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 opportunity cost-----------------------------------------------------------------------------------------------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. Industry/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 price in money 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 market 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 welfare. 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 economy. 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 wages 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’, ‘utility’, 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 goods 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 externalities