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  1. 1. 14 Sport funding and performance measurement in the future Overview This chapter will examine some emerging issues that sport organ- izations will have to deal with over the next few years. They include the development of public–private partnerships (PPPs), a greater reliance on debt finance, a move to privately-owned sport teams and leagues, a greater concern for corporate social responsibility (CSR), and the ways in which environmental constraints affect the financial sustainability of sport.Financing optionsAs the previous chapters of this book have indicated, large parts of sporthave become a complex operation that combines large-scale infrastructurewith the delivery of sophisticated entertainment experiences. They all comeat a cost however, and this raises the issue as to how they may be financed 201and operated.
  2. 2. Sport Funding and Finance For any major sport project there are a number of developmental and oper- ational stages to be completed. Moreover for each stage there are a number of decision-making options. The first stage is to decide upon who will be driving the project. The next stages involve deciding on the location of the facility and the funding required to secure control and/or ownership. The next stage involves the design of the facility after consulting with various stake- holders. Following this, is the decision about who will be responsible for construction of the facility. The next stage is to decide upon an arrangement for operating and maintaining the facility. The final stage is to put in place arrangements for securing and delivering sporting and related events. There are a range of possibilities which include the government as the sole driver, or a private consortium driving the project. Another option may include a mix of both involving a government agency and private or not-for-profit con- sortium in partnership with the government. Each approach has its own strengths and weaknesses. The strength of a government-controlled model is that it is not compromised by a commercial imperative for high profits and it can also provide for more community access and equity. The weakness is that there are insufficient incentives to ensure a reasonable level of efficiency, and accountability particularly with respect to the construction and management of the facility. Whereas the strength of a privately driven arrangement is that the government now has a lower financial risk exposure, and because of its busi- ness focus, (that is, long-term profitability) it will have a greater concern for cost containment, efficiency, and innovative practices. However, the major problem of a fully privatized arrangement is the lack of attention likely to be given to social benefits and community accessibility. That is, less emphasis will be given to low-cost facilities and indifferent response to low-income potential users. One way of overcoming the weaknesses of the above models, whilst maintain- ing their strengths is to create some type of Public Private Partnership (PPP) where government and the private sector jointly drive the project. There are also a number of models for financing major projects. At the sim- plest level the government can fund the entire project which can start with purchase of the land and include all design and construction costs and all management and maintenance costs. The government might also wish to fully manage the facility and deliver its services. At the other extreme all of these costs may be borne by a private business or consortium. However, there are a variety of schemes or arrangements that allow the public sector to fund some aspects of the facility development and the private sector to develop other aspects of the facility development. For example, the government might fully finance the land purchase, capital design and construction costs, and the management, maintenance, and the day-to-day operations may be contracted out to a private business. With respect to funding sources a fully public- funded facility will be funded predominantly from government revenue, that is taxpayers’ money or from external borrowings. If on the other hand the facility was funded mainly by the private sector, the funds can be sourced from either shareholders’ funds, that is equity finance, or from private bor- rowings and bonds. With respect to borrowed funds, governments are usu-202 ally able to borrow at a lower rate which consequently reduces the overall cost of the project. However, the disadvantage of high dependency on government
