Grand Prixtensions 2000

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Grand Prixtensions 2000
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Prixtensions 2000-Overview

• Key Points
• 1. Methodology/data
• 2. AGPC losses
• 3. Imports License fees
• 4. Economic losses/gains

The Australian Grand Prix Corporation runs the
Melbourne Grand Prix races on the assertion that
it is good for the Victorian economy. This
presentation (Prixtensions 2000) addresses this
assertion based on previous work in 1998 and
further refinements in 1999 - 2001.
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Main Points 1

• Methodology Data
• Survey technique, visitor numbers, expenditure
  levels are still questionable.
• The GPEE2 report repeats a claim made in the
  previous report that Victorians save less because
  of the Grand Prix.
• A claim rejected by most economists
• Prof. Peter Forsyth - To the extent that savings
  are reduced to fund current expenditure, future
  expenditure will be reduced Letter to SAP, Head
  of Economics, Monash Uni, Cost-benefit/Tourism
  expert.

• AGPC loses money
• AGPC 2000 Grand Prix lost 16.1m rather than the
  3.996m reported.
• AGPC has accumulated losses of 73.7m to date
  (13.5m on AGPC data).
• AGPC F1 Grand Prix is expected to accumulate
  losses, by the end of the 2010 contract in the
  order of 231.3m (53.5m on extrapolation of AGPC
  data).
• (calculated on an accounting basis based on the
  existing trend)

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Main Points 2

• Imports License fees
• The AGPC pays out license fees (hidden from the
  public), prize money and insurance.
• These are imports which should be offset by the
  exports earned from offshore.
• In the words of GPEE2 - The ideal situation for
  major events is a net import content of at least
  zero or negative. If net import content is
  positive then in the absence of offsetting
  effects, there would be little to be gained from
  Victoria hosting the event. GPEE2, pg 4
• License fees are hidden-Trust Us!
• GPEE2 refers to the Grand Prix Economic
  Evaluation 2000 by the Vic Government.

• Economic losses gains
• Dwyer/Forsyth back of the envelope estimates
  imply a net surplus of 7.59m from F1 QAGP (if we
  accept GPEE2 data - which we do not assuming
  that all the 7.59m accrues to Victoria - which
  it will not!).
• The cost of the promotion is the net cost of the
  FI QAGP.
• The cost of the promotion in 2000 is the cost of
  staging F1 QAGP. We estimate a cost of 16.142m
  (AGPC estimates 3.996m).
• Net benefit16.142m - 7.59m a loss of 8.552m
  - there is a loss from the 2000 F1 Grand Prix.

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The Main Report

• In subsequent pages we outline the analysis
  behind the main points in the previous slides

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Associated Documents

• Letter from Professor Peter Forsyth (see notes
  below).
• See Executive summary provided in written (ie
  non-powerpoint) format
• Copy of report by AGPC consultants on the
  economic impact of the 2000 F1 Grand Prix (GPEE2)
  - available from the Vic govt.
• SAP paper on survey methodology.
• See notes attached to some overheads.

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Sources 1

• Papers prepared by Professor Forsyth et al.
• SourcesDwyer, L., Forsyth, P., Government
  Support for Inbound Tourism Promotion Some
  Neglected Issues, Australian Economic Papers,
  December 1993, pg 355 - 374.
• Dwyer, L., Forsyth, P., Impacts and Benefits of
  MICE Tourism A Framework for Analysis, Tourism
  Economics, 1997, Volume 3, No 1, pg 21 - 38.

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Sources 2

• Dwyer, L., Forsyth, P., Assessing the Benefits
  Costs of Inbound Tourism, Annals of Tourism
  Research, Volume 20, 1993, pg 751 - 768.
• Dwyer, L., and Forsyth, P., Estimating the
  Employment Impacts of Tourism to a Nation,
  Tourism Recreation Research, Volume 23, No 2,
  1998, pg 3 - 12.
• Dwyer, L., Forsyth, P., Modelling Tourism Jobs
  Measuring the Employment Impacts of Inbound
  Tourism, Commonwealth Department of Tourism, 1994.

