Centre for Regulation and Market Analysis

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1 Centre for Regulation and Market Analysis Working Paper GOVERNMENT SUBSIDIES FOR PROFESSIONAL TEAM SPORTS IN AUSTRALIA John K Wilson and Richard Pomfret Respectively Centre for Regulation and Market Analysis, School of Commerce, University of South Australia and, School of Economics, University of Adelaide 1

2 The Centre for Regulation and Market Analysis (CRMA), recognised throughout Australia and beyond as a leading research centre in several areas of regulation, undertakes research in the broad fields of government regulation of markets, in particular in the fields of competition, rate of return regulation, water markets, business history, consumer protection, economics of crime, criminology, housing and property markets. The main focus is on markets in Australia, New Zealand, South-East and East Asia, and Europe. It supervises an increasing number of PhD and honours students working on a variety of topics in regulation and applied microeconomics topics, including market power in Indonesia, the demand for air travel between Taiwan and China, corporate governance of Chinese listed companies, regulation of mergers in India, regulation of medical devices in Europe, and a variety of topics relating to water markets in Australia and overseas, and finance markets in China. For further information regarding the Centre, please contact crma@unisa.edu.au or the Director, Professor David K Round, at david.round@unisa.edu.au John K Wilson and Richard Pomfret Not for distribution without permission of author(s) 2

3 10 July 2008 GOVERNMENT SUBSIDIES FOR PROFESSIONAL TEAM SPORTS IN AUSTRALIA John K Wilson* and Richard Pomfret** ABSTRACT: Professional team sports represent an important aspect of Australian life. Interest is great, and a significant portion of household expenditure is directed toward sportsrelated goods and services. Based on international comparisons and on the size of attendance and TV revenues, the sector should be highly profitable. Yet significant amounts of public funding and regulatory exemptions are afforded to team sports in Australia. This paper analyses the magnitude and reasons for government spending which subsidises professional team sports. ** School of Economics, University of Adelaide, North Terrace, Adelaide SA 5005 * Centre for Regulation and Market Analysis, School of Commerce, University of South Australia, North Terrace, Adelaide, 5000 We are grateful to Bernhard Lobmayr and Tara Mookherjee for their research assistance for this paper. 3

4 1. Introduction Sport occupies a significant part in the lives of many Australians. There is a high level of participation and expenditure in the sports industry. For example, over a 12 month period in 2001/02, 62.4% of Australians participated in some form of sport and 48.2% of the adult population attended at least one sporting event. In 1998/99, Australian households spent $4.1 billion (1.6% of total spending) on sports-related goods and services (ABS, 2006). Globally, the demand for sporting goods and value of TV rights is at least 218 billion per annum. 1 Although spending on participatory and spectator sports are often combined, the two have distinct economic characteristics and different public policy arguments are relevant. This paper focuses on professional team sports. Team sports represent a multi-million dollar industry and potential profits in this sector are substantial and often realised. Despite this profitability, government involvement is common. Public policy involves not only exemptions from consumer and trade practices laws, but also substantial levels of public funding. Somewhat surprisingly, given the social and economic importance of the industry, economists have paid little attention to either the structure of team sports in Australia or the justification and efficacy of various forms of public policy. This is at least partially due to the non-transparency of both public policy and the behaviour of owners and league commissions. Subsidies to team sports have become a pervasive and accepted component in the Australian public policy landscape, with far less public scrutiny of policies than would occur in other sectors. 1 This figure (from Andreff and Szymanski, 2006, page 5) includes 150 billion spent on sporting goods, 18 billion for sport sponsorship, and 50 billion for TV rights. The figure does not include gate receipts and the authors note that the value of TV rights increased by 993% between 1991 and Hence, this figure is likely to understate current expenditure. It also does not include gambling, which is an important source of finance for horseracing and some other sports. 4