  3. 3. Sport funding and performance measurement in the futureborrowings is that the costs are borne by future generations of taxpayers. APPP allows for a financing package that spreads the financial risks whilstsecuring the lowest-cost borrowing arrangements. As a result funds can beraised through a combination of government (taxes), private borrowings,sponsorship, and shareholders’ funds. Take for example, the location of a flagship sport stadium. The first thingto do is to decide upon the specific location. There are a number of factors tobe considered at this point. One option is to locate the stadium in an inner-city precinct as part of an urban renewal program. However, this can be costlyand will clearly involve significant government support and direction, butone of the benefits will be easy access and proximity to public transport. Theother option is to scan the outer suburbs and find a large piece of real estatethat can be used to create an appropriate facility. This has the advantage of alikely lower purchase price and no negotiations around preservation of her-itage buildings and the like. On the other hand, there is the problem of dis-tance and accessibility for the sporting public. Another option is to redevelopan existing facility. This has the potential benefit of minimizing the land pur-chase price. The limitation however is the constraints of the existing facilityand the space that it occupies. From a design perspective a fully publicly designed facility will be moresensitive to the needs of stakeholders and as a result aim to meet the needs ofminority groups and therefore provide for a diversity of usage needs. A fullyprivatized model is more likely to only accommodate design features thatwill deliver long-term profits. On the other hand, a PPP is more likely to iden-tify design features that combine the capacity to cross-subsidize high-profitdelivery outcomes with design features may be difficult to run at a profit. A government-driven construction model will generally provide for stableemployment over the short to medium term and less likely to contraveneworkplace, and health and safety legislation. On the other hand, there arefewer pressures to be efficient and provide a timely completion. A privatelydriven construction will be guided by the need to ensure a favorable returnon shareholders’ funds, and as a result timelines and construction budgetsare more likely to be more strictly adhered to. A PPP will ideally combine thebest of both the above models. The issue of the use of a fully public, a fully private, or some mixed man-agement system is particularly relevant to the operation and maintenance ofsports’ facilities. In particular Australian local governments have a history ofcontracting out the management and operation of sporting facilities to a pri-vate management group or consortium. On the other hand, large-scaleAustralian sport stadia generally are owned and operated by government orits agency in the form of a trust. Government provision will allow for stableemployment and where possible price the services at a level to ensure broad-based community use. On the other hand, the private sector tends to only pro-vide services which provide full-cost recovery. This will most likely reduce therange of activities and programs. Private providers will also have a tendencyto minimize maintenance and cleaning costs as a way of ensuring efficiencyand cost containment. At the same time, private providers are less likely to 203be constrained by traditional practices and the pressures of conservative
  4. 4. Sport Funding and Finance stakeholders. To this end they are more likely to be flexible and innovative in operating the facility. However, with respect to sporting fields and ball courts the delivery is the responsibility of a particular tenant who effectively leases the facility for a particular period of time. Conceptually, there are a broad range of models for delivering sport activi- ties. Government and its agencies can theoretically deliver sporting activities and this can apply to community leisure centers where government employ- ees plan and manage programs. The primary benefit arising from government delivery of sport is its continuity and reliability. However, this may come at the expense of innovation and new forms of delivery. However, in most situations sport services are delivered by members of not-for-profit sporting clubs and associations. The great strength of this model is its direct link with the user since clubs and associations are for the most part run by the members them- selves. This is to say, collectively the members will often both deliver and use the service. At the same time there can also be private providers who plan and deliver a sporting activity with a profit expectation. A good example of this model would be a privately managed, operated, and delivered rock-climbing facility. The benefit of private delivery is they are not constrained by tradi- tional practices and customs. The limitation though is that only those services that can ensure financial viability will be provided. Overall there are many public–private sector combinations for the planning and delivery of sport facilities, and they are illustrated in Table 14.1. At each of the seven stages of the project there are three possibilities. As a result the combinations are extensive, and indeed a bit daunting, although in practice the decision to go one way or the other is taken with a solid base of knowledge. Whereas in the past most of the seven stages of sport facility development have been dominated by the public sector over recent years the tendency has been to go for more PPP involvement in Step 2, and more pri- vate sector involvement in Steps 6 and 7. In short there are a variety of approaches that can be used to drive, fund, locate, design, construct, operate, maintain, and deliver sporting outcomes. They all have their benefits and costs, and while the traditional models have tended to be either public or private, there is a growing trend to PPPs. Ideally a partnership will combine the strengths of each of the collaborating Table 14.1 PPP options Mainly public Public–private Mainly private Steps of project involvement partnership (PPP) involvement 1 Project driver 2 Project funding 3 Land acquisition 4 Facility design 5 Facility construction 6 Facility management204 7 Service delivery
