Government overstates cruise terminal benefits by 25 times
With only 16 ships due to call at the new Kai Tak facility in its first 11 months, the contribution to the local economy comes to only HK$27m
The front page of yesterday's South China Morning Post carried a story warning that the Hong Kong government is overstating the economic benefits of its new cruise ship terminal at Kai Tak by a factor of four.
I've got some bad news. The government's over-estimate is far bigger than that.
I'm not quibbling here with my colleagues' projections for how many ships will call at the new terminal, or how much their passengers will spend when they step ashore.
But I am taking issue with how much that spending will add to Hong Kong's economy.
Government officials reckon the Kai Tak terminal will contribute around HK$1 billion to the city this year.
However, according to yesterday's article, only 16 ships are booked to berth at the new terminal in the 11 months after its June opening. Based on past spending patterns, the 34,000 passengers they will disgorge are likely to spend around HK$100 million during their run ashore.
Factoring in a multiplier effect of 2.5 times, Terence Chong, associate economics professor at the Chinese University, said all that extra spending will add HK$250 million to the city's economy.
No it won't. First, we have the question of additionality. Cruise ships already call at Hong Kong. According to the Tourism Board, their passengers spent just over HK$70 million here in 2011.
So if all visiting liners berth at the new terminal, the extra spending will be just HK$30 million, not HK$100 million. Even assuming that half the ships that called before continue to tie up at their old berths while the other half switch to Kai Tak, the additional spending attributable to the new terminal will be only HK$60 million.
Next, we have a question of how much that spending actually contributes to Kong Kong's economy.
Existing visitors devote three-quarters of their non-hotel expenditure to shopping, and a quarter to meals, tours, nightclubs and so on.
Now, most visitors these days are mainlanders who come here with the express purpose of going shopping. So let us assume our new cruise ship passengers are a mixture of Japanese and Europeans, who between them spend half their money on shopping and half on eating out and other entertainments.
Here's the catch. Let's imagine Hans-Peter from Hamburg gets off his ship, wanders into a shopping arcade and spots an Apple iPad for sale at its standard price of HK$3,088.
"Grüss Gott! That's cheaper than back home," he says and promptly buys one.
However, his new iPad was imported into Hong Kong, which means Hans-Peter hasn't pumped HK$3,088 into the local economy. Typically, around 80 per cent of the sale price goes to Apple, its assembler Foxconn, and various component manufacturers. Just 20 per cent goes to local distributors and retailers. So, in fact, Hans-Peter has injected just HK$618 into Hong Kong's economy.
Obviously, the local value-added component of tourist spending on meals, tours and the like is higher. But it is still a lot less than 100 per cent, especially as the cruise operators typically charge local restaurants and tour guides a 30 per cent commission for steering business their way.
As a result, we can estimate that for every HK$1 spent by visiting cruise ship passengers, just 45 HK cents actually goes to the local economy.
Suddenly, the extra value of our new cruise passengers' spending no longer looks like HK$100 million, or even HK$60 million, but just HK$27 million.
Now we come to that pesky multiplier effect. I don't know where Professor Chong got his figure of 2.5 to three times from, but I assume he must be estimating the "indirect" or even the "induced" benefits of tourist spending. The first typically includes investments by government and businesses to serve the tourist trade. The second includes spending by local employees of the tourism industry.
However, according to the standard Tourism Satellite Accounts methodology by which tourism's contribution to the local economy is calculated, neither indirect nor induced value-added count towards gross domestic product.
Tourism lobby groups often complain this is unfair. But even if you allow that there may be indirect benefits from tourism, a multiplier effect of 2.5 to 3 times looks absurdly high by international standards.
A recent study by Hawaii's Department of Business, Economic, Development and Tourism, for example, put the local multiplier effect of the indirect benefits of tourist spending at just 1.34 times.
If we assume the same multiplier for Hong Kong, the economic benefits to the city of the extra tourist spending attributable to the Kai Tak cruise terminal in the first year of its operation will not be HK$1 billion as the government claims, or even HK$250 million as yesterday's paper warned, but just HK$40 million.
That means the government has overestimated the terminal's economic benefits by 25 times. Now that's optimism.