5 As an indication of the scale of public spending in Australia, $2.1 billion was provided to sports by all levels of government during 2000/01. 2 A substantial proportion of public funding is directed towards organised team sports, in particular the construction and upgrading of stadia. A recent example is the Western Australian government s plan to build a new 60,000 seat stadium at a tax-payer funded cost of $1.1 billion dollars, which amounts to around $516 per resident in the state. In South Australia the government s allocation of $100 million in the 2008 budget to upgrade AAMI stadium has been criticized as potentially too little by the opposition, and is canvassing the idea of a billion dollar new stadium. Both of these projects, as with other recent stadium spending, will primarily be used by the cities professional sports teams, in Perth and Adelaide the two AFL teams. What are the grounds for public subsidies and regulatory legislative exemptions for team sports? Analysis of whether or not public funding is likely to be welfare enhancing requires identification of the public benefits (externalities), whether there would be a genuine under-provision in an unimpeded market, and evaluation of the costs associated with various forms of government support. We begin by examining the economics of the provision of team sports and the likely profitability of the sector. The Australian public policy debate tends to emphasise positive externalities without entertaining the possibility of negative external effects and completely ignoring discussion of whether public support is needed to ensure optimum supply. 3 The remainder of the paper is structured as follows. In section 2, we review the literature regarding the economics of team sports and efficacy of public policy. In section 3, 2 Details of this funding are available in ABS (2006). Over three-fifths of these funds were provided for the construction of upgrade of stadia. Approximately $450 million dollars of the total expenditure figure was associated with the Sydney Olympics. 3 Some analyses of major sporting events have included negative externalities, for example, Burns, Hatch and Mules (1986) consider injuries associated with increased traffic accidents resulting from the Australian Grand Prix. More generally, Siegfried and Zimbalist (2006) consider outward bound tourism and other negative aspects associated with major sporting events. Note also that the cost of providing public subsidies for private goods may exceed the dollar size of the subsidy if there is a public finance constraint and valuable public goods are foregone (López and Galinato, 2007). 5

6 we consider evidence on the profitability of professional team sports in Australia with particular focus on the Australian Football League (AFL), which is the most watched of the football codes in Australia. We assess the extent of and justification for government involvement in section 4, followed by some concluding remarks. 2. Related Literature The economics of professional team sports has some peculiarities. There is typically a single league structure which produces an undisputed champion, so there is inevitably nonapplication of normal anti-monopoly rules. At the same time there is a need for agreement among teams about the league rules, penalties for non-compliance, and so forth, which gives the industry cartel-like characteristics even when on-field competition is fierce. Further collusion may result from a desire for competitive balance, for example, sharing TV revenues or limiting players salaries in order to avoid dominance by the richest club. The extensive global sports economics literature is surveyed in Andreff and Szymanski (2006). The sub-discipline s origins in analysing the peculiar labour market for team players (and the phenomenon of superstars) and the exemption from antitrust policy located it firmly in the US institutional setting. In recent decades, the European literature has flourished, but with a concentration on association football with its idiosyncratic system of promotion and relegation and institutional changes such as the Bosman ruling on player contracts. The notable contributions to sports economics by Australian authors have focussed on issues relating to responses to market incentives (such as the player draft), competitive balance and the associated effects on the viability of leagues, and crowd attendance. 4 Another branch of the Australian literature is the evaluation of economic benefits from major 4 See Lenten (2006), Booth (2006), Borland and Lye (1992), Fuller and Stewart (1996) on competitive balance and crowds in AFL; Borland, (2006), Booth (1997) on labour markets; Booth (2006) on the development of the Australian Football League. Borland and McDonald (2004), Westerbeek et al. (1995) provide overviews of sporting history in Australia. 6