  5. 5. Sport funding and performance measurement in the futureorganizations, and negate their weaknesses. For example, the public sectorwill in the main have access to a bank of land from which the preferred loca-tion can be identified. It can also borrow capital at lower interest rates, andtherefore reduce the cost of funds and the risk of non-repayment. It also hasthe opportunity to waive any taxes and charges that may impede the develop-ment of a facility. Finally, it will have intimate knowledge of zoning regula-tions and planning permits which should enable proposals to be appropriatelyframed and defended. The private sector also brings many strengths to thetable. The primary strength is its management expertise. This comes throughnot only a broad base of experience where the pressures to be decisive and effi-cient are high, but also extensive industry knowledge. As noted in Chapter 2,this is especially important in sport, where volunteers are crucial to gettingthings done, where fan loyalty and attachment drives so much revenue collec-tion, and where cooperation and competition go hand-in-hand. The privatesector can also deliver lower labor costs through a combination of incentives,contract and casual workers, and fewer restrictive work practices to deal with.This model of labor supply can also deliver more flexibility by placing moreworkers on short-term contracts, which is particularly important with mega-sport events that require a large pool of labor for a short period of time.Corporate social responsibilityBusinesses are often criticized for thinking only of the profits they make, andignoring the social consequences of their strategic decisions and the outputsthey deliver. This dilemma is particularly striking in the case of tobacco com-panies. On one hand there are profits to be made, but on the other hand thereis a pile of evidence that links smoking cigarettes to lung cancer and heartdisease. Sport has for many years had a close relationship with tobacco pro-ducers, who have provided millions of dollars of sponsor funds to both com-munity and professional sport. There is now growing pressure from both government and the public ingeneral for businesses to move beyond the bottom line and take into accountthe effect their decisions have on the wider community. This idea has givenrise to the concept of triple bottom line accounting, which gets business toconsider their contribution to not just economic prosperity, but also socialjustice and environmental quality. While the measurement of social justiceand environmental quality is fraught with danger, the overall aim is to seeprofits and net worth as just one measure of the performance of an organiza-tion. Triple bottom line accounting consequently provides for three mea-sures of how a business contributes to society, with each measure beinggeared around the value-added concept. These measures are:1. economic value-added,2. social value-added, 2053. environmental value-added.
  6. 6. Sport Funding and Finance This way of measuring performance presents many challenges for sport organizations. It has already been noted that sport organizations are moti- vated by more than money. For a national sporting body the growth of the sport may be equally important, and for a professional sports club the domi- nant goal may be on-field success. However, despite the primacy of these goals, sport organizations can equally make decisions and produce outputs that have negative consequences for society in general. The heavy use of tobacco companies as sponsors may have secured a valuable source of funds, but the subsequent association of tobacco products with glamorous sport stars was instrumental in convincing young people that smoking was socially desirable, even if it might kill them in the long run. In some sports heavy drinking of alcohol products is part of the club culture, and in these cases no success is seen as complete without a long binge-drinking session. Similarly, in professional sport leagues, where neo-tribalism is strong, groups of rival supporters will resolve their antagonism with a wild brawl. Football hooli- ganism in Britain is the archetypal model in this respect. All of these outputs have negative social consequences, and it therefore makes sense to encourage sport clubs, associations, and leagues to measure their overall performance in terms of their social and environmental impact as well as their participation impact, win-loss impact, or revenue-raising impact. Recently a number of global businesses with the support of the United Nations developed a program called the Global Reporting Initiative (GRI). The mission of GRI is to design and promulgate sustainability reporting guidelines for each of the economic, social, and environmental outputs identi- fied above. Organizations that sign up to GRI are expected to enact reporting systems that are transparent and accessible, provide quality and reliable infor- mation, and include information that is relevant and complete. GRI has also compiled a list of factors under each of the economic, social, and