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The business case

convention-centre-april-2020

by PCGM
I agree with Guy Marriage. The convention centre has had some bad press recently (not least from me), but many of his points about the need for a mid-sized venue are well made – as is his assertion that it’s the right building in the right place, and will help build a better precinct around Te Papa. Most of the debate, however, is not about the building – it’s about whether it will ever pay its way.

In the language of economists, do the benefits outweigh the costs? Let’s prise open the business case for the convention centre and find out.

And just to correct another misconception: as Mayor Foster has pointed out, the business case for the convention centre has been online for ages – you can find it here (PDF). There’s actually been two of them, one from 2014 and the latest in 2018; the project was included in the Long Term Plan in 2018, and there was consultation and feedback in 2014.

So there’s been a fair bit of chat about the convention centre for a while now.

Let’s see what all those documents amount to.

What’s the big idea

The business case is set out in a pretty similar way in most of these documents, and it’s fairly readable – which is not to say that Stephen King will be feeling threatened as a top-selling author any time soon. It’s a technical document, but it makes some fairly clear points – and so that you don’t have to have the pleasure of reading it, here’s a quick summary.

Wellington currently enjoys about 20% of the national market for conferences, which are those multi-day extravaganzas where a bunch of people get together and tell each other a few things about a few things. Most of the conferences we attract are either from New Zealand or Australia – we’re not exactly a go-to destination for the international conferences where thousands come jetting in to press the flesh. That’s probably because of our lack of directly-connecting international flights, so no matter how flash a convention centre we build, that’s not likely to change.

The challenge for Wellington is that both Auckland and Christchurch are building big new convention centres that could steal about half our conferences. For the hospitality and accommodation sectors, that’s a major problem – it means that thousands of high-value visitors and millions of dollars of spending will vanish over the next few years. The projections in the business case (prepared by BERL) say that our market share will probably drop to about 10% of the market, costing the city about $30 million in visitor spending every year.

The additional factor that both the business case and Guy Marriage point out is that the capital is short of decent-quality midsized venues, both for conferences and other events. We haven’t been spending much on new venues for quite a while, and both the location and configuration of the buildings we do have are not great. The closure of the Amora Hotel for renovations hasn’t helped, nor has the glacial pace of the Town Hall rebuild. While earthquake strengthening is a priority, the effect has been to limit our ability to host the conferences that do bring a lot of high-value visitors.

There are considerable benefits – but only for certain sectors

Each of those high-value conference attendees spends more than $400 every day they’re in Wellington – albeit mostly in hospitality and accommodation. Presumably there are some taxi fares and a bit of retail spending, but mostly people are having coffees and meals and inhabiting hotel rooms. And for the restaurants and the hotels, these are good visitors to have, because a quirk of the convention industry is that most conferences happen over the autumn/winter period, when the events don’t interfere with our desire to take holidays and relax in the sun. From the point of view of the cafes and hotels, that’s excellent – it provides business in the off-season, and makes it possible for a few more businesses to flourish all year round. A more vibrant hospitality and accommodation sector means more jobs and all the economic benefits that come from that.

From the point of view of people not in those industries, the benefits are a bit less tangible. Yes, there will be more choices in cafes and restaurants because they’re not solely dependent on Wellingtonians to pay the bills, and it’s always a good thing to have more jobs in the city. But if you’re a panelbeater in Kilbirnie, the benefits of the convention centre are going to be minor and indirect at best – and there’s still the potential you’ll be paying for it in your rates bill.

So will it pay for itself?

This is a definite no in the business case – and even worse in a post-COVID world. Based on projections over the next 25 years, the convention centre will never cover its costs – it will always require a subsidy from rates. This is fairly typical of most convention centres worldwide, and is pretty much the reason why they are built by the public sector rather than the private sector – if they were profitable, councils wouldn’t need to be involved in the first place.

The business case thinks that the first three years will require about $8 million in rates subsidy, and every year thereafter it will need somewhere between $1.5 million and $3.8 million from the rates. That’s a not-insignificant amount of money – over the 50-year life of the building, the amount ratepayers spend on subsidising it may well be as much as the amount we spend building it. The trouble is, the projections in the business case may well be optimistic in the short term.

