For smaller recreational and community sport facilities, the amount of public money available to construct these facilities has reduced significant, and has resulted in private building of these types of complexes. However, with the increase in the privatization of sport facilities, the question is whether this will trickle up to the professional level – i.e. fully privatized facilities with no governmental interaction. While the trends show less public involvement (and hence more private involvement), there does not seem to be a time in the near future that public subsidy totally disappears from sport facilities. Municipalities need to show support in their communities for sport – since a large majority of the population has an interest in some aspects of sport, recreation, and/or leisure. Tax dollars need to support the interests of the public who pay those taxes – however it is becoming abundantly clear that there is a cap to the spending recommended.
On the private side, it is possible that we are nearing an economic and financial cap. The money is not endless, and with shifts in the economic and financial climate globally, the amount corporations are willing to spend on naming rights may be reaching a crescendo. They are discovering other sponsorable products that offer the potential of a great return on invest-ment (ROI) and return on objectives (ROO). Hence facilities are trying to meet this shift with offering sponsorships and advertising on everything from turnstiles to steps in the arena, so that they can get more money from more sponsors at a lower cost per sponsor.
Suggested discussion topics
1. In these trying economic times, how would you justify to a municipality (both the elected officials and the taxpayers) to enter into a public–private partnership for a recreation or community sport facility?
2. Identify 10 sponsorable non-traditional inventories within a professional sport arena or stadium (no naming or traditional signage rights), and explain how you would utilize those areas for a greater return on the infrastructure’s investment without turning the facility into a mass of advertisements that distract from the events?
niche in the financing of sport facilities; and (2) as a result of the globalization of sports, the effects of currency values as related to international/global invest-ments will be significant.
The influence of the voluntary sector
In years to come it is our view that the voluntary sector will have an increasingly important role to play in the provision of sports facilities for communities. The voluntary sector already owns and controls many facilities such as clubs, pitches and club houses. Rather than public authorities taking additional risk in trying to provide facilities themselves, there is some logic in the strategy of incentivizing the voluntary sector to open its facilities for the benefit of the wider community. An obvious example is the use of club facilities for after school clubs and as resources for young people to use during school holidays. It is widely accepted that sport and the voluntary sector can be used to help deliver wider government agendas such as health improvements, community cohesion, reductions in delinquency and improvements in educa-tional attainment. It is therefore more cost effective to offer clubs’ financial contributions than to provide new facilities from scratch. Not only does this approach make sound commercial sense, but there are also strategic benefits as well. The voluntary sector is more dynamic than government and can react quickly to changes in the external environment as it is not constrained by bureaucracy. The voluntary sector is also able to get closer to the customer than public authorities. Furthermore, the voluntary sector is capable of oper-ating at lower cost than public authorities and is more able to attract funding from charities and lotteries. Thus for these reasons it is a win–win situation for public and voluntary bodies to work together closely. In an era when public money for investment in sports facilities will be increasingly scarce, there will be a strong business and environmental case to make best use of that which already exists before new facilities can be justified. Consequently, at commu-nity level the voluntary sector is likely to have an increasingly important role to play in helping to provide new sports facilities and wider community access to existing sports facilities.
Effect of currency value on international/global investments
The notion that sport is a global business is well illustrated by the fact that many high profile sports facilities are funded by international investors as well as domestic investors. Much of the debt that has been raised to support the development of Wembley Stadium in London is owed to German banks. The United Kingdom uses Sterling as its currency whereas Germany uses the Euro.
The net effect of this situation is that if the two currencies fluctuate against each other, then one party will be better off than expected and the other worse off. In 2009 Sterling has fallen from £1 being worth around V1.40–1.10 – a fall of just over 20%. As discussed earlier the owners of Wembley Stadium paid around
£45M as interest in 2007. An adverse currency fluctuation of 20% would add
around £9M per year to the company’s interest charges and could make the difference between the company being viable or being in financial trouble. There are very few sports facilities that could take a financial hit of £9M without it having an adverse effect on the business whether this be cutting cost or having to stage more events to recover the deficit. In real life it is unlikely that such a stark situation would ever materialize. As part of Wembley Stadium’s efforts to manage its financial risks it will have negotiated sources of mitigation such as fixed exchange rates or exchange rates that float between two agreed fixed points but not beyond something that would impact too unfavorably on one party.
