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America's Cup hosting costs overcooked by €300million

by Richard Gladwell/ 1 Oct 15:43 BST 2 October 2021
Emirates Team NZ - America's Cup - Day 6 - March 16, 2021, Course C © Richard Gladwell / / nz

Significant issues have emerged in the post-event reporting on the 36th America's Cup. They have been highlighted by Irish media reporting a stellar "cost" of staging the next edition of the most prestigious trophy in sailing.

Over the past few weeks, the eye-watering cost of staging the 37th America's Cup has been reported as being between €200 - €600million - a figure which seems grow like Pinocchio's nose.

Mainstream media, both in New Zealand and internationally, have picked up on conclusions from the NZ Govt commissioned report, which states that the 36th America's Cup returned variously only $0.72 or $0.85 for every $1 invested.

A change in the analysis method from previous Cups, including estimated costs for "non-financial items" has cranked the hosting cost by several hundred percent, over standard methods which portray a more reasonable view.

After the Auckland event a cost-benefit analysis was used, which assigned a monetary value to non-financial items, which were then given the same status as cash items in the evaluation process. Previous America's Cups have been reported based on accepted accounting conventions rather than "funny money".

Notes attached to the report commissioned by the Ministry of Business, Innovation and Employment clearly states that a new methodology was used for AC36 "because any type of cost or benefit can be included if it can be given a monetary value. This allowed social, cultural and environmental impacts to be featured alongside the economic impacts."

The report includes non-financial costs running well into seven figures, including "carbon costs" of $1.5million. "Event attendee costs" of $104.7million which included the "Value of time and money devoted to AC36 by attendees". The report explains that away as "Anyone in the following groups who attended AC36 in-person: ACE, ETNZ, COR, Challengers, volunteers, broadcast and media staff, superyacht owners and crew, public attendees." In reality only a few of these people are paid by the Event, but they are all included as a cost of over $100million to the Event.

It is a very esoteric approach - which is fine for the economists, but not much use for potential venues trying to work out in cold, hard currency how much it will cost to host the next America's Cup. On the face of it, using MBIE's mix of theoretical and actual cash costs and benefits, the 36th America's Cup had a deficit of over $156million.

The theoretical valuations of the costs and benefit components make the MBIE report impossible to accurately compare with earlier America's Cup Reports, which are available back to the 2000 America's Cup in Auckland.

€300 million reporting discrepancy

For the simple version of the cost to host the last America's Cup Regatta, turn to the operational report from America's Cup Event Ltd . On page 68, the NZD$45.14million (€27million) actual cost of running the AC36 regattas is detailed. Most of these costs were covered by the NZD$40million Hosting Fee paid by the NZ Government.

Auckland Council says in an operational report that the actual cost of the Infrastructure was NZD$106.3million, which becomes a legacy asset for the ratepayers of Auckland City.

More accurate is the cost included in a separate Auckland Council operational report which states: "In total, the Crown spent approximately NZD$133 million, or €80million, on infrastructure, the Event Investment fee or hosting fee (at $40 million) and other operating expenditure."

In total the cost of the infrastructure construction work, shared between Council and Government, necessary for the America's Cup to take place was NZD$238.4 million or €143million. But remember that is a legacy project cost, and not one off project expenditure for the 36th America's Cup Hosting.

It's also a long way short of the NZD$744.2million claimed America's Cup cost in the NZ Government-commissioned report - in fact, there's over a NZD$500million €300milllion) discrepancy. But then the ACE and WEA reports are compiled based on accounting transactions, while the NZ Government report totals are inflated by "non-financial costs".

Because it is prepared on a different economic premise, the NZ Govt's AC36 report does not co-relate with the post-event report for the 2017 America's Cup in Bermuda, prepared by reputable international consultancy PWC. That report, which was tabled in the Bermudian Parliament, claimed a return of over US$5 for every $1 invested.

The standard accounting treatment with the redevelopment of a piece of infrastructure is to incorporate it in the Council books as an asset, which has a use over several decades, rather than being written off as a one off expense - similar to office stationery for the event.

