Has the building of convention centres become our new cargo cult ?

by Gordon Campbell

During the 1990, a lot of public money got poured into building sports arenas. It was a fad – or a scam, depending on your outlook – in New Zealand, and around the world. Riches were promised, stadiums were built and for much of the year they now stand empty. The upkeep and the debt servicing burdens have rendered the return on the investments borderline at best, and in some instances a drain – eg, the Forsyth Barr stadium in Dunedin – and that’s before you start calculating the opportunity costs of what the money could have been spent on. At the time, even the Business Roundtable didn’t think such investments were a wise use of public money, and argued that the alleged economic benefits didn’t stack up.

By and large, the economic payoff from sinking large amounts of public money into such facilities have not eventuated. As the veteran US sports economist Victor Matheson put it a couple of years ago in Atlantic magazine :

“There is a simple rule for determining the actual return on investment, Matheson said: “Take whatever number the sports promoter says, take it and move the decimal one place to the left. Divide it by ten, and that’s a pretty good estimate of the actual economic impact.”

Twenty years on, a fresh cycle of using public money as a subsidy for promoters, developers and the hospitality industry is being repeated around New Zealand. This time, a cargo cult of sorts has developed around using public funds to build convention centres. There are several coming down the pike, and they will be competing with each other for the same limited market. Unfortunately, the fact that each city is embarking on these ventures is being cited as the imperative for the others to do likewise.

Globally, New Zealand is not an obvious choice as a conference destination. Many of the large business conferences overseas devolve around products and sales – and New Zealand is not a centre of excellence for global enterprise in major conference fields such as telecoms, manufacturing, finance, medical research, oil and gas exploration etc etc. For good reason, our best and brightest tend to head overseas to such gatherings rather than the other way around. Nor is there any reason to assume that if we build the facilities, the world will come to our door. New Zealand is geographically distant, which adds considerably – and unattractively – to the travel costs for attendees. More on that below.

Regardless, New Zealand is heading down this path. A cursory list of the new ( or significantly revamped ) convention centres that have been completed – or are due to be completed – this decade include :

Auckland Sky City Convention Centre. Headline cost : $402 million. Due to open : 2017-18. Developer will pay construction and operational costs, in return for – among other things – extended gaming concessions, and exclusive use of a prime TVNZ Hobson St site for a related 300-bed hotel complex. Maximum conference capacity : currently 2,850 delegates. This figure has now been reduced twice by SkyCity without altering the gambling concessions they were granted at the outset.

Hamilton : Claudelands Events Centre. Completed 2011 Initial cost : $68.4 million. Capacity : circa 800 delegates. In December 2014, Hamilton city councillors were almost evenly split over a proposal to sell the debt-plagued facility.

Despite its recent success, the venue has struggled to turn a profit, generating revenue of $2.8 million and costs of $6.8m in the past financial year. When non-trading charges are added, Claudelands’ deficit approaches $9-10m a year.

From the outset, the revenue projections for Claudelands have been too high, while the estimates of operational costs have been too low.

Wellington : Wellington Convention Centre and adjacent 165-bed hotel. Reported cost : $125 million. Capacity : 1,200 conference delegates, 1, 450 seated diners, and 2,500 theatre-seated. Due to open : supposedly, 2017. As NBR explained last December, the developer will meet construction and operational costs, to be recouped from expected profits and via the council’s committal to a 20 year lease :

The council had agreed to pay an average $2.1 million a year to developer Mark Dunajtschik under a 20-year lease on the convention centre, with the costs front-loaded in the first few years until they are offset by profits from events at the centre. There was some risk to the city if the centre didn’t perform as expected, [the Council] has said.

