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Paying for new arenas: the economic realities

Canadian FlagWho should pay for new arenas in Canada has been a topic of much debate in Edmonton and Quebec City, where the desires of local hockey enthusiasts have clashed with fiscal conservatives. But the economic reality is that most cities need to subsidize construction to attract the NHL, according to a study.

The study, from the Conference Board of Canada, says that the economies of the largest Canadian cities – Montreal, Toronto and Vancouver — are large enough to support a privately financed arena. And, indeed, they are, as history as shown us.

But when you start looking at smaller cities, a public component has been necessary for a new facility to succeed. In Ottawa, a privately financed arena went under and was bailed out by new investors; conversely, Winnipeg’s MTS Centre was mostly privately financed.

“In an ideal world, pro sports franchises and their playing facilities would be privately-financed. But in Canada, this ideal has only worked out in the three largest cities whose arenas host National Hockey League teams,” said Glen Hodgson, senior vice-president and chief economist for the conference board, via press release.

In other Canadian cities, the local market may be too small and the potential number of events hosted at the venue too few to attract strictly private-sector investment.

“From a purely economic perspective, there is not a compelling case for public investment in professional sports facilities, but other considerations have to be assessed. A new arena or stadium may benefit the city as a whole by improving the quality of life of the community,” said Hodgson.

That’s red meat for the owners of the Edmonton Oilers (NHL), who have both made an argument for public financing of a new arena while at the same time pledging $200 million toward the project and positioning the construction as an economic-development tool. Similarly, public funding of a new Quebec City arena has been pitched as a quality of life issue. And we’d expect the owners of the Calgary Flames (NHL) to make similar argument when it becomes the Saddledome is financially obsolete.

The argument from the Conference Board is pretty simple and actually conforms closely to what actually happens now: each arena financing project must be evaluated on a case-by-case basis. There’s no formula that seems to work, no set economic strategy that succeeds in every situation. From the report:

Professional sports facilities can have attributes of what economists call “public goods”—that is, they provide economic benefits to society as a whole, and not just to the franchise owners, athletes, and fans. For example, a new pro sports facility and the franchise or franchises that use it might help to raise the profile of a community as a place for private investors to locate. The facility could encourage local entrepreneurs to create new ventures, or it could draw in tourists. All these things would bring ongoing economic benefits to the community. The facility can be used for other for-profit events (such as concerts), but also by amateur athletes or for other socially oriented purposes (for example, blood donation clinics or charity fundraising events), which might increase the possible benefit to all of society. The economic benefits to the community and to society as a whole can be evaluated, as can the costs, using techniques that economists have developed over many years….

In addition, positive economic benefits are likely to result from the investment, and these can be estimated. The dollars spent on labour and capital for the specific investment and its ongoing operations get re-spent in the local economy, creating multiplier effects, such as increased wages and additional jobs. But there are also bound to be significant economic costs and “leakages” from a pro sports project, including interest costs on borrowed public money, or imports used in construction and operation. A proper evaluation would need to consider whether the investment in a new professional sports facility was creating new or “incremental” activity, or simply displacing private or public investment that would have occurred in the community in any event. Governments need to consider alternative public infrastructure programs that might also generate economic and social benefits for the same funding. Public money needs to be spent wisely.

This means assessing what economists call the “opportunity costs”—a key variable in any kind of cost-benefit analysis (although challenging to assess). In the context of public money for professional sports facilities, opportunity costs mean that if a stadium or arena requires, say, $200 million in public investment, the alternative use for these public funds needs to be examined as well. If detailed economic analysis indicates that a similar investment of $200 million on other kinds of activities would yield stronger overall benefits to society, then the government should move forward with that other project, not with the stadium or arena.

You can read the full report here.

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