America's Cup Challenge 2007 - Economic Impact

Introduction

• Background
• Objective
• Key Issues
• Scope
• Assumptions and Scenarios

1.1 Background

Team New Zealand is seeking to mount a challenge for the 2007 America’s Cup, to be held in Europe, and wishes to secure funding for part of the costs of the challenge from central Government.

Conditions set by Government include Team New Zealand securing at least $2 of funding from other sources for every $1 of public funding, a maximum Government contribution of $33.75m, and assessment of the economic impacts and the tax implications.

This study identifies the economic impacts and consequent benefits likely to accrue to New Zealand’s domestic economy from such public investment.

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1.2 Objective

The project aim is to identify the economic impacts and consequent benefits likely to accrue to New Zealand’s domestic economy from public investment of $33.75 million to a Team New Zealand challenge for the America’s Cup.

These impacts would arise from:

1. impacts for the New Zealand economy, and the Auckland regional economy, over the 2004-2007 period, in terms of value added and employment;
    
2. generation of tax revenue.

The project has been undertaken by Market Economics Ltd and Horwath Porter Wigglesworth.

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1.3 Key Issues

The investment of public funds in a Team New Zealand challenge raises a number of issues, especially the scope of the impact assessment, and how potential consequent effects are analysed.

This is because the public funding would not be the only source of funds for Team NZ, but it would be a critical key or trigger to attract other funding for the challenge.

Therefore, the economic and tax effects will arise from the total Team New Zealand expenditure, and be the combined effect of both public and sponsor funding.

It is also important to recognise that expenditure by Team NZ will have two types of effect on the marine industry and the economy. There will be direct and tangible impacts, arising from the expenditure, which would not occur if there was no challenge.

In addition, there may be less tangible but very important benefits for the New Zealand marine industry, especially in terms of sustaining the impetus of America’s Cup activity within the sector, and maintaining critical mass and expertise in New Zealand, rather than having it simply dissipate to offshore syndicates.

Such effects would have benefits for the industry overall (ie outside America’s Cup activity), and may also encourage other challenging syndicates to source goods and services from New Zealand suppliers.

Equally, it is important to identify what is net additional spending in the New Zealand economy, and what is not. There are three main sources of funding:

• the Government input, which is treated as additional;
• funding from overseas sources, which is also treated as additional; and
• funding from within New Zealand, which may be additional (i.e. in a situation where Team NZ is the only body which would attract this funding, and it is not diverted from some other area of sponsorship or expenditure), or may be partly or wholly a transfer effect within the economy.

Therefore, the distinction between net additional and gross expenditure is critical.

The impacts will not just arise from syndicate spending. A large component of a challenge budget is in crew salaries, to retain the key expertise required.

The crew ‘community’ (crew members and dependents) has an impact through their consequent (consumption) spending in the economy.

This means that while salaries account for a significant share of expenditure, they also generate high direct tax recovery through PAYE on earnings in New Zealand, and GST on consumption expenditure.

Further, there is some prospect that other syndicates may base in New Zealand in the early stages at least, to take advantage of relatively low cost of services, the accumulated expertise, and possible benefits from having a ‘critical mass’ of challengers.

If they do locate in New Zealand, then they will also generate considerable economic impact, through similar processes to Team NZ.

More importantly, if the presence of other syndicates in New Zealand were influenced by the presence of Team NZ, then some of their impact may be attributable to the Team NZ presence.

It is also important that the wider and less tangible effects for the economy are recognised, even if they cannot be reliably quantified and lie outside the scope of this study.

There are likely to be trade and tourism benefits arising from the continued involvement of New Zealand in the Cup, as well as potential brand values, especially from the “New Zealand” component of the syndicate name.

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1.4 Scope

There are two distinct but related components of the impact assessment – the implications for the economy, and the tax implications for Government.

They do not measure the same things, and it is critical to understand the difference between the two, and the key
assumptions underlying this study.

The economic impact measures the net additional contribution to New Zealand’s GDP which would arise from the extra expenditure in this country by Team NZ. It is measured in terms of additional expenditure, the value added component of that expenditure and the employment implications.

Because any spending in the economy has some flow on or consequent effects, then the methodology examines both the direct value added and employment effects, and the total effects, allowing for the flow-on effects through the economy.

The taxation impact measures the net additional contribution to New Zealand’s tax revenue from the extra expenditure by Team NZ.  This includes:

• GST on goods and services consumed by Team NZ
• GST on goods and services consumed by the crew community
• PAYE on syndicate wages and salaries
• FBT contribution
• company tax generated from the additional turnover of businesses selling goods and services to Team NZ.

In addition, as the Team NZ expenditure effects flow on through the economy, more tax of each type is generated.

