Put down your beer jug and take a look at two inter-related problems: the almost non-existent secondary market for event tickets in HK due to an anti-free-market law, and the finances of the Rugby Sevens, which is hoarding cash, underpaying for the HK Stadium, and expecting taxpayers to build another one for at least HK$33.5bn.

Ticket markets and Rugby Sevens finances
10 April 2016

Hong Kong's annual beer-fest, the Rugby Sevens, is upon us again. So now is a good time to cover two subjects: the need to repeal an anti-free-market piece of legislation, and the finances of the Rugby Sevens and sports stadium development in Hong Kong.

The POPE restriction

Section 6 of the Places of Public Entertainment Ordinance (POPEO) outlaws the resale of tickets at a premium to face value, with certain irrational exemptions (including events at HK Stadium). We first wrote about POPEO over 10 years ago. It states:

"No person shall sell... any ticket or voucher authorizing... admission to any place of public entertainment... at a price exceeding the amount fixed by such proprietor, manager or organizer to be charged therefor..."

POPEO deters ticket exchanges and brokers from operating in Hong Kong, which makes it more difficult for people with a genuine need to resell their tickets to do so, which makes them less willing to purchase tickets for events in the first place. It is not illegal to resell tickets at or below face value, but if you only allow that portion of the market to operate, then it becomes unviable - it would be rather like operating a stock market in which shares can only be sold at or below their IPO price.

Section 6 also makes it impossible for people who are willing to pay a premium to do so without causing the seller to break the law. If you are a tourist who has just arrived and want to attend a sold-out concert at AsiaWorld-Expo, then you have to go into the black market, with all the risks that entails.

Organisers are of course free to attach conditions to the sale of event tickets, making them non-transferable and including requirements for photo-IDs (as airlines do), but again, that reduces the flexibility and the value to the ticket holder, and tends to invade her privacy. It also means that the customer must decide whom she is inviting to go with her before she books tickets, and no substitutions can be made. For all these reasons, event organisers rarely impose such conditions.

On 12-Dec-2014, the Hong Kong Rugby Football Union announced that it has entered into a "partnership" with Viagogo to operate an "authorised platform" for the resale of tickets. Viagogo is the "Official Ticket Marketplace" for HKRFU events, including the Sevens. We checked the site a few days before the 2016 event, when a 3-day ticket started at HK$3300 plus fees, compared with $1800 face value.

So how is this legal, you might wonder? Well, believe it or not...

Events at LCSD venues are exempted

Not only is the POPEO prohibition against the free market principles on which HK was built, it is also unfair, because it does not apply to events at venues managed by the Government's Leisure and Cultural Services Department or Home Affairs Department. That's because such places are exempt from the licensing requirements under the Places of Public Entertainment (Exemption) Order, and Section 6 of POPEO only applies to licensed places.

So as the Hong Kong Stadium, home of the Rugby Sevens, is managed by the LCSD (since 2000), Sevens ticket resales at any price are legal, but if you hold your event at a non-LCSD venue then the prohibition applies. While many major venues are managed by the LCSD, other venues have private-sector managers, including:

So reselling tickets for concerts, plays, movie premieres or other events at those venues, at a premium, is illegal.

Surprisingly, an inspection of Government press releases indicates some confusion in this area. A police announcement on 1-Aug-2003 titled "Police spare no efforts to combat illicit ticket scalping" stated that re-selling tickets for the Real Madrid match held at the HK Stadium was illegal. They were obviously unaware of the exemption.

Section 6 of the POPE Ordinance should be repealed without further delay.

Ticket pricing

Some event organisers (deliberately or not) under-price tickets, put them on sale on a first-come-first-served electronic system, and then they wonder why there is so much demand that the booking system crashes. Organisers should not be surprised when this happens. If they under-price tickets then they should expect others to buy them and raise the ticket price to the fair market value.

The HK Sevens are organised by Hong Kong Rugby Union (HKRU), formerly known as "Hong Kong Rugby Football Union", a company limited by guarantee. They have learnt from experience, and now avoid system crashes by organising a ballot (lottery draw) for the 3,000 public-sale tickets on each day of the Sevens. However, if the tickets are under-priced, then this still doesn't deter speculators, because it is entirely rational to enter the draw (with as many ID cards as you can rent) just for the chance of a quick gain on the "official" secondary market. Incidentally, the HK Stadium seats 40,000, so the HKRFU only sold about 7.5% of the tickets directly to the public, down from 5,000 3-day tickets (12.5%) in 2011 and 26,000 3-day tickets (then $750 each) in 2003.

To allow as many people as possible to win the ballot, tickets for the 3 days are now balloted separately. Each person can apply for up to 2 tickets for each day, and of course most people apply for 3 days x 2 tickets. If you apply for 2 tickets then you either get zero or 2, with each entry having an equal chance in the ballot.

Webb-site Reports has obtained summary figures on the 2016 ballot from an HKRU spokesman. We're still waiting for a daily breakdown, but here's what we know: this year, there were 23,446 applicants for tickets, and according to the spokesman, about 95% of applicants applied for all 3 days. We'll assume that half the remainder applied for 2 days, and the rest for 1 day, making about 22,860 entries per day, assuming they were evenly spread. We'll also assume that 95% of daily applications were for 2 tickets and the remainder for 1 ticket. As 1-ticket and 2-ticket applications had equal chances in the ballot, about 1,538 successful entries would be allotted the 3,000 tickets per day, or about 6.73% of the entries.

