Home > Economics - General > The opportunity cost of the Melbourne Grand Prix

The opportunity cost of the Melbourne Grand Prix

September 15th, 2017

Last Sunday, my wife Nancy and I had a great weekend in Mooloolaba, where I took part in the Ironman 70.3 event, along with a thousand or so other competitors from around Australia and the world as well as hundreds of spectators. As Nancy said, even though the Sunshine Coast isn’t far from Brisbane, we’d never get around to going if there weren’t an event like this, but the beautiful setting makes us keen to return.

While I was there, a friend mentioned that the Melbourne Ironman event had been cancelled because the date of the Grand Prix had changed, producing a clash. That got my mind away from transition times and back to economic policy.

The Grand Prix is subsidised to the tune of $60 million a year, a payment justified by the supposed benefits of tourism, estimated at 35 000 interstate and international visitors. Every serious economic analysis I’ve seen suggests that the net benefits are nothing like $60 million. Here’s Rod Campbell.

But, although I’m always banging on about opportunity cost, this particular example hadn’t occurred to me. In addition to the subsidy cost, the Grand Prix costs Melbourne events that would otherwise attract visitors without any subsidy**. The last Melbourne Ironman attracted over 2000 entrants, of whom a large share would have been visitors with accompanying family. It’s probably not the only event lost to Melbourne because of the Grand Prix. Add to that the potential visitors who choose an alternative destination to avoid the noise and congestion of the race, and you’ve cancelled much of the tourism benefit attributed to the Grand Prix.

* There are also nebulous benefits said to be gained from global TV viewers, who are supposed to be attracted to Melbourne by hours spent on the couch watching fast cars doing laps of Albert Park, interspersed with a promo clips/coffee break opportunities. I’m dubious.

** Various tourist bodies are listed as event partners for Ironman, but as far as I can tell, the monetary value of their support is trivial.

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  1. Pete Moran
    September 15th, 2017 at 10:45 | #1

    Our WA Tourism Commission and their funding body Eventscorp have recently given priority to smaller events that don’t ask for an up-front contribution. Also, importantly, don’t pretend to be a product that a state should ‘buy’.

    eg. Supercars funding to be cut is my understanding – always with their hand out.

  2. Smith
    September 15th, 2017 at 11:02 | #2

    It is apparently proven that the regions of France that are showcased during the Tour de France attract tourists. The proof comes because different regions get the Tour every year and the tourism regional pattern follows the Tour regional pattern with a one year lag. But since Australian Grand Prix is always held in Melbourne you can’t test the tourism attraction hypothesis in this way, so who knows?

    On the opportunity cost thing, it’s only weekend per year for the GP. That still leaves 51 for ironmen and other events. There’s plenty of weekends where no major event is on. It’s not like there’s some capacity constraint that says if you have the GP you necessarily must miss out on something else.

  3. Ronald
    September 15th, 2017 at 11:25 | #3

    Why not have a scavenger hunt with $59 million dollars in prizes only overseas tourists are allowed to partake in? It would target exactly the people Melbourne wants, there would be less road congestion, and Melbourne would be one million dollars ahead.

  4. Robert Banks
    September 15th, 2017 at 11:35 | #4

    Presumably the real reason for events like the GP getting massive public funding is that they play the lobbying game much better than nurses, education etc. And because it helps keep “mates” in the lifestyle they aspire to.

    We get a buzz, or at least some of us – liking fast cars, and a general sense of some sort of positivity is generated and accepted by those who don’t think in opportunity cost terms.

  5. Smith
    September 15th, 2017 at 11:39 | #5

    @Robert Banks

    Victoria, not having many natural attractions, has a “major events strategy” to attract visitors. A lot of events, not just sporting, get subsidies.

  6. boconnor
    September 15th, 2017 at 12:58 | #6

    I’m dubious about government giving money to essentially privately owned events. If they are going to do it it should be on the basis of what revenue is flowing back to the government from the expense. I doubt that the increase in say GST revenue would be equal to the subsidy cost.

  7. bjb
    September 15th, 2017 at 13:06 | #7

    Robert Banks :
    And because it helps keep “mates” in the lifestyle they aspire to.

    This. It’s just a way to funnel public money to private interests associated with mates. Just like the $30 mil gifted to Fox, supposedly to support coverage of women’s sport.