7 sporting events, such as Burns, Hatch and Mules (1986), examining the Adelaide Formula One Grand Prix. More recent contributions have focussed on the methodology of assessing the benefits derived from sporting activities (Hone and Silvers, 2006), evaluation of particular labour regulations (Borland, 2006) and ex post examination of the Sydney 2000 Olympics (Giesecke and Madden, 2007). A common theme which emerges from the event studies is the disparity between ex ante estimates of the benefits associated with major sporting events, and those which are measured ex post. Humphreys (2006, 215) makes the general observation that prospective economic impact studies are almost universally positive about the economic effects of proposed sporting facilities, while retrospective academic studies almost universally argue that the economic impact is negligible and the purported positive effects of sporting events or sporting capital are over-stated. Siegfried and Zimbalist (2000) identify a host of considerations which are not normally taken into account by impact studies of sporting events, such as intra-city spending shifts (leakages), associated exaggerations of multiplier effects, costs such as providing adequate police for crowd control, the effects of hooliganism, required increases in public transportation infrastructure, and other costs such as noise pollution. 5 Arguments that an influx of sports tourists bring new spending to a region often overlook the possibility that incumbent residents will leave the area during a sporting event due to congestion or some other associated negative externality. 6 Similarly, substitution effects may mean that increases in spending in one region lead to a reduction in some other region, hence imposing an economic cost for that area. 7 Siegfried and Zimbalist (2006, 420) 5 The public transport infrastructure, such as that built for the Sydney Olympics, may have long-lasting benefits for the community. However, rail or tram lines built to suburban sports stadia are unlikely to be the most costeffective extensions of the public transport system (the tram line to AAMI Stadium announced by the SA government, for example, does not pass through particularly densely packed suburbs or reach a suburban housing node). 6 Baade, Baumann and Matheson (2008), using Florida data, show that local taxable sales are as likely to fall as to increase after a new stadium is built or a mega-event takes place. 7 Baade (2006) argues that this occurred during the Sydney Olympics, where significant expenditure shifting occurred. 7

8 identify specific cases in Australia where public funding has entirely determined the location of a major sporting event; such as the loss of the Formula One Grand Prix from Adelaide to Melbourne due to a larger subsidy on offer from the latter, and subsidies aimed at procuring AFL games by the ACT and Northern Territory governments. In the USA, where major league franchises are moveable and owners play off cities against one another, public funding has played a major and increasing role in financing the cost of stadiums since The evidence is that stadium spending rarely if ever yields net social benefits (Schwester, 2007, 90). 9 In the USA new stadia tend to have small increases in capacity for general spectators and large increases in terms of corporate boxes, with the latter yielding greater marginal profits to owners. As noted by Siegfried and Zimbalist (2006), the benefits from public funding in the USA have tended to accrue to wealthy individuals who own sporting franchises and have strong incentives to lobby the government for the rents created by such policies. 10 Governments have been shown to grant policy favours to these individuals, justifying them on the basis of public benefit of various forms. A particularly generous form of public support has been the provision of subsidized stadia, reducing what would have been the clubs main non-labour cost, despite the overwhelming verdict of the economics literature that such subsides rarely if ever are welfare enhancing. There is rising opposition to the use 8 Baade (2003, 587) reports that about 30% of the cost of the 54 stadiums built for US professional team sports before 1939 came from public subsidies and 44 received no public financing, while for the 139 stadiums built since 1945 at a cost of $26.5 billion (at 1997 prices) over $20 billion came from public subsidies. Since 1987 costs have escalated, and Baade suggests that the private share of costs goes towards added features (such as executive boxes) which increase the club s profitability. He notes that taxpayers willingness to support public funding may be declining in twenty-first century USA, but clubs continue to benefit from generous lease and tax arrangements. 9 See Baade (1994, 2003) and Siegfried and Zimbalist (2006) on the economic gains from new stadiums; Miller (2007) on stadium construction and gains for franchise owners in Major League Baseball; Baade, Baumann, and Matheson (2008) on taxation revenues and public expenditure on sports. Schwester (2007) argues that public good aspects associated with stadium projects at Oriole Park and Jacob s Field, such as prestige felt by citizens, to some extent justifies public expenditure, but notes that the main beneficiaries are wealthy franchise owners. 10 In the USA, political donations from the professional sports sector have dramatically increased from less than half a million dollars in 1992, to $1.3 million in 1996, $2.8 million in 2000, and $3.5 million in In the 2008 election cycle, $US2.4 million had been given by the end of the primary season, with roughly half going to each of the republican and democratic parties. See accessed 7/7/08. 8