In fact, the mooted Wellington convention centre is a good example of the rhetoric and risks surrounding these developments. According to Wellington City Council’s published business case, the Council will not receive any profit share until the developer has recovered all pre-opening costs and early operating losses. ( Profits are not expected until years three to five of the centre’s operations.) If these profits are delayed or do not eventuate at all, ratepayers will be on the hook for up to $3.5 million a year. They will also be paying a share of the rates and insurance costs for the centre – somewhat paradoxically, given that the WCC business case also counts the revenue from the rates as one of the arguments in favour of the proposal.

The Hilton hotel chain, which will operate the convention centre/hotel complex on a prime waterfront site, stands to be the likely winner. In effect, they will receive a guaranteed public subsidy year after year, while being spared competition from other Council – owned conference facilities, such as the Michael Fowler Centre or in time, the old Town Hall which is currently being earthquake strengthened at considerable expense. ( For what end purpose remains unclear.) True, Hilton’s 125-bed boutique hotel would mean that any large convention would spill delegates over to other hotels. Part of the centre’s business case is that it will provide an alternative venue when the World Of Wearable Art (WOW) festival ties up existing venues such as Shed 6 and the TSB Arena for six weeks, every year.

However, since WOW already tends to overwhelm Wellington’s existing hotel capacity, it is unclear where any added influx of conference delegates attracted here by the convention centre during that time would actually be accommodated.

The WCC business case document perfectly illustrates some of the contradictions involved. Expected direct profits are part of the rationale put forward on one hand to reduce the costs to ratepayers – but simultaneously , the lack of direct profits is put forward in the business case as the rationale for the Council to step up and subsidise the project. See business case, p 16 -17 :

As stand-alone facilities, large scale convention centres are not constructed for financial profitability and often operate at a financial loss when the cost of the assets are accounted for. The case for building convention centres is based on the expectation that they will generate economic activity, through the expenditure of attending delegates, in the community. Because these community benefits are not able to be captured by private investors they would not normally be interested in building and operating a convention centre without subsidies…..

And again :

Council support is critical without it the project will not proceed. Convention centres are not typically funded through private investment because the benefits are generally from the

economic activity they generate rather than their direct return.

So apparently the centre per se will not generate direct profits – to the Council at least – but wider ‘economic activity’ beyond, assuming that this can be measured, and is traceable back to the centre. It looks more like an act of faith. Hardly a watertight justification for a fresh commitment by a city that already owns and operates six performance and conference venues – the Town Hall, Michael Fowler Centre, TSB Arena, Shed 6, St James Theatre and Opera House – some of which will be made expensively redundant by a new convention centre.

Christchurch : Christchurch Convention Centre. Estimated cost : circa $500 million. Due to open : late 2018. The government has earmarked $284 million from taxation and state asset sales. The Centre will be built on land previously occupied by the now-demolished Christchurch Public Library, which was relatively undamaged in the earthquakes.

The sole bidder for the project was the Australian public private partnership firm, the Plenary Group.

The Centre will be operated by the hotel chain Accor, headquartered in France. As of March 2015, key details of the Christchurch Convention Centre project – including how much it will eventually cost, and who will own it and the land upon which it sits – remained unclear.

The outgoing director of the Christchurch Central Development Unit, Warwick Isaacs, said he did not know the total cost, because commercial negotiations were still underway.

“We are still in a process around the design, the business planning, and the commercial negotiations for the cost centre….

Mr Isaacs was unable to say whether the Crown, or its private sector partners, would own the buildings and land.

Dunedin : Dunedin Centre. Refurbished 2013. Cost $45.4 million. Capacity : 400 delegates. From the Dunedin City Council website :

The redeveloped Dunedin Centre will be a fantastic addition to conference and event facilities in New Zealand. By integrating three of the city’s most significant heritage buildings into a single state-of-the-art complex, the Centre will set a new standard for venues in this country.

