Why Sports should consider a PPP model

This article was first published in the Australian Financial Review on 9 April 2017.

There’s always discussion about whether government should spend money on sport – from stadiums to Olympic programs down to the grassroots.  Of course they should – sport is crucial to the fabric of Australian cities.  Sporting teams provide dividends that transcend the bottom line.  The Cowboys are a top-end treasure, the Wanderers are the embodiment of the boom in Sydney’s West, whilst the Princes Park AFLW lock-out transformed women’s sport in Australia in one glorious afternoon.  The support for the Rabbitohs in 2001 laid bare what teams mean to their communities.  For this reason governments invest heavily – infrastructure, transportation, security.  The Big Bash in Adelaide on New Year’s Eve is now an annual reminder of the impact well-deployed public sporting investment can have on a city.

But codes are struggling with poor financial returns for teams, which in turn imperils these social benefits.  Right now it’s speculated that rugby could leave Canberra or Perth and rugby league could leave Newcastle, just as soccer left Townsville and the Gold Coast years ago.  The massive potential of the boom in women’s sport will turn to heartbreak too if financial mismanagement follows. 

Governments need reliable custodians for public infrastructure and cultural artefacts.  There is plenty of bitter experience in this regard (Edelsten, Tinkler and Skase stand out in a rogues’ gallery) but the nadir was Clive Palmer’s infamous Gold Coast crowd-cap to dodge council charges tied to attendance.  After trashing their relationship with the community, Gold Coast FC went broke anyway – the stadium lost a tenant and the people lost their team.

Undoubtedly Australia needs profitable teams to attract competition for ownership.  The US is testament to this – the former CEO of Microsoft paid US$2 billion for a rundown NBA franchise.  Reports estimate that the NFL’s 32 teams generated US$2.9 billion in operating profit during 2016 on a TV deal worth around US$7 billion annually.  In contrast, the Australian market is allegedly too small and competitive for sport to turn a dollar, and ROI has indeed been as weak as overpriced beer at the cricket – rugby league teams reportedly lost a combined $53m last year.  But with broadcast rights deals calculated in the billions, surely our sports can be profitable too? 

We need to consider different models - the A-League is reportedly looking at private equity investment at a league level while AFL and NRL clubs are wading into cross-ownership with women’s sports (including netball). Other options should be on the table too. Structures that Australia generally does very well are PPPs and resources joint ventures.  Governments in formal partnership with private equity in sport would be a compelling proposition to a strong class of financial investors.  A base return, in addition to all the non-financial benefits of vibrant sporting institutions, would make the investment case for government more than worthwhile.  Partnerships could be structured so that the private operator receives an outperformance return once a baseline IRR acceptable to the public partner has been met.  This would create the possibility of direct financial dividend for public investment as well as incentivising private operators to drive genuine value creation.  Partnerships could also use mechanisms like social impact bonds, where the public partner pays the private investor a ratcheted return if the team delivers key community metrics (tourism/community participation/ contra advertising etc.).

This structure would also protect public investment.  Given everything they have to bring to the table, governments in one team towns (think Canberra or Newcastle) should refuse to work with leagues unless they have confidence in the ownership group and a say in the future of the concession.  For all the money they’ve spent, Canberra and Newcastle should have a bigger say in the fate of the Brumbies and the Knights than they’re likely to get. 

A modified PPP structure in sport could attract quality private operators to drive overall financial performance and sustainability while safeguarding the social goals of sporting infrastructure. So if the Brumbies avoid the guillotine, the ACT government should give serious thought to demanding the concession is legally granted to a JV between them, other community stakeholders and a private partner incentivised to turn the opportunity into a profitable business.  The ARU would be lucky to have them.

 

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