Valuing small to medium arts venues



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Opportunity Costs


An opportunity cost is the value lost as a result of making a decision between mutually exclusive choices. Before assessing the economic benefits of art spaces in Sydney, the next best alternative for allocated resources is considered.

It is assumed that if individual purchases were withheld because the community placed no value on art spaces, that contribution could be invested in long term capital growth.

Therefore the opportunity costs is at least equal to interest forgone on the investment.

Art spaces opportunity cost = x



= investment

= rate of return on investment

The rate of return is determined from the 10-year bond rate of 2.52 per cent, as at 1 April, 2016 (RBA, 2016). 1.3 per cent is the long-run inflation rate, based on the final year projection of the percentage change in consumer price index (ABS, 2016b).

r = –π

r = real discount rate (or cost of investment)



= nominal long-run interest rate (3.49 per cent)

π = long-run inflation forecast (2.3 per cent)

Therefore applying the long-run cost of investment of 1.22 per cent, the gross opportunity cost of art spaces in the City of Sydney in 2016 is approximately $1.37 million.

Benefits


The economically valuable outputs of art spaces that impact on the welfare of all City of Sydney residents is considered in this next section. It is estimated that in 2016 attendance of art spaces in Sydney enabled at least $332.60 million worth of such benefits across the community.

Using the Regional Input-Output Matrix (RIOM) model, it is estimated consumers’ expenditure on art spaces increased output in the Sydney economy by $222.61 million. Increases in wages, rents, profits and taxes associated with the increase in production are estimated to deliver $115.42 million of additional value, or profit, to all Sydney based producers (compared to an alternative case where expenditure on art spaces ceased). Together with a productivity premium of $8.76 million, the sum of benefits returned to businesses as a result of art spaces in Sydney in 2016 was estimated to be $71.18 million.

Expenditure associated with art spaces in Sydney is further estimated to enable over 1,500 full-time and part-time jobs worth $62.52 million and taxation revenue to all tiers of government of $2.48 million. Total civic benefits are estimated to be $64.99 million.

Patrons of art spaces in Sydney revealed their satisfaction with art spaces purchases to be worth $65.14 million. Non-consumers, though not engaged, identified well being associated with having art spaces in Sydney; estimated to be $51.43 million. Total individual benefits from art spaces in Sydney are estimated to be $228.49 million in 2016.


Commercial benefits


Expenditure associated with art spaces in Sydney can be understood in two contexts. Firstly, spending by individuals, businesses and government on galleries and art spaces in Sydney reveals value the community perceives. Secondly, expenditure creates change in final demand producing economic impact on employment, output and gross national product. Economic impact includes the impact on intermediate goods and compensation of employees.

Analysis of total impact, including indirect effects, is based on an understanding that industries, and individual companies within these industries, do not exist in a vacuum, but use each other’s products to produce their own. Thus, an increase in demand for one industry’s products leads to increases in the demand of other ‘linked’ industries.

RIOM is a closed model that applies the ABS Australian 2012-13 transaction tables (ABS, 2015) in conjunction with demand and employment information for each Australian State and Territory to model the impact of changes in demand on these regional economies, estimating changes in their output, employment and gross state product.

The transaction tables used in the model identify 60 industries across 19 industry sectors. For expenditure allocated to each industry sector, a unique multiplier impact is calculated estimating the impact on gross supply, output, gross state product (following the value-added method), employment, wages, imports and taxation.

As previously noted, the producers and consumers of galleries and art spaces in Sydney spent $111.92 million in 2016. This figure represents final demand in three main industry categories:


    • Heritage, museums and the arts

    • Retail Trade, and

    • Road transport.

Changes in employment and gross state product (GSP) are proportional to changes in output following the constant return to scale assumption inherent in I/O models. An in-depth explanation of the RIOM modelling method can be found in the previously cited report prepared for the Live Music Office (2015).

The estimated economic impact of direct spending on art space attendance in Sydney related and motivated expenditure is shown below:



Demand Expenditure ($MM)

Output Impact ($MM)

GSP Impact ($MM)

Producer Surplus ($MM)

$111.92

$222.61

$115.32

$50.33

In RIOM each type of expenditure is allocated to a specific industry sector for the determination of economic impact. It is estimated that the impact of this expenditure is to increase output in the Sydney economy by $222.61 million. This includes the production of intermediate goods as well as imports of $36.36 million.