At the time of its release, the claim that AC36 did not wash its face was to be expected from the NZ Govt report, by an audience punch-drunk after being hit with a never ending COVID-related spend counted in the tens of billions of dollars. That is not to forget two points - first that the people of Auckland made a nice gain thanks to the Crown (NZ Govt) spend/gift of $133million on a Council owned asset; and second that the bulk of the $238.4million total construction cost was spent within the local economy providing a valuable offset to any COVID-19 economic downturn.

COVID impact downplayed

Two COVID-19 lockdowns were called during the regatta. There was a near-complete blocking of entry into New Zealand of fans, media, superyachts, sponsors, VIPs and the usual America's Cup entourage. The report blithely dismisses the point with the lament "the border restrictions caused by COVID-19 prevented most of these people from visiting New Zealand".

"Superyacht arrivals into Auckland were greatly reduced. Restrictions were placed on the number of media able to visit, which also impacted the level of coverage for the event," it continued.

No specific mention is made of the lost revenue or opportunity cost - to the NZ marine industry and the broader economy as a result of the effective lock-out of the superyacht fleet.

Estimates in a pre-regatta economic impact assessment, published in December 2017, based on the 2003 America's Cup in New Zealand assumed three levels of the superyacht numbers from 100 at the low end to 159 at the high end of the scale.

Prior to the portcullis being dropped at Fortress New Zealand in March 2020, a total of 170 superyachts had registered for entry to the event - which was beyond the high-end level of 159, assumed in the 2017 report.

According to the CEO of NZ Marine, Peter Busfield, the Silo Marina had 80-90 berths available, all of which were booked and backed with deposits. The deposits were non-refundable, but in the circumstances, they were refunded when the lockdown was put in place. The berths were offered to local boats at pre-Cup prices.

He says 110 boats were refused entry to New Zealand. Only seven were allowed to enter New Zealand with their owners aboard. Five of those came in under the major sponsor category, 25 entered under the exemption for servicing, and the rest were turned away.

Busfield says that superyachts spend between NZD$1-$6million on a refit/servicing, and they spend an average of NZD$3million per vessel. Given that the major sailmakers and spar manufacturers have a significant presence and superyacht standard facilities in Auckland, the loss of business is substantial. Unlike 2003, Superyachts are now required for insurance purposes to have a full refit every five years - and with the facilities and expertise available, plus the favourable exchange rate, makes Auckland a very attractive destination for superyacht skippers.

On this basis, the revenue loss to the NZ marine industry through the NZ Govt ordered COVID response is estimated to have been over NZD$300million.

TV value also greatly understated

One of the reasons for using the cost-benefit analysis evaluation framework used in the MBIE report is that "any type of cost or benefit can be included in a CBA if it can be given a credible monetary value," it explains. "The main benefit of CBA is that it treats market and non-market costs and benefits equally, which means that non-financial outcomes are given the same status as financial outcomes in the evaluation process."

This being case, it is surprising that the COVID-19 lost-opportunity cost of AC36 was not calculated. That would have covered the cancellation of three regattas that were due to have taken place around the America's Cup. The lost opportunity cost would have given an insight into the cost to the marine and tourist industries of COVID containment measures.

Not mentioned in the Fresh Info report is the cancellation of the J class regatta due to have been held in Auckland coincident with the America's Cup. The Class Association decided to not attend in April 2020 after the extent of the pandemic became known internationally.

NZ Government COVID border restrictions forced the cancellation of the Youth America's Cup, which had attracted 19 entries from 13 countries.

Another casualty was the Sydney Auckland race which had 20 confirmed entries and for which up to a hundred yachts were expected for the 1200nm race.

While the Fresh Info report blamed a lower spend on the reduced number of Challengers, the teams that did compete in Auckland were by previous Cup standards all "Superteams" independently funded with the overseas teams on budgets of over USD$100million. The teams' arrival in Auckland was all impacted by COVID in Europe. The number of international media in Auckland

Both the report produced by America's Cup Event Ltd and Fresh Info cite a dedicated TV audience of 68.2million, calculated by media monitoring agency Neilsen. The report commissioned by MBIE claims that figure was three times the size of the same audience for Bermuda viewing AC35 which appears to be incorrect according to the PWC report, which quotes an audience of 51.3million. The real answer is that AC36 was 1.3 times greater than AC35, probably due to the way the TV rights were marketed.

