Convention Centers: Private Sector to the Rescue?

August 9, 2012

For immediate release (769 words with optional cut)

by BARRY KEATING, Ph.D.

It was a simple statement, not particularly remarkable: “I really want the council and the city to take a second look at how we are spending the taxpayer dollars,” the new council member said, “and make sure we are getting the best return on investment.”

The statement was made recently after my city council’s discussion of a more than a million-dollar loss by the downtown convention center. It wasn’t the first time the municipal convention center had lost money; in fact, it had been losing money every year (another $1.2 million the year before and $1.3 million in 2010). The statement may have been prompted by another agenda item that called for discussion of a request for more than $4.9 million in capital improvements to the same convention center. Or perhaps the council member wondered if this spending ought to be a priority in a city with rising crime (by July the city had already reached the previous year’s murder total) and in a city with over 1,400 homes vacant and decaying.

But the council member didn’t only suggest “taking a second look.” She had the audacity to suggest that the city also consider following in the footsteps of Rahm Emanuel. While not mentioning him by name, the suggestion was that since we have asked the police and fire personnel to work without pay raises for two years, and since the council recently instituted a local option tax on its constituents, it might be prudent to examine other, possibly less-costly ways of managing the continually money-losing convention center. The suggestion made was to privatize the convention center and allow the new management to re-purpose the facility if that is what is needed to bring it into the black. Emanuel is turning to private firms as well in the city of Chicago. He intends to spend (or get someone else to spend) $7 billion to “rebuild Chicago.”

How can an ailing city like Chicago and a failing Indiana town expect to raise the large dollar amount it would take to rebuild a metropolis or purchase a convention center? The answer is simple: Let an investor like Macquarie Infrastructure of Australia do it for you.

If the name Macquarie sounds familiar to Hoosiers it’s because they are “investors” in the Indiana Toll Road. Yes, when Gov. Mitch Daniels privatized the Toll Road by using a long-term lease, he was using a tried-and-true international institution known as a PPP (a Public Private Partnership). That is precisely what Rahm Emanuel will try to use when he constructs two new runways at O’Hare Airport, replaces 900 miles of city water pipe and creates special routes for rapid bus transit.

The process of using a PPP is often described as a private firm investing in a public enterprise. It’s a model that is being used all over the world and it could work for the convention center as well as for the city of Chicago or the state of Indiana. It is not a panacea for every government foible, and it can be done poorly. In much of the world, though, it has a long and successful history. In the 18th century, Adam Smith pointed out that public works (like modern day airports, water pipes and sewage systems) create value.

In the case of social goods, such as education, Smith argued that whenever fees do not cover costs, creative institutional arrangements can be employed to motivate those providing the service to greater exertion. The goal then is to create the circumstances in which providers, public or private, are motivated to offer high quality and optimal quantities of the intended service at least cost. In public-private partnerships, good performance trumps any ideological preference for exclusive public or private provision.

Could a private firm be given an incentive to run the convention center on a long-term lease much like the toll road? Could we construct a detailed contract, like that used by Macquarie for the Toll Road, that would ensure high-quality service while freeing taxpayers of annual deficits? It would, of course, be a mistake to privatize the revenues of the convention center while leaving the public holding the obligation to pay any shortfalls. There are detailed provisions in the Toll Road contract to prevent just that from happening. And the rest of the world has been writing these types of contracts for decades; they are experienced in what works (and what does not work). With some diligence, we too ought to be able to motivate private firms to help us in providing public services.

But could a PPP work in the case of a convention center? That’s a much more difficult question. Rahm Emanuel plans to use PPPs to provide services that have always been the domain of government; economists call them “public goods.” These services, like public sewage systems, would not otherwise be provided by private firms and yet they clearly make almost everyone better off. Again, the Indiana Toll Road falls in this category; it would not have been built by private enterprise and yet it clearly has a beneficial effect on the state.

Does a convention center fall into this public goods category?

A 2008 study justified an annual public subsidy to the convention center in terms of the $26 million of spending by visitors to the city attending events hosted in the center. The “multiplier” concept suggests that deficit government spending is like planting magic seeds giving rise to beanstalks in the form of increased business revenue and job creation. Government spends a lot of money to plant those seeds and government all too often plants them in the wrong places. It costs a lot to collect the taxes to pay for the spending and even more for businesses and individuals to comply with tax laws. The fact that the convention center itself has been unable to simply cover its operating costs for years raises the question of whether any private enterprise would be willing to lease it under any conditions.

Using a PPP for a convention center on a local level may be a bit different than using it for the Indiana Toll Road or the Chicago Skyway but it would seem worth considering. It could be a means of aligning public interest with prudent and accountable facility management. Of course, it could be the case that government has simply “sown the seeds” in the wrong place by building the convention center, thereby creating a white elephant that no private firm could use to make a profit with or without a PPP in place. Apparently the College Football Hall of Fame in South Bend was just such a government foible; residents there will be paying the mortgage on the facility long after the Hall of Fame has left for Atlanta and the building itself is vacant. There is little evidence in downtown South Bend today that a “multiplier effect” from the Hall of Fame brought significant improvement to the area.

But our new council member has a point. The convention center story could have a different ending yielding long-term benefits in terms of rent and taxes to residents who built the center and will retain ownership. After all, a public enterprise like the convention center is supposed to benefit the members of the community, not impoverish them.

Barry Keating, Ph.D., a South Bend resident and an adjunct scholar of the Indiana Policy Review Foundation, is the Jesse H. Jones Professor of Finance at the University of Notre Dame. He has written or co-authored 15 books, including a best-selling textbook used in colleges and universities (McGraw-Hill), and a microeconomics book for public managers (Blackwell).



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