The International Ice Hockey League Federation strictly conditioned the award of the 2004 World Ice Hockey Championship to the Czech Republic on the building of a new ice hockey arena. To meet this condition, the Czech Ice Hockey Union must find an investor to finance this arena and a site in Prague to build it on. In its third year, the arena project is still in a very early stage — neither investor nor site has been definitely determined. Although the project is expensive (around Kc 2 billion), and may impact the lives of thousands of people, neither the government nor the municipality has fully revealed yet their justification for the arena.

The main argument for the construction of this arena remains one of national pride, or pride in the Nagano Gold Medal winners. National pride is important, but it is hard to value. The underlying economics of this new arena revolve around several key questions: What are the expected costs and benefits associated with the new arena; how will these costs and benefits be allocated among the parties; and which parties will bear the incumbent risks?

How beneficial?
The economic benefits provided by a public good, like a sports arena, can be difficult to measure in crowns. Czechs will have increased national pride from the construction of this state-of-the-art arena and from hosting a world championship event. They will also have an additional venue for future hockey games, concerts, and other public events. There is clearly some value in having more choice, but putting a price on this sort of benefit is difficult. The sale of tickets and concessions will generate revenues for somebody.

In the U.S., proponents of new arena construction often claim that such projects will produce tangible economic benefits; that is, they will create new jobs, raise the income of local residents, and provide the government with additional tax revenues. This issue has not yet emerged in the debate about Prague's new arena, but it almost certainly will in the future. The important point regarding this issue is that although those who want a new arena built claim that it will generate such benefits, there is no objective, concrete evidence.

The construction of the arena will clearly provide jobs to the workers who design and build it. In the U.S., proponents of arena construction always point to construction jobs as an important economic benefit. Unfortunately, construction is a cost of these projects, not a benefit. When you enjoy a good meal at a restaurant, do you say, "I am better off because I have paid the waiter"? No – a customer at a restaurant counts the meal as a benefit and the bill as a cost. The pay given to construction workers for building an arena is a cost and not a benefit. 

Jobs will clearly be created during the construction of a new arena However, even if one counts these jobs among the benefits from the arena, these benefits may not be as large as one would expect. Some, perhaps many, of those employed would have worked on some other construction project if the arena were not built. To count these jobs as a benefit overstates the case.
The owner of the land where an arena is built will receive compensation. However, there are a number of other important economic costs that are often ignored when the issue of a new arena is debated. One of the most important of these overlooked costs is opportunity cost. Economists define opportunity costs as the cost of foregone alternatives. What is foregone when a new arena is built? Sazka, or the major sport unions like Sokol and Czech Sports Association that own Sazka's stock, will give up spending on reconstruction of deteriorated gyms and other sports facilities.
If government money is used to co-finance a new arena, then the opportunity cost is whatever the government could have used those funds for instead of building special transport and other public utilities related to the new arena. Better funding for education, public health or safety, are among the other uses for funds.  

On the cost side
Other hidden costs exist. Will police officers provide security during events? If so, the government bears this cost and society bears some opportunity cost, as these officers could have been employed elsewhere. The crowds associated with an arena will burden the transport system and put more cars on crowded streets.

The important costs are often either opportunity costs or goods and services largely unnoticed by the average person. The evidence from the U.S. is that these costs amount to around $40 (Kc 1,500) per person each year.

And what about the allocation of these costs and benefits? In the U.S., most of the direct economic benefits are captured by the owners of the arena and those directly employed at the arena. Bar, restaurant, and hotel owners near the arena also benefit from increased business, but these benefits are offset by the losses experienced by other bar, restaurant, and hotel owners.

Few details of the financing have been made public, so the allocation of costs and benefits are difficult to determine at this point. In the U.S. over the past few decades, much of the costs have been borne by the taxpayers. To date, two competitors for the arena project have emerged: Sazka, a lottery company, and a consortium of western European firms including Euroinvestment Banking and Alpine Meyreder. Each has identified a potential site for their proposed arena. The western European consortium claims to have an outside investor to finance the arena construction. At this point, it appears that Sazka plans to finance the construction from a new lottery game.

The financing plans put forth by both potential owners have some undesirable features. The lottery revenues used by the Sazka project would come from those Czechs who play the lottery, and lottery players tend to be lower income people who can least afford to finance a new arena. The western European consortium has requested a tax holiday on the new arena until construction loans are paid. Also, much of the direct economic benefits would flow out of the Czech Republic if the new arena is foreign-owned.

If the Sazka project is built, the Czech stockholders of Sazka – sport unions — ultimately bear much of the risk. If the arena turns out to be a financial drain, either new lottery games or some sort of government bailout would be a likely outcome. But if a foreign-owned group owns the arena, then investors from outside the Czech Republic will bear much of this risk.

What is the bottom line on the economics of a new ice hockey arena in Prague? Based on the best evidence from the U.S., the effective total cost to residents of Prague may be as much as Kc 1,500 per year. To assess the importance of a new arena, each person should consider this question: Do you value the prestige more than Kc 1,500 per year? If the answer is yes, you should support the new ice hockey arena.

— Daniel Munich is assistant professor in economics and director of graduate studies at CERGE-EI in Prague. He can be reached at munich@cesnet.cz

— Brad R. Humphreys is associate professor of economics at UMBC in Baltimore, Md. He is currently a Fulbright Scholar at CERGE-EI in Prague. He can be reached at Brad.Humphreys@cerge-ei.cz