Interest is ramping up again in Calgary and Ottawa about new NHL arenas for each city’s downtown, after earlier projects failed to launch. Modern downtown arenas would have obvious attractions for owners and fans in both cities. If the projects proceed, however, it’s a lock that taxpayers will be asked to provide financial support. Should they? And, if they do, on what conditions?
The main purpose of any new building is to help the private owners of the franchise make more money by selling more tickets, luxury boxes, refreshments and advertising, including naming rights. In an ideal world, buildings would be completely privately financed and operate profitably thanks to strong demand, with frequent use for concerts and other events in addition to pro sports. NHL arenas in Montréal, Toronto, and Vancouver were built largely with private financing, which shows that in large markets it can be done. The New York Islanders’ new $1-billion arena is the latest example of private finance using a business model involving up to a hundred concerts and commercial events a year in addition to NHL games.
But in smaller markets, both the number of days the building is likely to generate income and the private sector’s financial capacity and taste for risk are more limited. City and provincial governments will therefore face requests from franchise owners, usually backed by fans, to provide financial support of some kind for new buildings.
New facilities do generally benefit the local economy. The local content of most construction projects is relatively high, often exceeding 80 per cent of the project’s overall cost. Construction can boost local employment, particularly if labour markets are slack — which of course they currently aren’t. On the other hand, any multiplier effect will be limited by “leakage” from imports used in construction and interest costs on borrowed money. And for multiplier purposes any construction will do: there’s nothing special about arenas.
Professional sports facilities also have some of the attributes of “public goods,” in that they benefit society as a whole, not just owners, athletes, and fans. A new arena could raise a community’s profile as a place for private capital to invest. It could also encourage local entrepreneurs to create new ventures or attract additional tourists — people who genuinely wouldn’t visit without the sports franchise being there. (People who take in a game while visiting for other reasons don’t count: if the team didn’t exist, they would likely spend on restaurants or other local attractions.)
Each case has its own characteristics. In Calgary, an arena financing deal between the city and the Flames that fell apart last year now appears to have been resurrected. In Ottawa, the National Capital Commission recently indicated it is again prepared to make land available in LeBreton Flats, where the Canadian War Museum and a few residential towers have already been built and a light rail system and public library are the latest development projects.
If taxpayers do end up supporting new arenas, they should share the benefit and not just the risk — which has been the traditional “socialism-for-capitalists” way of doing these things. Edmonton’s impressive new NHL arena was financed using public-private risk-sharing, drawing on projected revenues from an expanded property tax base, ticket surcharges, leasing fees and other arena-related revenue sources. Public-private collaboration is also being used in Ottawa to renew the city’s football stadium and junior hockey arena, while developing adjacent commercial and residential property. The city borrowed the funds for construction and is being repaid from multiple pre-defined revenue sources, such as ticket charges and an expanded property tax base. The private partner delivers construction and builds equity in the related commercial and residential property.
The Flames and the city of Calgary confirmed in October that negotiations on a new arena are restarting. A risk-sharing financial partnership that minimizes the call on ratepayers would be the best way forward. The current provincial government has shown interest in the project — an election is coming — but it should do what the government of Ed Stelmach did and not provide core financing for an NHL arena in Alberta.
In Ottawa, the Senators are up for sale after the passing of owner Eugene Melnyk so movement on a new arena awaits a new ownership group. The city should make clear that any new arena will be financed largely by the private sector, based on a strong commercial model for the facility and surrounding area.
The bottom line? If public dollars are needed to get either project across the goal line, they should be made available only if both risks and benefits are shared between private and public sectors and the specific sources of revenue that will repay government funds are clearly designated.
Glen Hodgson is a senior fellow at the C.D. Howe Institute and co-author of the 2014 book Power Play: The Business Economics of Pro Sports.
Published in the Financial Post