The pandemic impact

These projections were done back in 2018, when coronavirus wasn’t even a glimmer in a bat’s eye. Since then, New Zealand’s international tourism market has ceased to exist and we may well be headed for a major international depression. The business case points out however that Wellington’s convention industry isn’t dependent on international conferences, so there may not be the same fallout that Queenstown is experiencing. But it would take a wild-eyed optimist to think that the effects of COVID-19 are going to dissipate in the next 12 months and that the desire for conferences will come roaring back in the next two years, in time for the convention centre to open in 2023.

If the conference market settles at a lower level – say, 25-30% lower, as companies and people discover that in-person meetings aren’t as necessary as they thought – then the ratepayer subsidy to the convention centre will grow accordingly. At those levels, the building may easily require $4 million or $5 million or more per annum from the ratepayer just to keep its doors open, which is a significant burden for the city.

The TLDR version

So should we spend the cash? Clearly, if we were private sector investors the answer would be no – because even in the best-case scenario it will lose money. But that’s not the whole story – as the business case notes, the wider economic impact on the city is significant, with around $90 million in annual expenditure in the city, directly and indirectly supporting 550 jobs. That’s not to be sneezed at.

And to be clear, the council subsidises plenty of stuff where the benefits aren’t financial – sports fields, Zealandia, street festivals, cultural events, community spaces – where the costs are spread across a wide range of people who don’t really participate or benefit. There are plenty of instances where a relatively narrow group is getting a benefit while the rest of us contribute to the costs, and it’s been that way since the dawn of time. So why should the conference industry be any different?

The fundamental problem with the convention centre is that there’s so much uncertainty right now. Clearly, councillors were prepared to (and did) vote for an annual subsidy of $1.5-$3.8 million per annum. If we disagreed with their decision, then it was up to us to vote them out – democracy’s way of punishing bad decisions. But neither they nor us were voting for a subsidy that could exceed $5 million per annum, supporting an industry that may be extensively disrupted and a whole lot smaller in five years time.

As Guy Marriage points out, the building itself is to be fit-for-purpose – with open floors, high stud heights, no windows, flexible spaces – and can’t easily be re-purposed. It’s not a potential library or a good office space, leaving aside its location across from Te Papa. Once we’ve got a convention centre, then we’ve got a convention centre, not some general purpose structure that can be adapted at will. So the question is: why now? At a time of maximum uncertainty in the economy, what would be lost by pausing the project for a year and seeing what we need then?

The business case is clear that ratepayers are going to be on the hook for the convention centre for decades. But it seems prudent that the council shouldn’t dig a deeper financial hole than is necessary. So – like any other organisation that needs to re-assess its priorities in light of the pandemic – a pause for thought could be in order.

17 comments:

  1. Andrew, 27. April 2020, 10:08

    Sports fields, Zealandia, street festivals, cultural events and community spaces as subsidised by the council are all things that Wellingtonians can enjoy (mostly freely). The Convention Centre however is a place where you can go for a convention (woo-hoo) or if you want to go the long way around (as opposed to going straight down Tory or Taranaki Streets), you could use it as a foot route between the non-pedestrian-crossing parts of Wakefield and Cable Streets to end up either at the Te Papa parking lot or the probably-closed-forever and so non-accessible route through the defunct Reading Cinemas building. Sounds like a winner to me.

     
  2. michael, 27. April 2020, 11:18

    The Auckland and Christchurch convention centres are NOT being paid for by the ratepayers.

     
  3. Peter S, 27. April 2020, 11:51

    As has been said before, WCC should mothball the project (can be used as a carpark in the interim), and spend the remaining $120M on something the city actually needs, like the library or water infrastructure.

     
  4. Geoffrey, 27. April 2020, 12:27

    It will sit well alongside TePapa and be an asset for tourism, but a decade too late. Let’s hope future councils will be more fleet footed, and bold. The main attraction may well be the Studio Pacific design.