9 of public funds in the construction of stadia, for example, the New York Yankees have been granted $US941 million in tax-exempt public bonds to build a new stadium and are seeking even more funding, which has drawn criticisms regarding ticket price increases, damage to two city parks, and the fact that the Yankees have committed to the project regardless of the success or otherwise of their latest claim for public funding (Gormley and Matthews, 2008; demause and Cagan, 2008). This literature provides a platform upon which Australian government involvement in the provision of sporting capital should be examined carefully. In fact, the academic literature contains few studies which examine the structure and profitability of the major professional team sports in Australia. The overall structure and history of the AFL has been discussed by Booth (2006) and Borland (2006), who canvas such issues as the player transfer market and competitive balance. However, these studies do not fully capture two important aspects of the AFL, and other sporting codes. The first is that the revenue from TV rights and associated marketing has increased dramatically; for example, the AFL TV rights deal for the period , valued at $A850 million, is an increase of 70% over the previous agreement. The second is that over the past years there has been fierce rivalry between rugby union, rugby league, AFL and soccer to establish themselves as the dominant football code, and the AFL has expanded in terms of supporter base and the number of teams to become a national league. 3. Profitability in Australian Professional Team Sports The basic economics of professional team sports are very simple, starting from charging spectators to enter a stadium and see two teams compete, with potential additional revenue from concessions, merchandising and broadcasting. Given the strong demand and limited inputs this should be a very profitable industry. There are, however, many organizational models for determining the composition of leagues, the ownership of clubs, the distribution 9

10 of revenues between clubs and the central organization, and so forth (Borland and MacDonald, 2003). The peculiar economics of professional team sports include the natural monopoly of the leading league in a sport in any jurisdiction and the desire to avoid a monopoly at the team level (in order to promote competitive balance and result uncertainty). These conditions mean that some industry-specific public policy is likely, at a minimum to allow exemption from competition laws so that the monopoly league can operate and pursue policies to prevent the competitive imbalance that might result from unimpeded competition among clubs. In practice, public policy involvement is much greater as governments at all levels provide subsidies to sports, usually justified in terms of some form of externality but rarely subject to detailed scrutiny. We will ignore the regulatory issues associated with exemption from competition policy rules and special labour market conditions such as the player draft and focus on the provision of subsidies. A first question to be addressed is whether professional team sports is in fact a profitable industry. Clearly, not all team sports flourish in all countries, but the international evidence suggests that major sports, especially the leading football code, are very profitable in most high-income countries. In the USA many major league clubs report losses, but Fort (2006) has convincingly shown that the owners still gain a major economic benefit through the tax system; hence the dominant role of wealthy individuals as club owners, and their willingness to pay large amounts to buy franchises. In English soccer the amounts paid to buy clubs have also been large, irrespective of whether the owner wants to plough more of his personal wealth into the club as a hobby-owner (arguably the case for Chelsea or Manchester City) or whether the new owners are hard-nosed businessmen seeking a good 10

11 return on their investment (as with Liverpool and Manchester United). 11 A similar phenomenon is seen, albeit on a smaller scale, in smaller markets such as the Scottish Premier League. No Australian studies have evaluated the profitability of team sports. In the remainder of this section we provide evidence suggesting that professional team sports, especially in the current environment of large TV contracts, generate substantial revenues. How those revenues are allocated is opaque because useful accounts are not in the public domain. 12 Some of the returns may be taken as rents enjoyed by owners, officials, players, members or others, rather than as profits narrowly defined, but that does not change the conclusion that at first sight this is not an industry that needs public funding in order to survive. We use the example of the AFL to highlight these points. The AFL has its origins in the Victorian Football League (VFL) where ten of the current teams in the AFL originated. During the 1980 s and 1990 s the league gradually expanded to its current format of 16 teams. 13 Prior to this, state based leagues coexisted in Victoria (VFL), South Australia (SANFL), and Western Australia (WAFL). The emergence of the AFL greatly reduced the support for and importance of the latter two leagues, relegating them to feeder competitions for the AFL, while the AFL emerged as a dominant and reasonably national league The sums paid in recent purchases of English football clubs such as Liverpool ( 218 million), and Manchester United ( 1.47 billion) indicate the profitability of some professional sports teams. However, owning a leading soccer club is not a good thing everywhere; in May 2007 the President of Lokomotiv Plovdiv, a leading Bulgarian team, was found dead in his Mercedes with two bullets in his head the previous owner had been shot dead by a sniper in Most Australian teams are structured as members clubs. This does not preclude high profitability. Haugen and Hervik (2002) claim that the return to a leading Norwegian soccer team (Rosenborg Ballklub) which is owned by 1600 members is so high that the membership fee of about A$50 a year may be the world s most profitable investment. 13 This process included the admission of new interstate teams of Adelaide, Port Adelaide, West Coast Eagles and Fremantle and the relocation of South Melbourne and Fitzroy to Sydney and Brisbane respectively. 14 Tasmania is the only traditional Australian rules playing state without a team; however, games are played, predominantly by Hawthorn in Launceston. The expansion to NSW and Queensland has proven to be a success, given that Australian rules football was not the dominant code in these states. 11