The rights for the Auckland regatta were offered on a maximum viewership basis. In contrast, TV rights for the Bermuda event were determined mainly by maximising the dollar value of the TV rights. That meant in most instances that the rights were awarded to pay-TV channels and a smaller audience. For the Auckland event, preference was given (outside of the US) to free to air broadcasters to deliver a larger audience.

Fresh Info, a Ponsonby based consultancy, who compiled the report for MBIE, opted to report the viewership using "sales funnel logic" based on "the effect of growing (tourist) visitation to Auckland in future years."

This coverage seen by a Neilsen's assessed audience of 68.2million is valued at a mere NZD$5.3million (USD$3.66m) by Fresh Info. It the low-ball figure an "estimated value of future tourism inflows caused by the exposure."

The value of coverage for the smaller 51.3million audience watching the 2017 Bermuda America's Cup is calculated by PWC at USD$80.9 million, using the more accepted Equivalent Advertising Value method.

Using the derived value used for Bermuda by PWC, the value of the Auckland America's Cup audience is USD$107million (NZD$152million) - a good increase on the previous Cup regatta - and a stellar leap on the MBIE figure for AC36.

PWC predicted the value of the 2017 coverage to Bermuda to last for a further five years at an additional benefit of USD$76.3million. Tourism is the primary component of the Bermudian economy, and overall, PWC estimated the value of the Cup on the Bermudian GDP at $90.8million.

Even more curious is why the focus was put on tourism for the Auckland event, given that the COVID pandemic had been running for 12 months at the time of the America's Cup. Eighteen months later, tourists are still not allowed into New Zealand and are excluded from participating in the NZ Residents only re-entry lottery.

Marine industry ignored

Completely missing is any mention of the value of the 36th America's Cup to the New Zealand Marine industry, which turns over $2.4billion a year. The America's Cup has been a warm economic breeze on the back of numerous NZ marine industries, many of which are now world leaders in their field. The America's Cup Match is a focal point for the international marine industry to travel to the Cup venue. In Auckland's situation, this gives rise to invaluable business networking and export opportunities.

Auckland Council reports that the cost of the infrastructure developed specifically for the America's Cup was NZD$106.3million (USD$73.4m/€63.4m) - well short of the amounts, running into several hundred million dollars, claimed in NZ and international media as being the cost of the 2021 America's Cup.

Despite several weeks of lockdowns, the America's Cup infrastructure was handed over in March 2020, ahead of time and $15.48million under budget - quite an achievement for an America's Cup venue.

The final page of the Fresh Info report notes that it is reasonable to expect the net benefit of hosting a future (2024) America's Cup (in Auckland) to be materially higher. In other words, using the same Cost-Benefit Analysis approach, AC37 should show a positive return on investment.

The Fresh Info report notes that there are two main reasons for the improved viability: "The enabling infrastructure has been built and paid for. A future evaluation is therefore likely to be based on lower levels of government investment than the AC36 evaluation. Higher levels of international visitation are likely as COVID-19 border restrictions ease. The benefits of hosting a future America's Cup are therefore expected to be higher than those observed for AC36."

"The circumstances surrounding AC36 could reasonably be considered a worst-case scenario from an economic perspective, because local and central government had to bear significant one-off infrastructure costs to enable the event to be hosted, and the benefits were much lower than projected, due to the small number of challengers and the impacts of COVID-19."

That statement is about as close as the report gets to admitting the significant effect of the COVID pandemic on AC36 - both internationally and as a result of the domestic strategy adopted by the NZ Government aimed at maintaining a very low death rate from COVID-19.

Regardless of where it is sailed, AC37 should be contested in a much easier commercial environment and with a focus on what the real rather than imagined costs are of the regatta.

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