of error when examining 20 economic impact study methodologies, some of which resulted from misunderstanding, while others reflected seemingly intentional fabrication. Meta‐analysis has also been used to empirically examine the nature of 13
5 economic impact studies performed on professional sports teams by Hudson (2001). It was found that all of the studies in the analysis contained some of the same errors suggested by Crompton (1995) that had the effect of inflating the economic impact of the franchise being studied (Hudson, 2001).
Given the concerns inherent within economic impact analysis, much of the independent empirical literature has adopted econometric techniques to determine the ex‐post impact of events. One such technique is to utilise cross section and time series data to estimate pooled or panel regression models of local area real GDP, employment and/or wages (Baade, 1996; Baade and Dye, 1990; Coates and Humphreys, 1999, 2001, 2003; Hotchkiss, Moore, and Zobay, 2003; Hudson, 1999; Lertwachara and Cochran, 2007; Santo, 2005). Within these models, the effect of the event in question is typically measured using a dummy variable during the period in which the event occurs. An alternative approach is to use city‐level time series data to predict city‐level GDP or employment or wages in the absence of the event (Baade and Matheson, 2004). The difference between the predicted measure and the actual measure can thus be attributed to the presence of the event. Econometric approaches use a variety of controls in order to isolate the impact of the event in question, and are less susceptible to subjective errors in measurement. Because such studies are conducted ex‐post, they are useful as measures of evaluation.
3.1. The Model
This paper seeks to evaluate the extent to which estimates of economic impact are actually realised in those cities that hosted matches in Rugby World Cup 2011. Ex‐ante data for host cities in New Zealand is required to estimate an econometric model that predicts a city’s real GDP. If one assumes that the best use of local and central government funds in a city has always occurred leading into an event, predictions of future GDP based on past observations can be interpreted as estimates of a city’s optimal growth path (Baade and Matheson, 2004). Information on a city’s optimal growth path prior to the occurrence of an event can be used to produce estimates of what might have been expected in the absence of the event. The difference between the predicted growth path and the observed growth path is therefore attributable to the presence of the event.
Borrowing from the work done by Baade and Matheson (2004), the model used in this analysis is presented below in equation (1):