environmen- tal headings that indicate specific issues that require addressing. A sample of factors particularly relevant to sport organizations is provided in Table 14.2. The GPI model of performance management is complex, and will force sport organizations to be more systematic in the way they build their stake- holder relations. It will also enable them to go beyond revenue growth and on-field success and evaluate the contribution they are making to the wider society, and monitor their impact on the physical environment. This can only be a good thing. Where to from here? When viewed collectively, PPPs and CSR highlight the increasing impor- tance of working with core stakeholders to secure long-term financial sus- tainability. It also demonstrates the benefits that can accrue from building strategic alliances with other organizations, and in particular using those206 alliances to secure more revenue, equity funds, and long-term borrowings. Moreover, it shows that working toward the public good is more than winning
  7. 7. Sport funding and performance measurement in the futureTable 14.2 Global Reporting Initiative performance indicatorsPerformance category Performance measuresDirect economic impacts Sales to satisfied customers Purchases from suppliers Employees hired Taxes paid Dividend and interest paidProduct responsibility Safety and durability Truth in advertising and product labelingWork practices Health, safety and security Training, education and consultation Appropriate wages and conditionsSocial practices No bribery and corruption Transparent lobbying Free from collusion and coercionHuman rights Non-discriminatory hiring practices Free from forced laborEnvironmental impacts Efficient energy use Appropriate water recycling Controlled emissions Waste management Maintenance of biodiversityanother premiership, securing a better broadcast rights deal, or building anew sport stadium.Questions to consider1. What is the benefit of having a mainly public funded and managed sport facility?2. What is the benefit of having a mainly privately funded and managed sport facility?3. How do you explain the shift over recent years to more PPPs in the field of sport facility development?4. What is meant by the term CSR and how does it relate to the concept of triple bottom line accounting?5. How can CSR be applied to sport?6. How did the GRI originate, and what does it hope to achieve?7. How can the GRI model be applied to sport clubs, associations, events, 207 and leagues?
  8. 8. Sport Funding and Finance 8. In what ways might the development of strategic alliances and partner- ships in sport sustain its financial viability? 9. Discuss the different funding scenarios that sport will face in the future. Further reading The different financing options that face sport organizations in the future (including a review of the strengths and weaknesses of equity/shares and loans/bonds) is examined in some detail by Fried, G., Shapiro, S. and Deschriver, T. (2003). Sport Finance, Human Kinetics, Chapter 8 (Obtaining Funding), Chapter 9 (Capital Stocks) and Chapter 10 (Bonds). For an overview of the shifting balance between public and private funding of sport stadia in the USA see Crompton, J., Howard, D. and Var, T. (2003). Financing Major Sport Facilities: Status, Evolution and Conflicting Forces. Journal of Sport Management, 17, 156–184. For a more detailed review of the different ways that PPPs can be built, see Howard, D. and Crompton, J. (2004). Financing Sport, 2nd edition, Fitness Information Technology, Chapter 8 (Implementation of Public–Private Partnerships). There is a useful discussion of PPPs and their underlying ideology in Thibault, L., Kikulis, L. and Frisby W. (2004). Partnerships between Local Government Sport and Leisure Departments and the Commercial Sector: Changes, Complexities and Consequences. In T. Slack (Ed.), The Com- mercialization of Sport, Routledge, pp. 119–139. For a broad overview of recent trends in public sector financing of sport development in the UK see Kovalycsik, K and Karver, R. (2005). Sport Finance: The Cost of Success. PANSTADIA International, 43. An introductory discussion of CSR and triple bottom line accounting is contained in Atrill, P., McLaney, E., Harvey, D. and Jenner, M. (2006) Accounting: An Introduction, Pearson Education Australia, Chapter 15 (Trends and Issues in Accounting). For a detailed review of CSR see Hancock, J. (2004). Investing in Corporate Social Responsibility, Kogan Page. For a revealing analysis of how strategic alliances work in sport, and how they can be used to build brand equity and financial sustainability, see Gladden, J., Irwin, R. and Sutton, W. (2001). Managing North American Major Professional Sport Teams in the New Millennium: A Focus on Building Brand Equity. Journal of Sport Management, 15, 297–317. The ways in which alliances can be used to develop more creative funding arrange- ments is examined in Mahoney, D. and Howard, D. (2001). Sport Business in the Next Decade: A General Overview of Expected Trends. Journal of Sport Management, 15, 275–296. For a detailed discussion of sport’s impact on the environment, and how sport practices can be made more sustainable, see Chernushenko, D. (2002) Sustainable Sport Management: Running an Environmentally, Socially208 & Economically Responsible Organisation, Earth print.