Estimated costs and benefits of staging the Australian Grand Prix. Compares the analysis of the 2005 GP done by the Victorian Auditor General with estimates for 2011 and 2012 GPs prepared for Friends of Albert Park by consulting firm, Economists at Large (Source: Blowout! A cost benefit analysis of the AGP)

I’m suspicious of the bona fides of advocacy groups because they’re inherently political organisations. They usually behave, not surprisingly, very much like politicians.

So I approached the benefit-cost analysis released this week by the Friends of Albert Park in time for this weekend’s race with low expectations.

The organisation commissioned the interestingly named consulting firm, Economists at Large (EAL), to assess the event. EAL’s report, cleverly titled Blowout!, makes very interesting reading (you can get the full report here).

We’ve long-known the race held annually in Albert Park, Melbourne, demands a huge subsidy – $26.6 million in 2005, rising to $52.1 million in 2011 and $61.1 million in 2012. That’s real money from the State budget that’s no longer available for other purposes like funding schools.

Successive State governments claim the subsidy is worth it because it provides wider economic benefits, principally from expenditure by out-of-State visitors attending the race and downstream tourism attracted by the international exposure.

We’ve long known that claim is doubtful, too. A study undertaken by no less an authority than the Victorian Auditor General’s Office (VAGO) estimated the 2005 event lost $6.7 million even after accounting for wider economic benefits.

The claim made by EAL, however, is staggering. The firm says the real cost to the State of the event in 2012 – again after taking account of all financial and economic costs/benefits – was a massive $60.1 million.

That’s virtually the same as the cash loss ($61.1 million), indicating the wider economic benefits are all but cancelled out by the wider economic costs.

The figures EAL relies on to estimate the financial cost and revenue figures are straightforward because they’re taken from the Grand Prix Corporation’s annual reports.

However the way externalities are estimated is less straightforward. There’s considerable room for disagreement and reasonable assumptions have to be made.

This is where EAL have produced an impressive piece of work. The report has some sensible things to say, with implications for how we analyse the real costs of all events.

Confusing claims are often made about the economic effects of the grand prix using methods other than cost benefit analysis.  In particular, these claims relate to gross state product, visitor spending and media exposure.

Gross State Product (GSP)

GSP is a measure of economic activity rather than welfare.  It measures how much activity we undertake, rather than how much better off that activity makes us.  The grand prix may increase the overall amount of activity in Victoria, but its large costs mean it makes us worse off.

Visitor spending

The grand prix attracts visitors to Melbourne who spend money here in local businesses.  When visitors spend money however, they expect goods and services in return.  These goods and services use our resources and cost money to provide.  The benefit to Victoria is not the amount visitors spend, but the difference between what visitors pay and what it costs to provide those goods and services.  This benefit is included in our analysis as “Net benefits of increased visitation”.

Media exposure

Grand prix supporters often claim the main benefit of the race is the exposure the event brings to Victoria.  While measures of the degree of exposure through the media exist, this exposure only brings economic benefit if it attracts tourism and investment that would not otherwise occur.  There is little evidence to suggest a material increase in tourism or investment actually occurs.

The authors note the Auditor General was also sceptical about the value of media exposure. They also quote from a 2007 study by Giesecke and Madden on the Sydney Olympic Games:

For the three years immediately after the games, foreign willingness to pay for NSW tourism grew by an average 2.2 percentage points less than for Australia as a whole. Only by 2005/06 did the rate of growth in demand for NSW tourism match the Australian average. These results lend no support to the existence of an induced tourism effect.

EAL’s estimate of the net benefit from international and interstate visitors attending the 2012 event is $2.9 million and the value of media exposure is $0.26 million. Combined with $1.9 million for consumer surplus, the total of wider economic benefits to Victorians was only $5 million.

On the other hand, they value the loss of access to Albert Park for the eight week period during set-up and take-down at $2.7 million (using the same method as the Auditor General). Taken together with other negative externalities like noise and traffic congestion, they estimate the total economic cost of the 2012 race was $4.0 million.

Thus they conclude the $61.1 million cost to the State budget in 2012 was offset by net wider economic benefits of just $1.0 million.

Some Victorians doubtless get psychic value from their capital city being part of the international Grand Prix calendar (it’s one of 19 cities), but it comes at an extraordinary cost.

If EAL have done their sums right, there appears to be no rational case for funding the Grand Prix beyond the end of the current contract (which expires in 2015). To do so would be plain stupid.