     
  5. Guy M, 27. April 2020, 12:46

    Thanks PCGM for this post – very helpful to all to understand. The key point I’m taking away from this is that a spend of $1.5-$3.8 million per annum could have indirect spending in Wellington of $60-90 million per year to Wellington businesses. Which I view as a good thing. Yes, we need Council to undertake the basics like sewers and roads, but if we want to continue to thrive, then for some things we need the Council to step up and take the front foot.

    The only case in the world that I know of where the opposite happened is Hobart in Tasmania (our West Island – we really should ask them to secede from Oz and join us in our bubble), where a wealthy private individual (David Walsh) set up his own Museum (MONA) which is spectacular. It has also had a huge effect on the viability of Hobart – and indeed, Tasmania. We don’t have that many multi-millionaires who just want to spend all their money in our city – perhaps the Gov should have winkled Peter Thiel out of a billion or two before they let him hide in his underground bunker.

    Of the examples that Andrew notes, Zealandia is a good one. Set up as a private initiative, it is now funded by the Council, although still heavily reliant on volunteers. You could say that Zealandia lets us walk through a forest to see some birds (“woo-hoo”) or take the long way round and see a “probably-closed-forever” dam which is a failure of Victorian planning. Sound like a winner to you Andrew? Actually, it is phenomenally successful as an attractor to Wellington and is one of the world’s best successes as a mainland island of biodiversity. Indirectly, it has added massively to Wellington’s viability as a city, despite much opposition at the time by many Wellingtonians who regularly derided it as a waste of money. Sometimes, as George Michael said, you’ve just gotta have faith.

     
  6. Benoit Pette, 27. April 2020, 14:32

    It’s interesting how I agree with both Guy and PCGM. On one hand, it is very wise to think of the council as an enabler for the greater group to thrive (that’s Guy). On the other hand, there are plenty of other places, way higher in the priority list, where this money could be spent (that’s PCGM). To me, it’d make way more sense to spend so much money on the basics (water, library, transport, etc), and mitigating/preparing for the next crisis, i.e. climate change. These are domains where local governments are badly needed.

     
  7. judy siers, 27. April 2020, 15:07

    PCGM needs a big acknowledgment for his time and effort put into this discussion. Ah yes, business plans, the problem for me is that so often they fall short and the full purpose fails to be explored. I believe many Wellingtonians have not had the opportunity to grasp an understanding of the multi-use and scope of the new building. What is a convention centre? According to most dictionary definitions it’s a large building designed to hold functions where individuals and groups gather to promote and share common interests. This building will serve our community in that exact way, it won’t sit empty and wait for just conference people to attend. We need a large new venue in the city. Dame Kerry Prendergast mentioned this just last week.

    One example: I recall the recent Readers and Writers events, held over a week during the International Festival. It was compromised, as the area was not ideal. The organisers did their best, hundreds attended, and some sessions sold out in advance. Cramped into a long, deep space on the mezzanine floor in the MFC, it was fine for those in the front but many were seated a huge distance from the speakers. Unity Books were cramped likewise on the ground floor. It worked but could have been much better positioned as it could be in the new building.

     
  8. PCGM, 27. April 2020, 16:43

    Michael – While you’re right about the construction costs, my understanding is that the ratepayers in Auckland and Christchurch are very much on the hook for the operating losses of their convention centres. And given that both are aimed at the international conference market, they’re likely to be even more risky than our effort.

     
  9. PCGM, 27. April 2020, 16:49

    Guy M – The analysis in the business case says we need to fund the convention centre by $3.8m a year in cash terms, or $1.5m a year once all sorts of developers have built new hotels and the like and the commercial rates take has gone up as a result. Frankly, I think this is wildly optimistic.

    For the convention centre to “only” cost ratepayers $3.8 million a year, a number of things have to be true; firstly, that the conference sector will rebound to its full performance by 2023, and secondly, that Wellington’s economy will do the same so that plenty of new development is catalysed in the CBD. But if either of those assumptions is too optimistic, then we will be subsidising the facility to a much greater degree than is currently contemplated.

    Let’s take the more pessimistic view. If conference numbers reduce by 20% on a long-term basis and new rates-generating developments are modest, then the annual subsidy in the first decade could easily rise to anywhere between $6.5 million to $7 million – a very significant difference over what Wellington is expecting.

