SkyCity revisited

By Eric Crampton 15/05/2013 4

Auckland is to get a large new convention centre, to be built and run by Sky City, Auckland’s casino.

I chatted with Radio New Zealand’s panel about the plan Monday afternoon and Newstalk (Christchurch) on Tuesday morning.

Really, not a lot has changed from when this was first proposed a while back.

We should think of this as two separate deals.

First, the government is auctioning off some gambling concessions. SkyCity has bought the right to have an additional 230 pokie machines, 40 gaming tables, assorted other gambling concessions, and, possibly most importantly, a guarantee that if some future government reneges on the deal by banning gambling or otherwise eroding the benefits provided to SkyCity under the deal, they’ll be compensated. Now suppose that we opened that whole thing up to a general auction. People would then bid for those rights; the highest bid would approximate the expected flow of profits from having the concession.

Second, the government took bids for the right to build and operate a big convention centre. The high bidder, or rather the company willing to do it at the lowest subsidy, gets to build and run the convention centre.

In this case, SkyCity has to reckon that losses (if any) from building and running a convention centre are less than the gains from the gambling concession [NBR subscription, sorry]. And it isn’t crazy to think that the bundle provides added value: convention centres near casinos tend to lose less money than those not so-situated; there are reasonable complementarities between the kind of facilities attractive to conventioneers and those that are in place in casinos.

Conditional on the government wishing that there be a big fancy convention centre in Auckland, this is likely the least bad way of doing it. I haven’t gone through the accounting on it in any depth, but the bottom line has to be that SkyCity reckons it can make a go of it, since they’re bearing the risk if they can’t operate it profitably. And it isn’t crazy to think that there could be some economic benefits from increased tourist traffic if we host more conventions. But whether those benefits are larger than the amount SkyCity might otherwise have bid in an open auction for the gambling concessions, where the revenues went into the general fund rather than into a big convention centre, that’s rather less clear. It’s possible, but it’s far from certain.

Commenters at The Panel worried about social costs of gambling associated with the expansion. A lot there depends on how Auckland proceeds with gambling regulation. The cities that existed prior to amalgamation had a mix of gambling policies, with some imposing a “sinking lid” on the total number of pokie machines allowed. If Auckland as a whole continues with that policy, then much of the concession offered to SkyCity comes at the expense of the corner pubs who will see their licences killed more quickly than they otherwise would. That’s really rather bad for those pubs. Whether that increases or decreases social costs depends on your view about which is better positioned to identify and exclude problem gamblers; I’m agnostic. But I’m not agnostic about that most of the measures of gambling social cost assume away the enjoyment that gamblers get from gambling. If we’re happy to assume that every dollar spent on gambling by heavy gamblers is a total loss except where it results in a win, it’s pretty easy to generate large estimates of gambling’s social costs.

You could even make the case that the whole deal could, on the whole, be strongly anti-gambling. Here’s the case. Given the SkyCity concession AND that SkyCity has bought itself immunity from other gambling regulations, what happens to political pressure against anti-gambling regs? The immunity clause means that it’s in SkyCity’s interest that we have much tighter regulations against gambling in other parts of Auckland; it strengthens their position. If you think that gambling is a bad, which I don’t, then this deal makes SkyCity closer to a monopoly than it was previously, and makes every future regulation on gambling a pro-SkyCity regulation. If you hate gambling, you want it provided by a monopolist so that there’s less of it.

The anti-gambling folks should give their heads a shake and think about the opportunities now available to them if SkyCity can be exempted from their wildest anti-gambling fantasies. I’m glad they haven’t, as I don’t like monopolies and I think it’s ok for people to go and enjoy a flutter at the machines or at the tables. They should consider pushing hard on sinking lids such that SkyCity winds up being the only place left with them. SkyCity will be on their side in that fight. I don’t like that outcome, but that’s just me.

4 Responses to “SkyCity revisited”

  • “But I’m not agnostic about that most of the measures of gambling social cost assume away the enjoyment that gamblers get from gambling.”

    Do the measures also assume away the “lack of enjoyment” that those around the gambler – immediate family in particular – might experience?

  • They’ll typically say that the spending on gambling is a cost without benefit – a reduction in family resources without any kind of offsetting benefit.

    I could similarly produce measures of the social cost of male mid-life crises by assuming that no guy gets any kind of benefit from buying a sports car when he’s in his 40s. Then count all the expenditures and petrol as a cost to the family.

  • nice dodge, but not an answer.

    If the enjoyment of the person gambling should be considered in the economic analysis (implied in your statement), surely the dis-enjoyment of other affected parties can and should be measured and considered?

    I happen to think you are right – if the purpose of the gambling transaction is “enjoyment” (in its most stretched and widest possible context from my viewing of gamblers in the wild, but that’s merely an opinion), then that enjoyment must have a value. But similarly, the other emotions that certainly arise from problem gambling also have a value, and you would have to assume the value is negative.

    On your other point, let me attest that the cost of a sports car is waaaay lower than the cost of a trophy blonde once all associated expenditures are accounted for….