More advanced sources of mitigation might the use of currency hedge funds and options. This is not the time to explain what these financial instruments are.
However, their existence and application in the financing of sport facilities serves to illustrate further the broad range of skills and knowledge that sports facility managers may be required to call upon throughout their careers.
Chapter review
Financing is defined as the act of obtaining or providing money or capital for the purchase of a business enterprise. Developing new sports facilities is a risky process that invariably requires complex financial arrangements, as it is unlikely that any organization from any sector will have the spare cash available to develop and build a sport facility from the outset of a project. It is therefore a current practice that the financing of sports facilities tends to be made with financial contributions from a variety of sources. When borrowed money (or debt) is used to finance a devel-opment the stance of those borrowing the money is the belief that they can make sufficient profit to be able to service interest costs and still make a profit. For the providers of loans, the stance taken is that the interest being paid on the loans justifies the risk of lending to the developer. In practice the two parties’ fates are inextricably linked – for everyone to get a fair return on their investment, the development has to succeed.
Considerations around financing sports facilities are not confined to how much a building costs to construct in the first instance. For both buildings and equipment due consideration must be given to what are known as ‘life cycle costs’, which are defined as the maintenance of physical asset cost records over the entire asset lives, so that decisions concerning the acquisition, use, or disposal of the assets can be made in a way that achieves the optimum asset usage at the lowest cost to the entity.
The importance of being aware of life cycle costing can be appreciated by the finding that as much as 90% of the lifetime costs attributable to an asset are determined by decisions made in the early part of the asset’s life. The evidence that lifecycle costing for an asset is based on can be complicated as indicated in the range of consider-ations including purchase costs, running costs, maintenance costs, training costs, and decommissioning and disposal costs.
The justification for financing many sport facilities is often based on arguments made about the economic benefits that the development will have on the local
community. For sports facilities there are five key areas in which positive economic benefits can be delivered – construction, employment, supply chains, local income, and events. The manner in which potential economic impacts are quantified is by the use of specially commissioned economic impact studies, which attempt to model the future economic impacts of a sports facility or to measure the actual economic impact of a facility or an event.
Financing of sport facilities come in three basic forms – public financing, private funding, and public–private partnerships. Public funding of sport facilities comes from hard taxes, soft taxes, and bonds. Private funding comes from revenue created by sport businesses to enhance the financing efforts for a sport facility.
Many times, to effectively finance sport facilities, there is a need for a better relationship between municipalities and private entrepreneurs. The public sector has the authority to implement project funding through the governing process, while the private sector has the ability to contribute financing and management expertise in the area of sport facilities.
Historically, the financing for sport facilities before 1960 was referred to the Period of Antiquity, where the government was the primary source of funding for sport facilities general obligation bonds funded from the general property tax. The Period of Growth in the 1960s saw municipalities build sport facilities that focused on multipurpose use and unique architectural designs – funding through the government still though general obligation bonds, but with the increase in need for funding the government started offering bonds secured through a multitude of hard and soft taxes. The 1970s and early 1980s saw significant public subsidy offerings to sport facilities during the Period of Revitalization in sport facilities, which focused on building sport facilities in conjunction with improving the infrastructure of cities. The Period of Dis-continuance hit between 1984 and 1986. This was a significant time of change in the way in which sport facilities would be financed, and there were questions regarding the logic of dumping significant amounts of money into sport facilities when there were bigger economic and financial issues that needed to be addressed with governmental appropriations. As a result, there was a need for change, and hence the period from 1986 to around 1995 is referred to as a Period of Change in sport facility financing. During this time, there was a transition from fully public financing to public–private partnerships, and there was some growth taking place in privatized facilities. Since 1995, sport facility financing has taken another shift into the Period of Partnerships, where the shift has gone to funding being provided by both private and public entities, and has extended into the running of sport facility operations.
So what does the future hold for sport facility financing? Only time will tell.
But we can safely project that economic issues affecting both public and private entities will be at the center of the discussion. In addition, the emergence of the voluntary sector as an additional niche in the financing of sport facilities and the effects of currency values as related to international/global investments seem to be significant concerns related to the financing of sport facilities in the future.