12 There seems little doubt that this now established league is profitable. Revenues and attendances are strong and experiencing growth, and data provided from the AFL Annual reports confirm that supernormal profits are realised. 15 In a recent media interview, the Chief Executive of the AFL noted that the average attendance of 38,107 per game in 2007 was second only to the NFL in the USA. 16 In the year ended June 2006, total revenue was $215 million for the AFL, and this represented an increase of 6 per cent on the previous year. For the same period, the operating surplus of the league was $140 million, an increase of 8 per cent from the year prior. These surpluses have been growing at an average rate of 6 per cent since Moreover, individual clubs are profitable; in 2006, twelve of the sixteen clubs reported a profit and aggregate club profitability was $11 million. Paid membership is high, with 1 in 39 Australians a paid member of a football team (519,126). Broadcasting yields significant revenues, with a new TV rights deal worth $840 million being struck in 2006, a 70 per cent increase over the previous five-year deal. 17 Similarly, broadcasting rights for radio coverage increased to $8 million, up 240 per cent from the previous deal. The value of broadcasting rights is perhaps the best indicator of the increasingly commercial aspect of team sports in Australia. 4. Why Provide Subsidies to a Profitable Industry? The principal economic argument for subsidising an industry is that in the presence of positive externalities the market will undersupply a good or service (Gouget and Barget, 2006). Rarely is attention paid to offsetting negative externalities, or to the monopoly power of professional sports leagues or to the local monopolies of many clubs. The evidence in the previous section suggests that this monopolized activity makes substantial profits or rents that are distributed among owners, members and players. Compared to the USA, Canada or 15 The most recent AFL Annual Report, for the year ended 30 th June, 2006, provides much of the data and comparisons used in this paper. 16 See (accessed 1/7/08) 17 This figure includes a separate $60 million deal with Telstra. 12

13 major European countries, Australia with 20 million people is abundantly supplied with major league football teams. An often publicised positive externality is the public health aspect of sport. This is a stronger argument for public subsidies for participatory sports; many local governments provide tennis courts and funding for amateur sports, but this is a small part of total public spending in this area. Professional sports may encourage greater participation, especially as young players try to emulate their sporting heroes, but the strength of this argument is largely unproven. Most spectators, especially TV viewers, are more likely to be couch potatoes than active players. While participation in Australian Rules football increased during the period from 350,000 to 579,000, this rate of growth was dwarfed by the almost tenfold growth in AFL revenues, of which TV rights are a large component. Subsidising the professional league may be an inefficient way to promote participation and, if health externalities are of concern, then subsidising participatory sports is surely a better option. Government spending on sport is not transparent. Public accounts often aggregate spending on all forms of sport or expenditures are dispersed through different parts of the budget. In Queensland, two new stadia constructed in the past five years (Suncorp Stadium at a cost of $280 million and a new stadium on the Gold Coast costing $160 million), for which the main tenants are profitable sporting teams, dwarf spending on other sports related projects. In its 2003/04 budget, as the Suncorp stadium was being built, the Queensland government highlighted an outdoor facility at Deagon, eight multi sports fields at Zillmere, and a baseball facility at Ormiston, but the combined cost of these projects was less that one million dollars. Despite arguments that spending on sport promotes participation and associated health benefits, the majority of public spending seems to be squarely directed towards the construction of stadia for the use of professional teams. 13