  8. John Street
    September 15th, 2017 at 15:11 | #8

    I happen to be a keen cyclo-touriste who finds cycling in France most congenial, in part because the French have a very positive attitude towards cycling. And this positive attitude seems likely to be due in part to the Tour de France. I wonder if I hate visiting Melbourne because the Melburnians have a positive attitude to fast cars and a corresponding negative attitude to bikes. @Smith

  9. Smith
    September 15th, 2017 at 15:31 | #9

    @John Street

    Melbourne, from what I recall, has the most positive attitude to bikes of any Australian city.

    The F1 Grand Prix is returning to France in 2018. Does this mean that the French all of a sudden will have a negative attitude to bikes?

  10. Troy Prideaux
    September 15th, 2017 at 16:26 | #10

    I watch F1 and have done for decades, but I agree it’s a waste of money hosting it. Bernie Ecclestone (the previous commercial rights holder) made no secret that he only cared about 2 things – (1) his self interest and (2) the interests of his shareholders. He publicly admitted to milking all the venues wanting to host the events for all the spondulas he could gouge out of them. If that meant losing both the drivers and fans favourite (European) race tracks, then so be it. It was only after he lost control of the rights that he publicly conceded he overdid it re: overcharging the venues.
    The problem still exists of course, because the new rights holders had to cough up ridiculous $$$ to purchase the rights, so they’re forced to also milk everything to breaking point.

  11. Peter Chapman
    September 15th, 2017 at 17:10 | #11

    One aspect of the TDF passing through different regional areas in France is that local roads along the route get upgraded. So initial ‘subsidies’ also have an identifiable ‘legacy’ impact that all local residents can see and benefit from.

  12. Fran Barlow
    September 15th, 2017 at 17:25 | #12

    Preface: i have long opposed state subsidies to elite sport, and this certainly qualfies as elite. I don’t want to explore my definitions of elite or subsidy in this thread, as it would take us off topic, but if anyone is keen, I will discuss this general view in the sandpit.

    It seems to me though that one ought not to subsidise this event purely on carbon footprint grounds, and I am not merely thinking of the competing vehicles either. If the inbound tourism really did produce enough extra business to warrant the subsidy, it would be very destructive of the environment and prejudice carbon targets quite seriously. And it’s a damned nuisance.

    Sandpit for that too …

    PRQ however is right to ask the OpCost question. Doubtless many would abandon Melbourne if the Grand Prix were in town, and an amateur Ironman Event — with a minimum of subsidy — surely hits more bona fide public goods targets than fast cars.

  13. hc
    September 15th, 2017 at 17:26 | #13

    I had some involvement in one review of the GP. Fixed fees paid to Bernie for doing nothing were never made public but it was known they were huge and it looked a dud deal for plausible guesses. A basic problem was that all spending at the GP was assumed by a prominent group of Melbourne economists to be a benefit attributable to the GP. In fact, much of it displaced spending elsewhere. Only international spending was an exogenous injection and it was small. Some very small gains for Victoria at the expense of other states but no gains for Australia.

  14. jrkrideau
    September 15th, 2017 at 22:13 | #14

    @Smith
    It is apparently proven that the regions of France that are showcased during the Tour de France attract tourists.

    The TdeF covers roughly 3,500 kilometres every year and anyone watching gets to see a lot of France and a few glimpses of other countries.

    How much of Melbourne, let alone Victoria, does one see watching the Grand Prix.

    Perhaps a televised Iron Man would give more of a view of the city?

  15. 2 tanners
    September 15th, 2017 at 22:52 | #15

    There could be data to test the op cost. Don’t forget, F1 was in Adelaide first, until 1995, before Melbourne outbid SA to take it over.

    Race attendance in 1995 was 210,000 (I assume 70,000 over 3 days) which was a world record for F1 and *might* have made economic sense. The move to Melbourne was a bit of a disaster, I understand, but perhaps economists couldn’t be blamed for the initial investment.

    It’s be interesting to compare outcomes many years later. Especially since Adelaide now hosts the V8’s at almost the same time of year as the Melbourne F1 race. This year the turnout was low averaging about 60,000 per day over 4 days. Since the V8s are held in every state and in NZ, you’d have to guess that the vast bulk of visitors are local to SA.

  16. September 15th, 2017 at 23:23 | #16

    @jrkrideau
    Has anybody looked if the TdF had significant lagged tourism benefits before the TV coverage included lengthy shots from helicopters? That’s what showcases the French countryside and architectural heritage.

  17. Ikonoclast
    September 16th, 2017 at 08:45 | #17

    The state government can find $60 million for a loud, polluting car race involving a dying technology (internal combustion engines) but can’t find that same $60 million for public housing or homeless shelters. That’s the opportunity cost that annoys me.

