Is Private Management Always the Solution?

For the past fifty years almost all of the Convention Centers, Arenas and many of the Performing Arts Centers, in this country, have been built and are owned by some unit of local government. The days are long past when a private entrepreneur could build a major public assembly facility and expect to make a return on his or her investment. Given the cost of purpose-built facilities, only government or maybe the rare sports team owner can afford this type of investment. From the early 1960’s the mind set of many local governments was, “ we can build the facility and even if we have to subsidize the cost of operating the building we can expect to see great indirect benefits through the collection of taxes on delegate spending or the spending of sports fans who will flock to our new facility”.

For many years this type of return was a real possibility, if the facility was built in a city that was attractive enough to draw convention delegates or large enough to support a major franchise.

Unfortunately, starting as early as the 1980’s, the economy began to falter on a fairly regular basis and too many city’s had jumped into the “let’s build a major venue” game. The combination of fluctuating economic conditions and over- building has caused many cities to see little or no return on their investment. Government owners who are now, often facing greater priorities such as police or fire coverage, have started to look at ways to reduce or eliminate the on-going cost of operating that Arena or Convention Center. Many have turned to Private Management as the solution, but is this always the best choice?

Private management firms are very skilled at convincing government owners, who are facing difficult budget issues, that they can operate the facility cheaper, better and more profitably than it can be run by the owner.  Unfortunately, this is not always the case. Private management firms are not always an “easy fix” solution to what is normally a much more complicated problem.

Let me say right up front that private management companies are not bad. In some instances I think they are the right way to go for some cities. I do believe, however, that to make an informed decision it is important to understand how private management companies work and what might be available as alternative solutions.

Management companies typically require a contract where they are paid a fixed fee for their services as the operator as well as an incentive fee if they meet certain specified performance benchmarks. The private manager bills the City for all of the cost of operating the facility as well as for the management fee. In many instances this arrangement can add as much as ten to fifteen percent to the overall cost of operating the facility. For the owner to see an improvement in their financial position the private manager must save substantial amounts on operating costs, or produce substantially more event business for the facility. Unfortunately this is difficult to do, even for a very capable private operator. If costs of operation are cut to dramatically the guest experience can suffer and this often means less revenue, not more. Because there are so many facilities out there it is difficult to bring new business to a non- major market. The same thing is true for conventions groups. They have many choices for destinations and not having the ability to provide extraordinary service or value pricing can make matters far worse. There are some instances where private management has increased revenue or reduced operating expenses to the point that the owner actually sees a reduction in their overall cost. Unfortunately, these examples are not as prevalent as you might expect.

Private management companies are very useful in circumstances where the city has no experience in operating a public assembly facility and they are ready to open a newly constructed building. The private manager can bring experienced personnel and knowledge to the owner which can avoid many complications and dramatically reduce the learning curve on operations… Private management also works well when extreme costs are associated with facility operation such as overreaching union wage agreements or work restrictions. If the private manager is allowed to circumvent these conditions it is possible to see major shifts in operating costs. Shifting operation of a problem facility is also a way of moving a political hot potato. It may not solve the problem but it changes the focus.

Often an underlying problem with facilities is that before they were built promises were made to the citizenry that were not possible to achieve. Unfortunately some consultants just don’t know how to say “This is a bad idea” to a group that is convinced that a new Arena or Convention Center is just the thing for their City. There are numerous examples of facilities being built that just don’t have a chance to deliver on the promise. In some cases the event projections are overly optimistic for a venue that may be in a third tier market or in the case of convention centers it may just be that the city is not an attractive destination to visit or there may be a lack of easy transportation to the destination.

It is not unusual that a government owner does not want to acknowledge that they may have made a costly mistake. In other cases the problem may just be that governmental red tape is bogging down the operation to the point that it cannot operate as a business. Sometimes it is as simple as the manager of the facility is just not doing a good job.

If these conditions exist, it may be better to re-think how the facility is operated. By turning the operation over to an authority or some other autonomous or semi-autonomous entity, it is very likely that great improvements can be made in cost reduction and revenue production without having to pay a higher cost for to private management.

A good first step is to have a qualified and experienced operational assessment firm audit the operations of the facility and provide the owner with recommendations. Management of public assembly facilities is often anathema to government organizations. The successful operation of a public assembly facility is a business and must be managed accordingly.