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1.5 Assumptions and Scenarios

There are necessarily a number of core assumptions which underpin the analysis.

i. If there were no Government funding, then it is assumed that the Team NZ challenge would not proceed. Therefore, all net additional impacts which are consequent on the Government funding are attributable to that funding. This recognises the role of Government funding as the trigger or catalyst for the challenge, and its consequent impact on the economy.

ii. The Government funding would not be diverted from an alternative expenditure, but would be net additional funding of activity.

iii. Overseas-sourced funding is allocated first to overseas Team NZ expenditure , and the balance then allocated to expenditure in New Zealand. This means that overseas expenditure is held constant across the scenarios (see below) as is the net balance of overseas funding then attributed to spending in New Zealand.

iv. The Team NZ syndicate crew would not be part of the national economy if the challenge did not eventuate. This is because with the quality and nature of the skill sets offered, they would instead be employed by other America’s Cup syndicates, or be employed in professional yachting activity (including marine support activity) in overseas economies.

v. The fifth key assumption relates to whether the non-Government, New Zealand sourced funding for Team NZ is net additional sponsorship, or a transfer from other sponsorship and promotional activity. This has an effect on both the economic impact and the tax outcomes, as follows:

a) If the funding would have occurred in any case, then the net effect is a transfer within the New Zealand economy. This would occur if the corporate sponsors involved have a sponsorship budget, and would have spent that amount in any case on other sponsorship or mainstream marketing activity if it did not go to Team NZ. If that was the case, then the net additional economic impact of that spending would be small – assuming the same amount of sponsorship went to Team NZ, or some other sponsorship, then the only differences would arise from a different mix of sectors where that money was spent, and the proportion spent overseas.

If the sponsorship expenditure only occurred because of Team NZ, then the alternative for that money would have been corporate profit, or distribution to shareholders, either of which would be taxable. Therefore, around one-third of the amount would have gone as tax, and around two-thirds would have been either kept as retained earnings, or been distributed to shareholders. If shareholders are New Zealand residents, then much of this distribution would have gone to private consumption and savings, also with flow on effects for the economy.

Therefore, the difference in economic impact would arise from the net addition of between two-thirds and all of the sponsorship amount now being spent in the economy, rather than going as a mixture of tax, retained earnings and distribution to resident and overseas shareholders, together with any variations in the mix of spending across sectors.

Since the structure of New Zealand sponsors is not yet known, then it is not possible to state whether that sponsorship money should be counted as a transfer effect, or a net additional effect. Accordingly, both of these alternatives have been examined, as different scenarios.

b) The different outcomes would also impact differently in terms of the tax implications. If the money would not have otherwise gone to sponsorship (ie the sponsorship amount is a net addition), then there is an approximately equivalent amount by which the profit of the corporate sponsors would reduce. This would mean a corresponding reduction in company tax or income tax on dividends of between one fifth and one third of the sponsorship (assuming an average tax rate of between 21% and 33%). This is represented by Option 1.

However, if the sponsorship for the Team NZ challenge was a transfer from alternative sponsorship or marketing, then an equivalent amount of sponsorship would have occurred anyway. Assuming that the sponsorship amount would be tax deductible whether going to Team NZ or some other activity, then the ‘transfer’ means there would be no net additional tax offset. This is represented by Option 2.

Option 3 represents a mid point to demonstrate the rate at which these assumptions impact on the outcomes.

vi. Finally, we have assumed a range of average tax rates for companies operating in New Zealand as alternative scenarios – 21%, 27% and 33%. This allows a more realistic range of outcomes than the maximum taxation rate of 33%. We have also assumed an average PAYE rate of 27.5%. This relatively high average rate is associated with incomes of around $70,000 which is considered reasonable for Team NZ and suppliers overall.

These various assumptions and options have been combined into three scenarios, which reflect the range of outcomes from Team NZ activity in the economy. The scenarios are:

i. Scenario 1 – All non-Government, NZ-sourced funding is additional. All Government funding and overseas funding is net additional. This scenario would arise if a New Zealand sponsor has a choice to make between two alternatives – funding Team New Zealand or funding a totally offshore based marketing campaign to achieve the same levels of brand exposure and marketing effect. This scenario would show a high level of net additional expenditure, and therefore impact.

ii. Scenario 2 – A small amount of the non-Government, NZ-sourced funding is additional. All Government funding and overseas funding is net additional. This scenario would arise where a New Zealand sponsor chooses to fund Team NZ rather than the alternative of a marketing campaign primarily in New Zealand (80%) but with an overseas component (20%). This scenario would show a low level of net additional expenditure.

iii. Scenario 3 – This scenario would reflect the middle ground in terms of net additional expenditure, with approximately half of the non-Government, NZ sourced funding is additional. All Government funding and overseas funding is additional. This scenario demonstrates the approximate mid point between the high and low scenarios. It would arise from a different share of spending going off shore for marketing or where the New Zealand sponsor decides to use the money to pay out a dividend, retain some earnings and pay tax with the remainder, compared with funding Team NZ.

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