Queenstown : Convention Centre and adjacent 150-bed hotel. Capacity : 750-800 delegates, as cited in the Horvath review of the project, 2012. Cost : $58 million as estimated in the March 2015 annual plan, with $31.35 million of that from local ratepayers and $26.7 million from ’ external funding ” – this latter sum has been envisaged to come almost entirely from central government, via taxation. That expectation looks increasingly unrealistic. In Budget 2015, no central government funds at all were earmarked for the Queenstown proposal. At Prime Minister John Key’s post-Cabinet press conference on May 25, I asked him whether this amounts to a vote of no confidence by central government. No, Key replied, but repeated his position – apparently stated in correspondence with the Queenstown Council last year – that any central government contribution would in the order of $5 million, and $10 million at the very outside.

Recent estimates of the total cost of the Queenstown proposal go all the way up to $140 million, when related factors, including interest, are included – though some of those costs could be partially offset by the expected returns from other commercial activities (including sub-division) on the Lakeview site. Reportedly, the steadily escalating cost estimates have been causing alarm in some quarters in Queenstown and the surrounding region .

Originally billed by the Queenstown Lakes District Council as a $52.5 million project, in terms of capital costs, fresh figures released last Thursday put the capital cost at $60 million. The figure lifts to $69.2 million when infrastructure costs, a commercial subdivision at the Lakeview site, overlooking the town, and the first five years of deficits are added. The extra cost is interest on a 50-year loan, totalling $74 million. That total of more than $140 million – before any commercial return to the council from its Lakeview subdivision – is making some businesspeople reconsider.

It isn’t as if Queenstown wasn’t warned. According to the 2012 Horvath feasibility study

the Queenstown project couldn’t be justified by the “modest” direct cash returns from the convention centre /hotel complex itself, but in the alleged “wider economic impact” [again!] that it would supposedly generate :

However, given the relatively high capital cost of the proposed facility, the modest direct cash returns it would generate, but the significant wider economic impact it will generate, the funding to build the facility will require a broad element of risk-sharing. The majority of funding will need to come from public sector stakeholders on behalf of the wider communities they represent.

Righto. Yet as of May 2015, those ‘wider communities’ are baulking at the cost, and doubting that the likely returns justify the risk.

In sum, almost every major city and tourism centre in New Zealand is – simultaneously – building or extending convention centres, and is taking significant risks and investments in public money ( and public land) in the process. All these complexes are targeting much the same basic audience : the domestic and international conference markets. The economic rationale for these projects is based on the spending that the centres are being hoped to generate from (a) the hotels that will accommodate the delegates (b) the bars and restaurants that will serve them and (c) the retail outlets in which they will spend a remainder of their money.

To date, there has little or no analysis of what the net national benefit would be – if any – to New Zealand from these ventures. Constantly, the facilities will be competing with centres offshore for hosting rights to a limited number of major international conferences. Domestically, one region’s gain will be another region’s loss. As tourism analyst John Moriarty told Werewolf :

The current problem ( with smaller conventions and competing conventions) can be a “race to the bottom” from the number of districts having medium

sized convention facilities that are wholly under-utilised.

The question of net benefit is very difficult as it [accrues from] the additional spend, over and above what would otherwise occur. From a New Zealand point of view, there is probably NO net benefit as the money would be spent anyway, but there is a regional benefit in that it gets spent there – and a corresponding dis-benefit

elsewhere!

International conventions, Moriarty continued, do bring in additional income but they also create additional expenses, such as marketing. “Whether the income actually exceeds the costs (including the costs of capital for infrastructure) is to me, still moot, unless existing infrastructures are utilised.” Even in the best case scenarios, whether convention centres (and the business they attract) constitute the best use of large amounts of public money is highly debatable. As Moriarty points out, the claimed net benefit of five or six years of the Americas Cup presence in Auckland was about $500 million. In his view, that figure paled before what could have been delivered if the money had been spent in other ways – say, on an enhanced advertising campaign that boosted tourism numbers by only one per cent. “If we brought an additional 28,500 visitors per year (+1%) , this would have been a greater benefit,” Moriarty says, “and would not have involved more public money.”