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Data, Methodology

• Discussed in 1997 Prixtensions report.
• GPEE2 has adopted some of our points.
• Previous points still stand.
• Survey technique, visitor numbers, expenditure
  levels are still questionable.
• Last time we focussed on the detail, this time
  we focussed on the systemic issues.

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Victoria saves less due to F1

• The GPEE2 report repeats a claim made in the
  previous report that Victorians save less because
  of the Grand Prix.
• A claim rejected by most economists.
• Prof. Peter Forsyth - To the extent that savings
  are reduced to fund current expenditure, future
  expenditure will be reduced Letter to SAP, Head
  of Economics, Monash Uni, Cost-benefit/Tourism
  expert.

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Summary of GPEE2 net impact

• International Visitors 13.2m _at_ an average
  1497.7/visitor (7556 net additional visitors)
  (probably reduce significantly).
• Interstate visitors 22.5m/visitor (15,996 net
  additional visitors) _at_ 1,346 per head (probably
  reduce significantly).
• Event personnel/complementary expenditures
  14.5m.
• Induced tourism 8.1m.
• Enhanced resident expenditure effect 11.5m.
• Complementary expenditures 2m.
• Direct import content -0.4m (this becomes
  positive by about 4m if 11.5m in savings is
  dropped as we suggest).
• Repulsion tourism effect -1.8m (they adopted one
  of our criticisms but gave it a low value).

High but AGPC says Trust us!!
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Major Cost Overrun

• AGPC reported losses of 3.996m.
• Annual accounts fail to include
• Depreciation (within F1 accounts)
• Capital cost
• Additional capital increments.
• Capital cost is shifted to government or
• paid by government.
• Add back the capital cost and the
• AGPC lost 16.14M in 99/00 - see table.

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AGPC Version ofthe Annual Accts
Table 1
By missing rows we mean that the Formula 1 Grand
Prix accounts need to include the data in the
missing rows in order to provide a complete
picture of the AGPC financial performance
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Corrected AGPC Acct
Table 2
Note - non-operating costs refer to costs not
directly incurred by operations of the race but
by the financial structure of the business.
Table 3
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The Forgotten Costs
Table 4
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Other costs by component
Table 5
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Additional capital costs
Table 6
Table 7
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AGPC F1 in the red

• AGPC 2000 Grand Prix lost 16.1m rather than the
  3.996m reported.
• AGPC has accumulated losses of 73.7m to date
  (13.5m on AGPC data).
• AGPC F1 Grand Prix is expected to accumulate
  losses, by the end of the 2010 contract in the
  order of 231.3m (53.5m on extrapolation of AGPC
  data).
• (calculated on an accounting basis based on the
  existing trend)

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AGPC Version of Accounts
Chart 1
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Corrected version of Accounts
Chart 2
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AGPC loss vs real losses
Chart 3
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Importshidden license fees

• The AGPC pays out license fees (hidden from the
  public), prize money and insurance.
• These are imports which should be offset by the
  exports earned from offshore.
• In the words of GPEE2 - The ideal situation for
  major events is a net import content of at least
  zero or negative. If net import content is
  positive then in the absence of offsetting
  effects, there would be little to be gained from
  Victoria hosting the event. GPEE2, pg 4

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Show Us The Money!!!!!

• License fees are not disclosed - import export
  details not made available
• If the import/export details are wrong (license
  fees understated) this event becomes a net
  importer and the economic benefits are reduced -
  possibly substantially
• We are asked to take this on trust!
• License fees need to be disclosed

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TV payments to F1 HQ

• Payments (net) for TV license fees do not appear
  to be included - these go directly from networks
  to Formula One overseas and would be imports.
• If they are significant GP imports would exceed
  exports by a significant margin undermining the
  alleged economic gains to Victoria such that
  there would be little to be gained from Victoria
  hosting the event.GPEE2, pg 4

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Economic benefits

• F1 rationale - good for the Victorian economy.
• GPEE2 claims economic benefit through increased
  economic activity (130.7m).
• Is this true?
• Depends on
• The foregone project
• The cut-off point
• Definition of economic benefit.

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What did we give up?

• The foregone project - GPEE2 suggests we gave up
  some public works.
• We suggest that the Kennett Govt would have added
  to the budget surplus, and lent money to the
  private sector via the market creating a new or
  bigger business - ie focus on economic growth.
• If they wanted to add value to tourism they could
  also have underwritten a overseas tourism
  campaign.