    Using that money for health promoting exercise would be good too, or for bike-ways or green energy projects or (less desirable but better than an ICE race) use some of it to promote Formula E (electric car racing). Useful advances could possibly come out of an open, no-rules, Formula E. I did say “possibly”. 🙂

  18. sunshine
    September 16th, 2017 at 09:07 | #18

    I cycle in Melbourne almost every day and am aware that it is said Melbourne is the best Australian city for it. The others must be bad indeed ,Melbourne is relatively flat and there are some bike lanes etc but the attitude of drivers here leaves a lot to to desired. Cyclists are vilified by the Murdoch press as if its a clear sign of something backward and Red.

    It is notable that when the GP is in town trucks with big billboards featuring strip clubs circle outside the Albert Park GP track all day .Also ,like motorcycle gang parties , motorsports pay young scantily clad women to hang around their events . Sordid and blokey. I could hear the cars from Northcote when I lived there -more than 10 km away.

  19. John Quiggin
    September 16th, 2017 at 12:17 | #19

    @sunshine

    Surprisingly, Brisbane is better than Melbourne, despite lacking the natural advantages. Just compare the separated cycle and walking lanes along the Brisbane river, much of which had to be built out over the river because the banks were private property or used for roads, with the narrow shared path along the Yarra. Oddly enough, the LNP here is full of keen cyclists and public debate reflects that.

  20. Smith
    September 16th, 2017 at 15:13 | #20

    @Ikonoclast

    Quite right. The Victorian government can’t find $60 million for housing assistance.

    But it can find $460 million each year for housing assistance.

    It’s amazing what you can learn by looking up facts.

  21. david
    September 16th, 2017 at 17:42 | #21

    John I moved to Buderim in 1991 to work and surf and have since seen the despoiling of the environment with a council now full-on development with closet Liberal developer-minded councillors. Do not think the Gold Coast CORRUPTION to be confirmed on 4 Corners on Monday to be quarantined at the Logan River.
    Love to see you in the surf John as that is one of my talents.

  22. September 16th, 2017 at 20:00 | #22

    Let’s quantify this. The Quiggin Multiplier is the ratio of municipal financial support to net additional spending in the city by participants and tourists.
    Positive multipliers result from cheap facilities, low disruption, and well-heeled or numerous spectators. Examples: chess, marathon, triathlon, archery, table tennis. If you already have the venue, tennis, badminton, weightlifting, swimming, cycling stage races, track and field athletics, soccer, rugby.
    Negative multipliers result from expensive facilities and/or rent-seeking by the event organisers. Examples: Olympics, track cycling, canoeing, equestrian competitions, Formula One car racing.

  23. Clive Newton
    September 17th, 2017 at 04:17 | #23

    A scandalous aspect of the F1 game was the way one man, Bernie Ecclestone essentially controlled the granting of an F1 race. He signed contracts with odd places (favoured rich dictatorships often) and sold rights to highest bidders. Adelaide ran a great F1 race for years on a good circuit (Melbourne is one of the dullest tracks in use!) but was outbid by Melbourne (remember the spiv Ron Walker who did the deal?)with, naturally, commercial confidence clauses keeping the $$$$$ secret. Bernie ended up a very rich man from very dodgy (think Great Train Robbery rumours) early days as a car salesman. Ran the former Brabham team and notoriously cheated, but then most of F1 was at the time. Not the best example of private enterprise. Or maybe it is.

  24. Greg McKenzie
    September 17th, 2017 at 08:27 | #24

    I was visiting Dublin in May of 2012 when they staged a road gala day. Its main attraction was the F1 car drive by Britain’s best F1 driver. There were also high performance road cars and Supercars involved in a sort of motor/petrol head “ballet”. It was put on by the Dublin City Tourist Bureau. The whole of downtown Dublin, admittedly that is no big area, was fenced off for one day. Being Irish the locals still went ahead with their “Pink shirt marathon” the day before the car extravaganza. No hassles, no problems and no thoughts of cancelling a marathon for are a car road farce.
    All this begs the question, if little Dublin can do it – you can walk around all of that city in one easy ramble – then why can’t Melbourne do the same? I am a sceptic and see conspiracy to make rich people rich in all government decisions. One great American robber baron once said publically that : ” The business of government is BUSINESS!”.