The Gross Value Added (GVA) to the Sydney economy is therefore $115.32 million, or 0.02 % of NSW’s Gross State Product (GSP) of $513.31 billion (ABS, 2015a).

Sydney firms also enjoy a net commercial benefit that is attributable to art spaces. Producers’ surplus is an economic measure of the difference between the price a producer receives and the minimum amount they would be willing to accept. The difference, or surplus amount, is the benefit a producer receives for selling the good.

As material inputs are already allowed for, and the assumption is that the infrastructure would exist regardless of art spaces, if GVA is discounted by the cost of labour and taxes we are left with a theoretical surplus to firms of $50.33 million.

In equilibrium, surplus represents the fair return to providers of capital sufficient to cover the cost of investment and the opportunity cost of capital. This is fundamentally a short-run concept in competitive markets. In the long-run, economic profits (profits in excess of the cost of capital) would generate new entrants that reduce profitability to normal.

The nature of this modelling means the $50.33 million is distributed amongst all Sydney firms who contribute intermediate or final goods and/or services that are consumed as a result of art spaces in Sydney, and not just art spaces producers.

Following the methodology of UTAS 2015, the acknowledgement of a productivity gain associated with art space attendance, a commercial productivity premium was further estimated for Sydney 2016. Accounting for positive and negative productivity impacts, the net productivity benefit is estimated to be $8.76 million. Giving a total commercial benefit from art spaces of $59.09 million in 2016.

Distribution of Impacts


The spread of the impacts across different industry groups provides additional information. Distributions are presented in the following tables and graphs. The largest contributing increases to the Output and GSP (GVA) are seen in the Retail trade sector (G) and the Arts and recreation services sector (R).

Figure 2 Impacts on Output and GSP (See Table 1 Impacts on Output and GSP for data)



Figure 3 Impacts on wages and employment (see Table 2 Impacts on employment and wages for data)
Table 1 Impacts on Output and GSP

Sector

Code

Output ($mm)

GSP ($mm)

Agriculture, Forestry & fishing

A

3.42

1.35

Mining

B

0.66

0.34

Manufacturing

C

13.90

4.35

Electricity, Gas, Water and Waste Services

D

5.51

2.02

Construction

E

1.59

0.38

Wholesale Trade

F

5.65

2.76

Retail Trade

G

48.01

29.05

Accommodation and Food Services

H

3.44

1.04

Transport, Postal and Warehousing

I

22.99

10.52

Information Media and Telecommunications

J

10.08

2.71

Financial and Insurance Services

K

7.05

4.64

Rental, Hiring and Real Estate Services

L

4.60

1.17

Professional, Scientific and Technical Services

M

13.78

3.61

Administrative and Support Services

N

5.00

3.45

Public Administration and Safety

O

0.94

0.60

Education and Training

P

2.11

1.61

Health Care and Social Assistance

Q

2.84

2.08

Arts and Recreation Services

R

57.57

33.70

Other Services

S

5.24

2.85

Ownership of dwellings

T

8.23

7.11

Total




222.61

115.32

Table 2 Impacts on employment and wages

Sector

Code

Employment (persons)

Wages ($mm)

Agriculture, Forestry & fishing

A

16.53

0.29

Mining

B

0.87

0.07

Manufacturing

C

42.56

2.70

Electricity, Gas, Water and Waste Services

D

9.69

0.61

Construction

E

6.59

0.24

Wholesale Trade

F

18.64

1.83

Retail Trade

G

478.17

20.02

Accommodation and Food Services

H

51.30

0.77

Transport, Postal and Warehousing

I

103.29

6.05

Information Media and Telecommunications

J

33.58

0.93

Financial and Insurance Services

K

14.58

1.98

Rental, Hiring and Real Estate Services

L

15.29

0.36

Professional, Scientific and Technical Services

M

99.08

2.56

Administrative and Support Services

N

10.68

2.83

Public Administration and Safety

O

4.08

0.49

Education and Training

P

19.25

1.39

Health Care and Social Assistance

Q

31.21

1.74

Arts and Recreation Services

R

505.52

15.63

Other Services

S

46.85

2.04

Total

Total

1508.84

62.52



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