14 Table 1 provides an incomplete list of stadia built or upgraded with public funds in recent years. The Western Australian government s planned 60,000 seat stadium at a taxpayer funded cost of $1.1 billion dollars is explicitly aimed to serve as a venue for professional AFL, soccer, cricket and rugby. Unsurprisingly, it has been welcomed by both the Fremantle and West Coast Eagles football clubs, and in a media statement, the Minister for Sport and recreation, John Kobelke stated that The stadium will also provide a financial boost to the sports that use it. 18 All of the other stadia listed in Table 1 will reduce the private costs of professional sports teams. INSERT TABLE 1 HERE Public sector involvement does not appear to be directed at countering underprovision in the market which results from a positive consumption externality. Many of the stadium upgrades make little difference to the overall capacity of the stadium. They do improve facilities for preferred customers such as members or in the form of corporate boxes which add to the users profits. 19 At best, the public benefits which may accrue are aligned to more pleasant viewing facilities, and are unlikely to encourage increased participation. One question raised by the nature of public funding in this area is why taxpayers, rather than sports fans, should pay the cost. A response common in the USA is that it is important to be a major league city. This would appear to be less relevant in Australia where the number of cities is small. It has, however, been used in the smaller capitals. An infamous example is the Hindmarsh Stadium upgrade in South Australia, which received $24.5 million in taxpayer funds from the state government. The primary justification of this project was to secure seven Olympic soccer matches in A report issued by the state s 18 (7/7/08). 19 In its 2005/6 Annual Report (page 6), the SA Cricket Association acknowledged public assistance: As a result, the SACA will register an extraordinary surplus in excess of $18 million, and be in a position to bring forward our plans to improve members facilities 14

15 auditor general noted that little consideration was given to other alternatives such as the use of the already developed Adelaide Oval and highlighted the decision making process: The Government through its responsible Ministers committed to the expenditure of substantial sums of public monies with insufficient regard to existing controls for determining whether that expenditure was, in all circumstances, warranted. The Government made financial commitments and entered into legal obligations on the basis of inaccurate and incomplete information, and in the absence of adequate analysis (MacPherson, 2001, 11). Despite dissatisfaction with the public money associated with the upgrade of Hindmarsh Stadium, the same argument is being used in 2008 to justify spending upwards of a hundred million dollars to have a stadium fit to make Adelaide part of an Australian bid for the 2018 World Cup in both cases the public benefits seem trivial compared to the financial costs. 20 Some iconic value may be placed on large stadia, perhaps arising from team allegiance or from the history of sporting events which have taken place at the location or entrenched in aesthetics. The robustness of such claims is, however, rarely subjected to public or academic scrutiny, and grandiose building plans can distort public budgets for years. 21 As detailed in section 2, many of the purported benefits of public spending in this area are accepted as fact, and later found to be untrue, or of smaller magnitude than initially thought. In addition to public spending on professional sports teams major capital cost, Australian governments have also provided other support. In 2006 the Australian Football League established the AFL Club Facilities Program valued at $55 million with a 20 Apart from the probability that the 2018 Australian bid will be unsuccessful, there is a question mark about the international exposure accruing to minor host cities. The Olympic soccer games in 2000 scarcely put Adelaide on the global soccer map and how many people are aware of whether Essen or Dortmund hosted matches in the 2006 World Cup? 21 The dramatic venues and village built for the 1976 Montreal Olympics involved huge taxpayer expense and massive corruption, which contributed to the fall of the provincial government and its replacement by a government of an extremist party. 15