The current mania for convention centres poses the risk of a double whammy, to ratepayers and taxpayers alike. Nationwide, taxpayers are (a) pouring nearly $300 million into the Christchurch Convention Centre, and will also be (b) picking up the social and economic costs from the trade-offs agreed by the Key government over the SkyCity deal. Moriarty is sceptical that these investments are worth the candle :

In my view the SkyCity deal is still a ‘public money issue’ as it will create a specific community licence to increase monopolised gambling and the net welfare to New Zealand over time is extremely moot (I’d guess, negative) when one takes into account the harm and wealth transfer to shareholders from a vertically integrated enterprise (such as SkyCity) that stands to benefit directly from accommodation, catering, gambling and convention fees in a manner that no other Auckland enterprise can match.

The capture by foreign-owned private companies of the main benefits of the inputs of public money and resources into convention centres is worth noting. In Auckland, that will be SkyCity ( an Australian firm) in Wellington it will be Hilton ( a US firm) and in Christchurch it will be Plenary Group (Australian) and Accor ( French) Apart from those highly nebulous ‘wider economic benefits’ – most of which would have eventuated if existing facilities had been utilised – the return to local communities in job creation is not substantial, given the risks involved. At best, the WCC business case estimates the Wellington convention centre would bring between 172 and 247 FTE jobs to the region – and as some submissions in the consultation process pointed out, most of these would be in the low skilled, low paid hospitality industry. It is a very expensive job creation scheme.

In the past, sports stadiums were touted as partly paying their way from other events – eg big rock concerts – they would attract. These have proved to be few and far between. Convention centres may similarly find their conference bonanzas to be thin on the ground. In a country where a domestic conference of 600-800 delegates is large – and a conference of 1,500 delegates counts as huge – the financial solvency of some of the purpose-built circa 3,000 delegate facilities will be reliant on the capture of a consistent number of major international conferences, each year and every year. Some – conceivably all – will fail to do so.

There’s a global reason for that pessimism. Globally, a number of cities handily adjacent to each other in the ‘golden circle” of western Europe – Paris, London, Barcelona, Madrid, Lisbon etc – are the world’s most popular sites for international conferences. The reason being : they’re close to their target populations. Distance is costly, and travel costs are unpopular, within the sober climate of post -GFC recovery. For any given conference, three major costs provide the competitive edge (a) the cost of the travel to get there (b) the cost of the hotel accommodation while there and (c) the conference fee itself.

As mentioned, basic geography does New Zealand no favours. Auckland, Christchurch and Queenstown are a long and expensive distance from anywhere. They will be hoping to become part of an Asia-Pacific conference circuit ( in unison with the likes of Tokyo and Brisbane) but there is only a limited incentive for those cities to want to share the business they already have.

Ultimately, the Wellington business case is touchingly. naively optimistic about investing in a business where geography already puts this country behind the 8-ball, and at a cost disadvantage. The pattern of major conference business suggests as much. Globally, conference numbers expanded rapidly between 2001 and 2008 – at a rate of 9 % per annum – and then crashed between 2008-2012 to only 3.7% per annum, before picking up again recently to something like the pre-GFC rates. Post-GFC though, a more cost-conscious climate has plainly been to New Zealand’s detriment as a conference destination. As the WCC business case says :

Despite this context of world-wide convention growth, the number of international conferences captured by New Zealand has grown much more slowly, and was more severely affected by the GFC.

And even worse :

Whereas the Australian and world markets grew at a relatively continuous pace prior to the GFC, the number of international association conferences held in New Zealand has fluctuated considerably from year to year, given the “lumpy” nature of convention activity. The slow growth is likely to reflect New Zealand’s small size and distance from the major sources of international conventions in the northern hemisphere. The costs imposed by distance are likely to increase in future as a result of expected increases to fuel prices which will continue to be offset to a degree by improving plane efficiency….

