By Rod Campbell, cross-posted with author permission from The Drum
It’s that time of the year again, when the high-pitched whining of Formula One cars can be heard across Melbourne.
It gets so loud sometimes that it almost overpowers the lower-pitched droning of all the economists who think it’s a bad idea.
Why can’t us economists just let Victorians enjoy the race in, er, peace?
We would if the Victorian Government would come up with a different reason for keeping it, such as a gift to lovers of motor sport. Or because they want to help out Bernie Ecclestone, who is in a bit of a tight spot at the moment. Or even just because they like it.
All of these reasons would be fine with economists, just don’t try to tell us that it is good for the Victorian economy.
The grand prix loses money. Lots of it. This isn’t new, it’s been happening since the beginning.
Taxpayers spent $58 million dollars on the race last year and $54 million the year before. No one suggests that future events would cost taxpayers any less.
So what do we get in return? According to Tourism Victoria, we get “media or advertising-equivalent value of $35.6 million,” which sounds pretty good as long as you don’t look too hard at how they got that figure.
Tourism Victoria’s figure is from a 2009 report that they commissioned, by UK media firm Comperio Research.
Comperio’s analysts endured watching 43 hours of grand prix coverage and timed how long each sponsor’s logo was on the screen for, including Melbourne and Victoria logos.
Then Comperio found out how long the race played for in all countries and guessed how much similar amounts of commercial advertising might cost.
“All countries” might be an exaggeration – North Korea doesn’t seem to be in there, but the petrol heads of Angola, Benin and Rwanda will be pleased to know that they were counted.
It is debatable how much it is worth to have our logos on the TV in Guinea-Bissau. What isn’t debatable is that Tourism Victoria misrepresented this report. Comperio make it clear its $35.6 million figure relates to the media value for all sponsors, while the value for Victoria and Melbourne is only $6 million.
OK, so they might have overstated how many Romanian and Nigerian tourists might come, but surely lots of other people come, right?
Sure. A 2011 Ernst and Young report commissioned by the Grand Prix Corporation estimated that 9,000 tourists came from overseas and 25,000 thousand from interstate.
For the money we lost on the grand prix – only $52 million that year – we could have given away airfares to more people and it would have cost half as much. If we assume a return airfare to Asia is $1500 and a domestic fare is $500, it would have cost only $26 million to fly all those people here. Besides, Qantas could use the money!
Even so, all those tourists do spend money, by Ernst and Young’s estimates about $34 million. But tourism expenditure isn’t free money – sorry to play the dismal scientist here.
Providing the goods and services these tourists demand also costs us money. Only the difference between what tourists pay for goods and services and how much it costs us to provide them is true economic benefit. Based on tourism industry margins, this benefit would be about $6 million.
So for our $50+ million dollar outlay we’re getting back tourism benefits of $6 million and “media values” of $6 million. (Tip to economics students – don’t include “media values” in your reports until after you’ve graduated.)
Then there’s other costs.
The race causes congestion and disruption around the circuit. It makes a lot of noise. Albert Park normally receives about 33,000 visits per week, which can’t happen at all during the week of the race and are affected for months either side.
All of these impacts are costs to Victorians.
So if you’re a petrol head and you love the grand prix, that’s fine. In fact we want you to like it, as it is our gift to you.
If you’re a Victorian politician (both flavours) and you want to keep the race because the lobbyists like using the corporate boxes, that’s OK too.
Just please stop telling us the grand prix is good for the economy. Then we could stop droning about economics and get on with whining about the noise.
Rod Campbell is a director of public interest economics group, Economists at Large.