That's about 1 in 14.9 applicants for each day. We calculate that an applicant for all 3 days had about a 18.86% chance, or 1 in 5.30, of getting at least 1 day, a 1 in 77.0 chance of getting at least 2 days, but only a 1 in 3,281 chance of getting all 3 days. So almost any successful applicant who wanted to follow the tournament from start to finish would need to buy the other days in the secondary market, at a premium. Many applicants of course had no such intention.

Ticket odds

But there is a way to avoid the ballot. That is to gain entry to one of the many clubs which receive allocations of 3-day tickets. You don't have to play rugby, or even regularly attend matches, to do this. The rugby sections of recreational clubs (many of them sitting on 15-year recreational land leases) receive a quota, and in return for an annual membership fee for the rugby section (which the club retains), the members get first bite at a pair of 3-day tickets. One recreational club we know charges HK$500 per year for this additional membership, equivalent to a modest premium of $250 per ticket. The fact that 3-day tickets were available on the Viagogo platform suggests that at least some of these tickets make their way back to the secondary market.

Tenders

The solution to excess demand for an event is obviously to raise prices. However, if ticket prices are set at too high a level, then organisers risk having unsold seats. If they want certainty that every seat will be sold at the best available price in one go, then they can sell tickets by tender, where applicants submit how much they are willing to pay for a particular class of seat, and the tender price is struck at the point at which all seats in that class are filled. This would eliminate most of the speculative demand and ensure that the full value goes to the organisers.

Ironically, the HK Sevens are jointly sponsored by Cathay Pacific which, like any competent airline, is an expert at pricing capacity on its aircraft to maximise revenue using sophisticated software. Given that revenues from the Sevens are supposed to support Rugby in HK, every extra dollar should help.

HKRU - a cash shell

Webb-site Reports has pulled the accounts of HKRU for the year to 30-Apr-2015 (it changed its name in Jul-2015). HKRU is stated to be engaged in "the support, promotion and development of rugby in Hong Kong". According to the spokesman, the company currently has 21 registered members, which are local Rugby Clubs.

At the financial year-end, HKRU had consolidated net assets of HK$314.0m, of which $267.1m, or 85%, comprised investments and cash. If this was a listed company, it would meet our definition of a cash shell - a company with more net cash and securities than other assets. Looking back to the accounts at 30-Apr-2010, HKRU had net assets of HK$180.6m, of which $151.5m, or 84%, was in cash and investments. So over the last 5 years, HKRU has racked up operating and investment surpluses of $133.4m, an average of $26.7m per year.

The growing reserves are partly due to the rising ticket prices necessary to stem demand. A 3-day Sevens Ticket in 2010 was $1250. Subscriptions from members were $44.3m in 2010 and $114m in 2015 (these figures include suite and box hire), while ticket sales were $44.0m in 2010 and $60.7m in 2015.

On the other side of the Sevens costs, HKRU paid just HK$29.6m in 2015 for "stadium costs" for the Sevens, up from HK$18.2m in 2010 when it was broken down into three stadium-related items, namely "stadium hire" of $8.3m, HK Stadium Executive Suite lease payments of $6.6m and "stadium preparation" of $3.4m.

Looking at the core objectives of HKRU, in the latest year, HKRU spent $23.1m on "Club & Community" and $18.7m on "representative squad costs" (details in Note 15). It also had capital expenditure of $12.6m on pitches (Note 5).

Kai Tak Stadium

It is plain that HKRU can afford to do much more, if the rugby community actually needs it. While a modest amount of reserves to handle economic fluctuations in demand for the Sevens would be sensible, there is no obvious reason to be hoarding ever larger amounts of cash. It would take 4 years in which not a single ticket was sold to burn through the current reserves.

Yet at the same time, rather than raise ticket prices higher to meet demand for 40,000 seats, they have been calling on the Government to build a 50,000 seat stadium, part of a proposed Multi-Purpose Sports Complex at Kai Tak. The Government commissioned PwC to look at the financial options for this project. In Sep-2013, PwC came up with a base cost of HK$33.5bn - the net present cost at Apr-2016 prices (assuming the project began then) for construction plus a 30-year operating period, after allowing for all revenues. And that's assuming nothing goes wrong. PwC also included a risk-adjusted figure of HK$45.9bn, allowing for various overruns and design changes.

Conclusions

Clearly, HKRU is struggling with two problems:

  1. It either can't or won't find ways to spend the surpluses from organising the Rugby Sevens on the development of rugby, and as a result it is hoarding more and more reserves; and
  2. It is charging less for tickets than the market will bear, but if it charged the full market value (rather than leave the difference to speculators) then its surplus would be even larger.

Meanwhile, the Government is struggling to justify sinking HK$33.5bn of public money into a new sports complex at Kai Tak. The Government might find it easier to justify this to legislators in the Finance Committee if it received a fairer share of the revenue from the Sevens and other events. It wouldn't come anywhere close to bridging the gap between costs and revenues, but it would be a start. Here's what should be done:

It is politically unwise for HKRU to continue to undercharge for tickets, hoard surpluses and underpay the Government for the facilities it needs.

© Webb-site.com, 2016

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