As a business pitch, that’s hardly a cause for rampant optimism. Or for assuming that the building of bigger, better and more expensive facilities ( with a bit of marketing on top) will somehow transform New Zealand into the swan of the international conference circuit. Clearly, the WCC business plan has misgivings on this point, but what the hey :

There is uncertainty as to whether rapid growth will continue in future years due to the impact of external factors such as the European economic crisis and generally increasing fuel prices, however the growth trends represent a significant opportunity for New Zealand, especially with the right facilities.

Yup, lets build those ‘right” facilities and hope that they’ll come, with a bit of marketing. There is an even more mundane reason for caution besides the infrequency of major international and large domestic conference events, and the pre- existence of adequate facilities for the medium scale and smaller ones. Again, Wellington’s business case is a treasury of relevant information.

Of the 80,000 conference events in New Zealand annually, it says, 80 % of them are only one-day affairs. Currently, two thirds (just over 67%) of conference attendees in Wellington are locals, 28% come from elsewhere in the country and only 3.8% are international. If major international events are the goal, it is clearly going to be an uphill slog for the Capital, from a 3.8% starting point.

Supposedly, a new convention centre will swell the annual conference attendees in Wellington to 68,000 – a 10 percent increase – and attract new events to the Capital at considerably more than one per week, or 74 new annual events in all. Interestingly the business case paints a dire picture of the damage that new centres in Auckland, Christchurch and Queenstown will do to Wellington’s current conference traffic if the Capital doesn’t build its own new facility. (Allegedly, it could lose “ up to 17%” of its current conference market share.) Yet it contains only guesstimates on how the subsequent competitive battle for business may pan out if it does proceed. Will Auckland, Christchurch and Queenstown continue to be more attractive destinations ? Quite likely.

Clearly, any conference business would help to boost the occupancy levels at New Zealand hotels during the slacker times of the year. If the new convention centres do manage to attract the conference business on which their profitability and survival depends – and that’s a big “if” – then each city has to be capable of providing enough extra hotel beds (up to circa 3,000 in some cases) over a sustained 3-4 day period, and regardless of the competing traffic at the peak times of the year.

This is by no means a given. In the year to February 2015 – which captures the summer peak period – hotel occupancy rates in Auckland were running at a high 83%. Stephen Doyle, national director of the Hotels & Hospitality Group at Jones Lang LaSalle (JLL) has pointed out a key reason – the limited supply of new rooms – for the recent rise in occupancy and profitability :

Doyle said there had been a limited supply of new accommodation coming onto the Auckland market over the last five years and over that period occupancy rates in the city had risen by more than 10% and revenue per available room had increased by an average of 5.3% a year.

It is something of a chicken and egg situation. If you build the convention centres – and the delegates come – you then need the hotel beds for them. Yet you will only get the conferences if you can demonstrate that you have the hotel beds. Co-ordinating the two elements can be a close-run thing – and if one city’s convention centre succeeds at the expense of its provincial and metropolitan rivals, the related major hotel investments will also be on the line. Obviously, the hotels being built on site by the convention centre operators will capture any immediate business that the conferences may generate.

Wellington has a bit more slack : its occupancy rate average last year was only 74.6 %. In Christchurch, occupancy averages fell to 73% last year as new hotels ( Rydges Latimer Square Hotel, Hotel 115 (formerly Hotel Off the Square) Hotel Montreal and Ramada Suites in Tuam Street) opened for business. In that respect, the optimists would say that the new Christchurch convention centre (now delayed until 2018 ) will generate visitors who will soak up the excess hotel capacity being built in Christchurch, while the pessimists will argue that the new convention centre/hotel complex will be adding to an existing oversupply that’s likely to persist for some time.

The ultimate question is this one. Should ratepayers and taxpayers be being used to underwrite the costs (and to eliminate the risks) of the private sector players in these high stakes gambles ? And are the projections of the ‘wider economic benefits’ to the host communities anything more than exercises in civic pride and rampant self-delusion ?

ENDS