Private management is not a panacea for a poor performing facility. There is more than one possible solution. All the possibilities should be researched, before a course of action is determined. Before you make a decision, seek qualified advice from an experienced facility operator with a solid track record of successful operation. Be prepared to accept that the reality that changes must be made to correct or mitigate the problem. Let your advisor help you through the decision making process. Private management may be your solution, if so let your advisor assist you through the procurement process to assure that you are well positioned to see results.

Are There Too Many Convention Centers?

The question of whether there are just too many convention centers has been debated for several years now. It seems the debate started with an article was published by the Brookings Institution, authored by  Heywood Sanders a professor of Urban Studies at the University of Texas at San Antonio, titled “Space Available: The Realities of Convention Centers as Economic Development Strategy”. In this article Sanders concluded that:

  • The overall convention market is declining in a manner that suggests that a recovery is unlikely to yield much increased business for any given community, contrary to repeated industry projections.
  • Nonetheless, localities have continued a type of arms race with cities competing to host these events, investing massive amounts of capital in new construction and expansion of existing facilities.
  • Faced with increased competition many cities spend more money on additional convention amenities, like publicly financed hotels to serve as convention” headquarters”. Another response has been to offer deep discounts.

Sanders concluded in this article that local leaders should take pause as they consider calls for even more public investment in Convention Centers.

This article sparked a fire storm in the industry back in 2005, and generated substantial response from industry leaders saying that Sanders was miss- guided and was not considering all the facts. The industry claimed that the real problem was the industry was still rebounding from the impact of 9- 11 and that Sanders was just crying ”the sky is falling”. For a while it looked as though the industry might have been right as the convention industry hit record income levels in 2007. Unfortunately that run up hit the wall with the economic recession of 2008, and the industry is still trying to make up for the losses of the last four years.

Now at the onset of 2012 we have a new article published by the Wall Street Journal, authored by Steven Malanga, titled “ Have we got a Convention Center to Sell You!, From Boston to Austin, politicians spend money on fancy white elephants”. In this article Malanga concludes that despite very optimistic projections Convention Centers are not living up to those projections and politicians should be concerned about how they are spending public money.

Not surprisingly the industry is once again “up in arms” about what they view as an assault on their livelihood.

Who is right and who is wrong in this debate? In my humble opinion both sides are failing to see the whole story. The reality is that too many cities have entered the “space race” without the benefit of a sound business case.  Convention centers are built or expanded for a variety of reasons, some as logical as a desire to capture income for the location and some as silly as wanting to show the world that our city is just as ”World Class” as your city. Unfortunately, some cities view convention centers as a piece of civic furniture and the fancier the furniture the bigger the bragging rights. It would be totally unfair, however, to decide that based on examples of bad business decisions, that all convention center investments are ill advised.  Not unlike any other business, before a decision is made to make such an investment, it is important that the location do its homework. Well-designed convention centers in attractive destinations generally do very well in terms of bringing positive economic impact to their cities. Conversely, convention centers which are poorly designed, built in unattractive locations or in locations where there are natural impediments to attracting conventioneers such as lack of reasonable airline connections, lack of quality hotel rooms or lack of non-convention attractions generally do not do well.

It is vitally important that cities which are considering an investment in public assembly facilities such as a convention center or a conference center take a realistic look at what their destination has to offer and what the market demand might be for that destination. It is just as important that the city be repaired to ask really tough questions before you enter into such an investment. An in-depth feasibility analysis should be conducted before any serious consideration is given to an investment in a convention center or conference Center. Cities must be prepared to tell the consultants who do this work that they want to hear not only good news but the negatives as well. Unfortunately, some consultants feel that they need to tell their clients what they want to hear. I believe that consultants must be honest with their clients. Sometimes the kindest thing a consultant can do is tell the client not to make the investment.

If the feasibility analysis shows that there is a reasonable business case for moving forward with the investment in the facility is vitally important that the city ensure that the facility is well-designed, flexible and can meet the needs and desires of their potential clients. Cities should be cautious to engage well experience architects and operational advisors to assure that the facility will meet industry expectations.

If the feasibility analysis shows that there is not a solid business case for moving forward with the investment in the city should be prepared to deal with this reality and find more suitable ways to invest their funds in an effort to improve the economic vitality of their community.

The real question is not whether there are too many convention centers because the answer to that question is unfortunately yes. In those cases where cities have made poor business decisions they will assuredly have to deal with the financial consequences of those will decision for a long time. That having been said if a solid business case can be made that a convention center and or a conference center can be a reliable economic generator for the community then the leaders of the community should not shy away from this opportunity.

The convention industry is a business and any decisions related to investments should be treated as business decisions.