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Business vs Party option

• In the previous report we assessed the economic
  impact of a business option.
• The business option (investing in industry)
  delivers benefits that exceed those from the
  party or F1 option.
• Why does the business option deliver more than
  the party option? The business option
  creates wealth through uniting capital with a
  business enterprise - in the next section we map
  out the trade-off posed by the QAGP.

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The Grand Prix trade-off

• GPEE2 identifies five revenue sources unlocked
  by the event.
• The business option identifies what could have
  been - profits/return on investment recouped
  capital expenditure as sources of new additional
  expenditure given up in pursuit of F1.

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AGPC costs revenues

Net additional revenue claimed by GPEE2 to
provide the source of economic benefits
A
Operating cost for QAGP
Apparent loss on QAGP paid by government
B
Actual losses suffered by govt
Categories of expenditure
D
C
Outline of the QAGP business
Gross revenue
Missing profits depreciation
Capital investment 50.5m (assumed low estimate
from GPEE2)
Diagram 1 Not drawn to scale
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Key policy question?

• How much should you spend in government subsidy
  to suck expenditure into Victoria before the
  cost of the subsidy outweighs the net benefit?
• This question is not answered by GPEE2 which is
  why it is an inadequate explanation.
• According to diagram 1 govt spends the yellow
  part to earn the extra revenues (maroon) which we
  believe is offset by the foregone profits and
  depreciation (orange).

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GPEE2 claims net additional revenue

• GPEE2 claims economic benefit derived from
  additional revenue comprising
• Retained Victorian expenditure
• Ticket revenue from interstate overseas
• Non-ticket expenditure by additional
  non-Victorian visitors enhanced expenditure by
  Victorians
• Non-Victorian sponsorship
• Retained sponsorship.
• Source GPEE2, pg 4 (see page 49 for the amounts)
• We could compare the F1 option vs business option
  at this point but it would be misleading because
  the wrong data is being used.

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The AGPC Gross Product

Net additional revenue claimed by GPEE2 to
provide the source of economic benefits
Not drawn to scale
Categories of expenditure
Pink Yellow Gross revenue of QAGP Yellow
purchases on supplies (intermediate goods) by
QAGP Pink purchases of labour, capital by QAGP
equivalent to Gross State Product (Gross State
Surplus) used in GPEE2 as a measure of economic
activity - GPEE2 claims that the pink expands
because of F1
Gross revenue
Capital investment 50.5m (assumed low estimate
from GPEE2)
Diagram 2
Where gross revenue goes beneath the line this
captures the subsidy from government
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AGPC vs public works

Net additional revenue claimed by GPEE2 to
provide the source of economic benefits
Column B represents the gross revenue of the
project chosen by GPEE2 to be foregone (given
up) in order to fund the QAGP
B
Not drawn to scale
Diagram 3
Categories of expenditure
Green brown Gross revenue of foregone
project Brown purchases on supplies
(intermediate goods) Green purchases on capital
labour (ie gross state surplus as correctly
measured by GPEE2)
Gross revenue
Pink Yellow Gross revenue of QAGP Yellow
purchases on supplies (intermediate goods) by
QAGP Pink purchases of labour, capital by QAGP
equivalent to Gross State Product (Surplus) used
in GPEE2 as a measure of economic activity -
GPEE2 claims that the pink expands because of F1
Capital investment 50.5m (assumed low estimate
from GPEE2)
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Misleading net versus gross

• GPEE2 correctly subtracts the green in the
  foregone project (column B) from the pink
  (gross state surplus in the QAGP).
• The net gross state surplus is considered to be
  the increase in Gross State Surplus caused by the
  F1 according to GPEE2.
• Gross State Surplus is the equivalent to a large
  company subtracting input costs from the gross
  revenue and claiming this is the benefit to
  shareholders. The benefit to shareholders is
  profit - not gross state surplus.