    The effect of looking to the upside and not to the downside is known as optimism bias, and we’ve been there before – notably with Zealandia, where overly-rosy visitor and revenue projections led to an eventual council bail-out. That’s not to say that Zealandia is a bad facility – it’s not – but it’s safe to say that the original numbers didn’t bear terribly much resemblance to the eventual reality. And are we really sure we want to put on the rose-tinted spectacles again?

    In this environment, it’s hard to see what the compelling reason is for pushing ahead with a convention centre at a time of maximum uncertainty. Sure, it will create some immediate construction jobs – but so will any other construction project, few of which will require anything up to $7 million per annum in ongoing ratepayer subsidy. The prudent approach is to pause now, before all the capital costs are incurred and the operational costs commence, and assess the timing of the project when we know a bit more about what our economy will look like in 2023. The worst case from pausing is that we will open the convention centre a year or two later. The worst case from proceeding and discovering we have been far too optimistic is that we will have built a lovely building that will become a financial drain on us and our children. Prudence says wait.

     
  10. TrevorH, 27. April 2020, 17:21

    @PCGM: “new hotels and the like”? That’s worrying. The all too common response to a failing convention centre is for consultants to diagnose a lack of sufficient high quality hotel accommodation as the reason. So, as Hayden Sanders points out, city governments across the US have then stumped up for new hotels alongside their convention centre. When it is found the additional accommodation fails to attract extra convention business, consultants determine the reason is that the convention centre isn’t big enough and needs to be expanded. And so it continues…

     
  11. Hel, 27. April 2020, 18:12

    PCGM, love Zealandia and you’d be surprised how close it is now doing relative to the original projections. Got off to a shocker due to the crazy idea to charge nearly $30 entry. Once they cleared the old Chardonnay board and sorted out its offering, it has been performing well. My reading of the convention centre business case is different to yours, the $1.5m you refer to has nothing to do with other developments, the way I read it other developments would reduce this number.

     
  12. PCGM, 27. April 2020, 18:45

    TrevorH and Hel – If the existing hotels are full, then it’s reasonable to expect that the private sector will leap in and build more. But remember, one of the primary purposes of the convention centre is to protect our existing market share from the depredations of the new facilities in Auckland and Christchurch. And in the business case it appears that the number of events in Wellington won’t grow massively, albeit there seem to be assumptions that the number of attendees at each event will increase.

    So while there may be some additional demand for additional hotel rooms and restaurant tables, it may well be able to be accommodated within our existing capacity, thus raising profitability for existing operators – and with the tenuous state of the restaurant sector in particular, that may be no bad thing. In the first decade – particularly following the pandemic – empty hotel rooms may be more of a problem than over-booked ones … in which case, very little additional development (and therefore rates increases for the council) will materialise. Which means we’ll be putting our hands in our pockets again.

    The comparison with Zealandia is a good one. Yes, the numbers are starting to fall in line with the original projections … a decade later than was originally forecast. And in the meantime, the ratepayer has been constantly writing cheques. The trouble is, the convention centre might easily chew up $5 million a year for a decade as well, which is an additional $50 million you and I are going to have to find, and which won’t be available to do anything else we might actually want in the meantime.

     
  13. Guy M, 27. April 2020, 21:23

    PCGM – you know more about the numbers than me, so I’ll bow to your superior knowledge on that. But here’s a thing. Years ago I worked on a project in England, in the depths of the recession there, when no one had a job. John Major’s government decided to go ahead with the project, although everyone loudly complained he was mad and that the business case was awful etc, and what a bad move it was. It was budgeted at 1.9 billion pounds, which was an awful lot of money back then and still is, even now.

    But he went ahead with it and it saved Britain. It kicked off a building spree and a business boom that kept Britain going for the next 20 years, until Farrage and Boris screwed it all up. Putting aside the current Brexit debacle, the point is that having confidence in a city and putting money in to make the city grow and flourish, is even more important in a time of crisis and depression. In this case, particularly so, given that the cost of borrowing money is almost sitting at zero – hell, they’re even giving oil away this week along with another $28 per barrel just to take it off their hands!