16 substantial portion of funding coming from local councils (28%) and state government (26%). 22 This contribution from the public sector came at a time when the AFL had just concluded its five year TV rights deal worth $840 million. In 2008 the newly elected Rudd government committed $32 million to the (soccer) Football Federation of Australia in order to raise Australia s profile in Asia. 23 In its 2008 budget the South Australian government, as well as committing $100 million to upgrading their stadium, allocated $2.5 million to each of the state s two AFL teams. The political economy issue is why taxpayers are so willing to shoulder these large bills for limited public benefits? The rent-seeking literature emphasises the benefits to wellorganized lobby groups and the collective action problem of dispersed losers. 24 The initiative for large sports-related public spending, such as for stadia improvements, in Australia often appears to come from politicians rather than from the sports leagues themselves. The competition between political parties as to which can spend the most on sports subsidies is presumably based on a calculation that more votes will be gained from rabid sports fans than will be lost to taxpayers uninterested in sports, whose vote is likely to be determined by other issues. 25 State-level generosity may also reflect a peculiar Australian fiscal arrangement whereby state governments are not identified with major taxes and thus rarely compete on 22 Details of the scheme can be found in a Media Release, office of the Premier Steve Bracks, 7 June 2006 at: 401f1a1ca fdfb!OpenDocument 23 Reported in Inside Sport, June 2008, page 8. The decision reflected a serendipitous coincidence of Australia s shift from Oceania to Asia in FIFA s regional scheme (and success in the 2008 qualifying stage for the World Cup) and the new government s reorientation of foreign policy towards Asia. It should be noted that these government funds invariably favour one football code over others; this competition distorting aspect will not be addressed in this paper. 24 There is a significant literature relating to special interest group influence over policies (for example, Grossman and Helpman, 1994), but little of this has been applied to the sports sector. Siegfried and Zimbalist (2000) examine some of the political economy aspects of team sports in the USA. 25 As an example, while the SA State Government has announced a $100 million dollar upgrade to AAMI Stadium, the opposition Liberals also have a refurbishment on their agenda, and their policy states that should a refit of the existing stadium not be sufficient to get the World Cup games from a future successful bid, then a new stadium should be built in the CBD of Adelaide. The Liberals policy document applauds what has been achieved in Western Australia, where a new 60,000 seat stadium is to be built (Liberal Party of Australia, SA (2008), A Liberal Vision and Master Plan for Adelaide, available at 16

17 cutting taxes but rather on who can spend the revenue in the most popular way. The difficulty of justifying a positive return from the normal use of the stadium is implicitly recognized in Australia, where stadium spending is usually justified by some large exogenous benefit, such as the heritage status of the main cricket grounds or most recently the challenge of bringing the 2018 soccer World Cup to Australia. 5. Conclusions The accounts of the major Australian professional team sports are non-transparent; indeed, it is difficult to think of any other industry of this size whose economics are so difficult to scrutinize. Despite headline-making stories of loss-making clubs in the crowded Melbourne AFL or Sydney NRL markets, it is unimaginable that professional team sports overall is not a profitable industry (or could be organized as a profitable industry), albeit if some profits are dissipated as rents to players, administrators and club members. Given the industry s profitability it is surprising that it receives public subsidies. The main expenses are salaries and grounds. The biggest subsidies have taken the form of ground upgrades, sometimes justified by other uses (e.g. for one-off events like the Olympic Games or the soccer World Cup) but overwhelmingly used by AFL, NRL or A-league teams. The positive externalities claimed for such public spending are small and negative externalities such as congestion, noise or bad aesthetics are rarely considered. 26 The idea that professional sports are a profitable industry, whose size and composition should be determined by demand and for which public subsidies are unnecessary, has not entered the public debate. 27 The political economy of sports subsidies appears to reflect politicians beliefs that many sports fans are potential single-issue voters happy to see tax dollars spent to support professional team sports, especially in upgrading facilities. High profile announcement of 26 In Adelaide decisions encroaching on the historic parklands have generally been opposed, but vertical extension of the Adelaide Oval with unpopular floodlight pylons went ahead. 27 In the UK direct subsidies to professional sports by the central government are prohibited by law on the grounds that this is a profitable private sector industry. Local authorities sometimes provide indirect support to football clubs through their treatment of stadium taxes, but this is of dubious legality under EU law. 17

18 individual spending items combined with opacity about total subsidies for professional sports suggests that governments are concerned about not informing and alienating non-sportsoriented voters. The overall outcome has been spending in the hundreds of millions of public dollars to the benefit of a profitable industry with limited, if any, net positive externalities. 18

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