Brent Wheeler: America's Cup win offers huge returns for NZ economy

The problem here is that for every extra coffee sold in the Viaduct Basin there might be one less sold in Ponsonby Rd. Photo / Getty Images

Winning the America's Cup might be the most valuable option for growth New Zealand ever buys.

The holder of the Cup becomes the holder of an "option" (the right to participate) to create new possibilities in technology, software, hardware, in manufacturing, in travel and tourism and new possibilities that are worth getting educated for. Critically it also generates the confidence to participate and succeed.

It is close to impossible to say what these new choices are worth. Rather like the invention of the wheel. It created new options which were impossible to value but worth a staggering amount.

Traditional economic analysis looks at sports and entertainment events as spending on items like accommodation, restaurant meals, fuel, clothing and a host of similar items. It then adds spinoff which creates more spending and generates jobs.

The problem here is that for every extra coffee sold in the Viaduct Basin there might be one less sold in Ponsonby Rd. During the Rugby World Cup taxi drivers complained that as domestic tourists poured in, business travellers stayed away, depriving the taxi industry of any extra spend and depressing normal levels of work.

The analysis gets more complex, the data less reliable, the assumptions more heroic and the result is a number describing something that might not happen anyway.

But treating a Cup win as an option is different. Ask "what should we pay to own the option - which is a chance, not a certainty - of increasing GDP growth by, say 1 per cent or $2.18 billion over the three years it is held?"

It costs around $130 million to mount a challenge. So the bet is $130 million down for a possible $2.18 billion win. This is risky. The volatility on earnings in the marine and its supporting industries is above 50 per cent. So what should we pay for this option?

The option pricing model says, if this is the prize, it would be rational to sink about $700 million right across the economy - that's $130 million mounting the challenge plus the related resource which is committed (and so unavailable elsewhere). The money could be public or private. At present $36 million of it is public.

The prize in this case might be an extra 1 per cent in GDP growth worth $2.18 billion. Roughly a 3 to 1 payoff. No guarantees, plenty of risk but a realistic way to think about what a rational spend is.

I have no idea what the value of winning the America's Cup is, but am convinced the options which winning creates for new jobs in greater numbers across more industries are enormously valuable. For a 1 per cent GDP increase they are worth spending $700 million.

I can't see many other government expenditure beats that offer anything like a 3 to 1 payoff for anything like this prize.

Brent Wheeler is an economist who is the principal in Dunedin-based Brent Wheeler Group.