America's Cup Challenge
2007 - Economic Impact
Methodology
2.1 Overview
The methodology is based on understanding of how a Team NZ challenge
would affect the economy, drawn from analysis of the economic impacts of the America’s Cup
in 2000 and 2003, and studies of the marine and tourism sectors.
Key steps have been:
- Assembly of the relevant expenditure and salary information by Team NZ
into an evaluation framework;
- Reconciliation of the total funding structure, to identify Government,
New Zealand sourced and overseas sourced funding;
- Reconciliation of the total expenditure structure, to identify
spending of each type likely to occur within New Zealand, and overseas;
- Assessment of the key sectors into which the New Zealand spending will
be directed;
- Analysis of the direct and total impacts (in terms of value added and
employment), applying relevant economic models;
- Reconciliation of the expenditure and funding flows, to identify the
consequent direct tax flows within the overall structure;
- Analysis of the gross output implications of the Team NZ spending,
also calculated through the economic models, as the basis for assessing the flow on and
total tax implications.
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2.2 Data Sources
Detailed information on planned expenditure was provided by Team New
Zealand, to identify the likely flow of direct expenditure to each sector,
over each year of the campaign.
This covered:
- The total amount of planned funding for Team NZ, including potential
funding by Government, the amount to be funded from other sources in New Zealand (potentially a transfer), and funding from offshore (a potential direct
addition to the NZ economy):
- The total amount of planned expenditure by Team NZ, covering capital
and operating expenditure, the items of spending and the sectors likely to
receive the expenditure, and the shares in each case directed to Auckland, other parts
of New Zealand, and overseas;
- The salary and wages and contractor components of the budget and where
that will be paid (ie which taxation regime).
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2.3 Net Expenditure Analysis
The expenditure information has been cross checked against the Team NZ
budget for the 2003 Defence, and against average expenditure data for
syndicates from the economic impact study of the 2003 event.
The net additional expenditure has been attributed to each sector and
year, as well as by region, according to the scenarios.
An important aspect of potential is the consumption expenditure
sustained by the crew salaries, for crew and families living in New Zealand
rather than being based overseas.
This has been assessed according to MEL models of household expenditure
and consumption, across retail, service, transport and other sectors of the
economy, drawing from the Household Economic Survey (Statistics NZ, 2001).
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2.4 Additional Syndicates
One of the issues raised at the start of the study was that other
America’s Cup syndicates may decide to establish in New Zealand, and train in the Hauraki Gulf
because of the Team NZ presence.
However, consultation with the other syndicate most likely to establish in
New Zealand advised that any decision to locate here was not influenced by
whether or not Team NZ mounted a challenge.
In any case, there were pros and cons - pros in terms of potential for
competition, and maintaining the marine industry critical mass and
expertise, cons in terms of competition for sponsorship funding, crew and
access to marine industry services.
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2.5 Marine Sector Impact
It was also believed that there are potential benefits to the marine
industry of maintaining an
Americas Cup presence.
Although the effects may not be directly
quantifiable in terms of
additional business activity, it is important to understand the potential
flow on effects of this
core of marine service (as distinct from sailing) expertise moving
offshore.
Consultation with the marine industry helped identify the extent to
which the continued presence of an America’s Cup syndicate in New Zealand
is likely to benefit the industry, through:
- The direct business and employment consequences of a challenge based in
New
Zealand vs no challenge (ie from Team NZ presence);
- The indirect business and employment effects, including retention of
an Americas Cup-related core of expertise, and how this may impact on
other parts so the marine sector;
- Prospects for other challenger syndicates establishing in New
Zealand;
- Maintenance/retention of any competitive advantage which New Zealand
has in Cup and other high technology yacht racing.
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2.6 Economic Models
Economic models for New Zealand and Auckland region have been applied to
identify economic impacts, and to estimate consequent benefits.
This generic model capability was developed for the year ending June
2002, and has been updated to prepare estimates of regional and national
economies for the years ending June 2003-7.
These provide the basis for assessing the impacts in each year.
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2.7 Economic Impact Assessment
The expenditure estimates for Team NZ have been applied to the
appropriate regional and national models, for each year, to identify the
direct expenditure effect, estimated gross output, direct value added and
employment.
The total impacts have been identified by applying appropriate
multipliers. This shows the direct, indirect and induced impacts as net
value added ($m) to the New Zealand domestic economy over the next four
years, and the estimated FTE employment sustained.
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2.8 Benefits
The estimates of benefits to both Auckland and New Zealand, and to key
sectors, have been
estimated quantitatively, according to the tax and economic impact results,
as well as
qualitatively, based on marine industry consultation and assessment.
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2.9 Taxation Revenue
The total direct and additional taxation revenue (PAYE, GST, FBT and
company tax)
generated to 2007 has been estimated according to the annual expenditure
flows and their
distribution within syndicate budgets and across sectors.
This provided core information to trace through direct tax implications, as
follows:
i. PAYE has been calculated for Team NZ salaries and contractor payments,
with
regard to the salary structure and based on an average PAYE rate of 27.5%;
ii. GST has been calculated in gross and net terms, to cover the GST
component of
Government funding ($3.75m) and other NZ-sourced funding, less the implied
GST to be paid by Team NZ on goods and services in this country.
iii. GST has also been calculated to cover the GST component of
consumption expenditure by syndicate crew in New Zealand.
iv. FBT amounts have been calculated according to Team NZ records of actual
payments for the 2003 Defence, and applied pro rata to the budgeted
expenditure for the 2007 challenge.
v. Company tax has been estimated according to the gross revenue which
expenditure by Team NZ implies for the businesses from whom they will
purchase goods and services, allowing for relevant operating surplus %
shares
(based on the economic models) and applying company tax rates. This allows
for
a high rate of 33%, a medium rate of 27% and a low rate of 21%, recognising
that
not all the operating surplus for companies is taxed directly (allowing for
extraordinary items, credits and so on).
vi. There are also company tax implications of the flow on effects through
the
economy, where indirect and induced expenditure generates gross revenue to
businesses for which some tax on their operating surplus will be payable.
The
increases in company tax as a result of total increased activity have been
estimated by applying a national average operating surplus ratio to total
estimated gross output then applying the high, medium and low average tax
levels to this amount.
vii. In addition, there are salary and therefore PAYE implications from the
flow effects
on wages and salaries. The total PAYE has been estimated based on total
employment effects. Average salaries by sector have been applied to total
generated FTEs, then taxed at an average rate of 26.4%.
viii. Total GST has also been calculated by applying 12.5% to total value
added as a
result of the Team New Zealand and syndicate crew expenditure. This
excludes
the initial GST effect (the GST on funding, less the GST on goods and
services
directly purchased.
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