  25. Greg McKenzie
    September 17th, 2017 at 08:29 | #25

    I was visiting Dublin in May of 2012 when they staged a road gala day. Its main attraction was the F1 car drive by Britain’s best F1 driver. There were also high performance road cars and Supercars involved in a sort of motor/petrol head “ballet”. It was put on by the Dublin City Tourist Bureau. The whole of downtown Dublin, admittedly that is no big area, was fenced off for one day. Being Irish the locals still went ahead with their “Pink shirt marathon” the day before the car extravaganza. No hassles, no problems and no thoughts of cancelling a marathon for are a car road farce.
    All this begs the question, if little Dublin can do it – you can walk around all of that city in one easy ramble – then why can’t Melbourne do the same? I am a sceptic and see conspiracy to make rich people rich in all government decisions. One great American robber baron once said publically that : ” The business of government is BUSINESS!”. But maybe it’s just because we aAustralians always pander to foreign interests over national interests.

  26. Stockingrate
    September 17th, 2017 at 12:11 | #26

    At least the $60m subsidy is public- I haven’t seen a figure for the ALP (state) and LNP (Council) spending our money for us on the recent spectacle of 2 people punching each other.

    I think the deadweight-loss of taxation would be a part of the opportunity cost if the alternative had been lower taxes.

  27. Ikonoclast
    September 17th, 2017 at 13:54 | #27

    @Smith

    Indeed, and if they didn’t waste $60 million on motor races they could find $520 million. This n would be a 13% increase: quite a significant boost to public housing.

  28. Smith
    September 18th, 2017 at 09:50 | #28

    @Ikonoclast

    It’s also true that if they spent less on schools they could spend more on public housing. Any money spent on anything could be spent on something else. If it was up to me I wouldn’t spend $60 million on a motor race, but a lot of people like motor racing.

  29. Troy Prideaux
    September 18th, 2017 at 11:00 | #29

    @Smith
    Like I said, I’m a passionate F1 fan for decades and I live in Melbourne, but I think hosting the race is like throwing good public money into the wind. If you added up all the $$$ pumped into the event since its been in Melbourne, you could probably build a pretty impressive tourist attraction to serve a similar purpose re: the economic justification.

  30. Mpower
    September 18th, 2017 at 11:35 | #30

    @Troy Prideaux
    If I was in power, my first act would be to ban all car racing. It must encourage a culture of speeding as fun, and prangs more so. ( and to be clear, I don’t actually like banning anything much!) I would also deregister firms who show it justified using dodgy estimates, probably the same cowboys who do the tunnel benefit/cost stuff. As for stadiums, the cost per seat shows how outlandish the assumptions are. Even worse, the Qld Governrment subsidized a Townsville stadium which include benefits from people in the region spending in Townsville rather than back home.

  31. Alistair Watson
    September 18th, 2017 at 13:11 | #31

    I live close to the Albert Park GP track. Other recreational uses of the park are restricted for several weeks either side of the event. One of the more amusing aspects of the dodgy multiplier analysis that is supposed to justify public expenditure on the GP is that a lot of locals leave town. The so-called ‘benefits’ appear elsewhere. Two of my neighbours unexpectedly met one year at MONA, which has had such beneficial effects on Hobart that air travel to Tasmania is now slightly more expensive. The Victorian Government has long been besotted by events, including all codes of football, which are more than capable of standing on their own feet. While the aforementioned dodgy multiplier analysis is usually trotted out to justify the expenditure, I suspect politicians and the hordes of now under-employed journalists working in PR are also seeking additional colour and movement is their often limited lives.

  32. Darragh
    September 18th, 2017 at 17:00 | #32

    I can’t comment on the OC of the grand prix, but well done on the 70.3. I was competing too and it was excellent conditions for triathlon!

  33. Kevin Johnson
    September 18th, 2017 at 22:09 | #33

    I’ve mentioned this before on this blog, but two things are true of the GP as I understand it. Firstly it’s one of the few major Victorian evwnts that is exempt from standard open BCA scrutiny by the State Governent (it gets a free pass of this, of sorts). Secondly it doesn’t stack up anyway. I think there is something in Hansard about it. Its known to be a net loss to the State. Still, someone/s is doing well out of it.

  34. John Quiggin
    September 19th, 2017 at 17:26 | #35

    Thanks for this Rod, I was a bit lazy about links, but I’ve now added yours to the post.

  35. Jim Rose
    September 27th, 2017 at 10:38 | #36

    The global subsidy market just like films. I am told that the computer game industry is bigger than the film industry but received few subsidies because the lack of political photo opportunities

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