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Misleading Data net vs gross
Diagram 4
Not drawn to scale
A cost-benefit analysis would have compared the
net surpluses from each project

Net additional revenue claimed by GPEE2 to
provide the source of economic benefits
The Pink area represents the gross state surplus
from QAPG (pink) less the gross state surplus
equivalent from the foregone project (green) as
undertaken in GPEE2.
B
B
F1
Categories of expenditure
In cost - benefit analysis the gross surplus is
useless as a measure of the benefit because it
does not tell us what the profit is. That is the
labour and capital tied up in producing the gross
surplus did not come for free - this capital
labour could have been used elsewhere. In order
to determine the net surplus the costs of
labour and capital should be deducted. The light
blue areas represent the net surplus component
of the gross surplus of each entity. The net
surplus represents the unique increment in wealth
flowing from the chosen project.
Gross revenue
Capital investment 50.5m (assumed low estimate
from GPEE2)
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Net Surplus how are costs calculated?

• The costs of labour capital are the wages or
  return on investment that they would have earned
  in an alternative project.
• The F1 is only a net benefit, all other things
  being equal, if the net surplus from QAGP gt the
  net surplus from the business option and/or the
  aerospace museum option.
• Next we provide an example, representing the
  standard economic view, from Prof Peter Forsyth
  to illustrate.

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Tourism promotion example

• Assume Aust Govt spends 1m through the
  Australian Tourism Commission to promote
  Australia overseas.
• Raising 1m in revenue causes costs to the
  economy of 0.275m through efficiency and foreign
  currency losses (this is not essential to the
  analysis but is part of being complete).
• Estimates show that 1m spent on overseas
  promotions produces additional tourist
  expenditure of 40m in Australia.

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1m expended 40m on gross benefit

• The gross benefit needs to adjusted to reflect
  the cost of factors of production (labour,
  capital).
• Modelling shows that for every 1 spent on
  tourism by a tourist only 5 cents is available to
  provide a net benefit or net surplus. That is
  each 1 of gross benefit requires 95 cents to be
  spent to purchase labour and capital from other
  sectors of the economy leaving only 5cents as a
  net gain in Oz wealth.

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Net OZ gain from 1m overseas promotion

• 1m (which is really costs 1.275m)
• in promotion
• 40m in gross tourism revenue which
• 2m in net surplus (_at_5cents per 1 spent)
• 1.65m in additional foreign exchange effects
  (receiving additional foreign exchange is
  beneficial to Australia but also has costs).
• Therefore 1.275m in promotion 3.65m in net
  benefit (source see notes - Forsyth Dwyer
  paper).

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Net Surplus Analysis

• The previous analysis required strong
  assumptions to be made by the writers.
• It illustrates the error in the approach of using
  gross measures to indicate benefits.
• It provides a order of magnitude measure of the
  net gains to Australia from extra tourism
  revenue.
• Applied to the F1 QAGP it reveals that Australia
  gained only 7.59m in net benefit (surplus) in
  2000 (see following table).

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Dwyer/Forsyth model applied to FI QAGP
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Implications for QAGP

• Dwyer/Forsyth back of the envelope estimates
  imply a net surplus of 7.59m from F1 QAGP (if we
  accept GPEE2 data - which we do not assuming
  that all the 7.59m accrues to Victoria - which
  it will not!).
• The cost of the promotion is the net cost of the
  FI QAGP.
• The cost of the promotion in 2000 is the cost of
  staging F1 QAGP. We estimate a cost of 16.142m
  (AGPC estimates 3.996m).

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2000 F1 GP loses 8.552m

• The 2000 F1 GP created 7.59m in net surplus
  based on AGPC data using the Forsyth model yet
  cost 16.142m to stage (gross revenue less
  staging costs).
• The net loss to the economy caused by the Grand
  Prix is the 7.59m minus 16.142m that is
  8.552m.

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QAGP a loser

• It is our conclusion that the QAGP causes
  Victorians to be poorer when the analysis is
  conducted in a proper cost-benefit framework.
• Economic impact modelling has its place but needs
  to be integrated into a cost-benefit framework to
  measure the net benefit to the Victorian economy
  from government investments in tourism.
• The methodology chosen in GPEE2 is inappropriate
  and leads to misleading conclusions about the net
  benefits of QAGP.

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Economists_at_Large Associates Melbourne, March
2001 Any commentary in this document is solely
the responsibility of Economists_at_Large
Associates
Adding Value to Society
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• ENDs Here Folks!