    The “austerity” measures wielded throughout the European Union over the last decade have been a disaster. Austerity measures like not spending on infrastructure, not spending on hospitals, bridges, roads, people, and jobs. For years it has been “not possible” to spend money for most things – now, suddenly, as you may have noticed, money is being liberally sprayed around so as to not let us slip into the void. I’m no economist, but the old world order has been truly upended and i think if we hide in a box and fear the sky falling on our heads, then that may indeed happen. I think we need to have confidence, and proceed. With caution, yes, but still proceed.

     
  14. Concerned Wellingtonian, 28. April 2020, 7:17

    Councillors who are associated with memories of the last Mayor must ensure that the forecast annual losses are funded by rates from the business sector and not by residents who will get no benefit.

     
  15. PCGM, 28. April 2020, 8:38

    Guy M – I hear you on the desirability and even the necessity to push ahead with projects in times of downturn. But as I’ve said, the disappointing part of the council’s response to COVID is that the convention centre seems to be the only investment of note. Financially and environmentally speaking, the convention centre is a lemon. It will lose money every year and actively make the climate crisis worse – and yet this is the best project the council could put forward to the government? Where’s the innovative urban regeneration? Where’s the investments in light rail and better public transport? Where’s the money to decrease our emissions and make us a carbon-neutral capital? The answer, I suspect, is that all these things have been lost in the endless dither and bickering around the council table for the last decade.

    Do I agree that the convention centre could be a lovely building in the right place? Yes, entirely – you’ve thoroughly convinced me on that point. Do I think it’s a dog from a financial and climate perspective? Absolutely. And do I think it’s going to get built anyway? Yes – because in the immortal words of Margaret Thatcher, “there is no alternative”. And the fact that there’s no alternative should cause the Mayor and the councillors to hang their heads in shame, because the blame lies squarely with them.

     
  16. LanceL, 28. April 2020, 9:40

    I continue to have difficulty with the apparent main argument in favour of the convention centre that we see in the comments and other articles: “that it will bring in business.” If this is the sole criteria for council funding of a commercial venture, then why limit ourselves to something so pedestrian as a convention centre? Why not a council-funded spaceport? Or an amusement park? Interestingly, Porirua mayor Anita Baker just wisely turned down her city stumping up rates dollars for an amusement park.

    City councils have a very specific fiduciary duty to their citizens, with a specific role – they are not a catch-all independent state. A wise city council should be in the business of ensuring that citizens can do business within its city, and that citizens can and want to live in that city. It should not be in the business of making businesses for itself, particularly loss-making ones with nebulous benefits. In short, this isn’t the business that the council should be in, particularly when this same council finds itself contemplating many years of rates raises that are many multiples of inflation during a time when its citizens are seeing their incomes decrease.

    But sadly, PCGM is correct – our council doesn’t appear to have the vision or interest for any sort of alternative, and unfortunately, all of us are going to continue to pay for their shortcomings in the years ahead. Maybe it’s time to move to Porirua.

     
  17. K, 28. April 2020, 11:54

    Excellent discussion and articles from GuyM & PCGM. I think it’s a fair argument to discuss whether an annual subsidy of $1.5-$5 million+ to protect up to $90 million (?) in annual economic activity in Wellington is a wise idea or not. (I think obviously the lower the subsidy, the more sensible the subsidy is if it indeed protects/generates a large amount of economic activity at a good cost to benefit ratio).

    The fact the construction is already underway (you can no longer use the site for car parking as it has been excavated and foundations started) – and the possibility that the government may part fund its construction from the covid19 recovery funds – means the argument to stop the construction is a non-starter I think. Any projections about future viability need to include the non-convention activity that will be taking place in the new building – both from the 1293sqm ground floor exhibition space and from non-convention bookings in the convention centre spaces.

    by the way, I have read numerous times that the 1293sqm ground floor space would be unsuitable for use as a new or temporary city library – why is this? it seems like ample space to house a library so would be interested to hear specifics as to why it wouldn’t work.