Review of the Orchestra Sector. Final Report. Funding Framework. 7 December 2012

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1 Review of the Orchestra Sector 7 December 2012 Final Report Funding Framework

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3 Preface This report has been prepared for the Ministry for Culture and Heritage by Chris Gould, Nick Davis and Nicholas Carlaw from MartinJenkins (Martin, Jenkins & Associates Limited). Our goal is to improve the effectiveness and efficiency of the organisations we work with. We do this by providing strategic advice and operational support in the following areas: Strategy, Transformation & Performance Policy & Economics Evaluation & Research. MartinJenkins was established in 1993 and is 100% New Zealand owned. It is governed by executive directors Doug Martin, Kevin Jenkins, Michael Mills, Nick Davis and Nick Hill, plus independent directors Peter Taylor (Chair) and Sir John Wells. Restrictions This Report has been prepared solely for the purposes stated herein and should not be relied upon for any other purpose. To the fullest extent permitted by law, we accept no duty of care to any third party in connection with the provision of this Report. We accept no liability of any kind to any third party and disclaim all responsibility for the consequences of any third party acting or refraining to act in reliance on the Report. We have not been required, or sought, to independently verify the accuracy of information provided to us. Accordingly, we express no opinion on the reliability, accuracy, or completeness of the information provided to us and upon which we have relied. The statements and opinions expressed herein have been made in good faith, and on the basis that all information relied upon is true and accurate in all material respects, and not misleading by reason of omission or otherwise. We reserve the right, but will be under no obligation, to review or amend this Report, if any additional information, which was in existence on the date of this Report, was not brought to our attention, or subsequently comes to light. This Report is issued pursuant to the terms and conditions set out in our Contract for Services dated 15 October 2012.

4 Contents 1 Introduction 1 2 Approach 2 3 Findings 8 Appendix 1 Funding framework 17 Tables Table 1: Funding sources... 5 Table 2: Overview of orchestra activities... 6 Table 3: Assessment of the economic characteristics of orchestra activities Table 4: Allocation of central government funding... 20

5 1 Introduction In July 2012, the Ministry for Culture and Heritage (the Ministry) published a discussion paper relating to a review of the orchestra sector. The review is wide ranging in its scope. One of the purposes of the review has been to consider how to achieve best results from the government funding that is provided to the orchestra sector. 1 Central government is by far the single largest funder of the orchestras. In 2010, it provided funding totalling $17.1 million; a figure that accounted for about 56% of total orchestra sector revenue. 2 In an environment of constrained fiscal budgets, there is increasing need to ensure that there is a sound basis for providing central government funding to the orchestral sector and to ensure that, within the sector, government funding is allocated on a sensible (and defendable) basis. To these ends, central government funding ought to reflect the mix of public/private benefit stemming from the activities of the orchestras. Furthermore recipient organisations should face strong incentives to use funding wisely and, wherever possible, seek to supplement Crown funding with other sources. This report describes a framework within which the case for central government funding of orchestras can be considered. The report is aimed at addressing two principal questions. Is there a case, based on first principles analysis, for central government funding of orchestras? In instances where a case for central government funding is established, should funding be directed to all of the orchestras that are within scope, or only some of them and on what basis? In the next section of the report, the approach to the development of the funding framework is explained. This is followed by section 3 which presents a summary of key findings. The analysis that sits behind the findings is presented in Appendix There are five orchestras that are within scope of the review (and this report); the New Zealand Symphony Orchestra (NZSO), the Auckland Philharmonia Orchestra (APO), the Vector Wellington Orchestra (VWO), the Christchurch Symphony Orchestra (CSO) and the Southern Sinfonia (SS). Ministry for Culture and Heritage (2012) New Zealand Professional Orchestra Review p 11. 1

6 2 Approach Orchestras are funded from a mix of sources including: ticket sales and member subscriptions commercial hires sponsorship donations and grants central government local government. The first of the two main questions addressed in this report is whether there is a case for central government funding of orchestras. The approach we have taken to this issue draws heavily on Treasury guidelines relating to the setting of charges in the public sector. 3 In brief, the guidelines focus on the economic characteristics of goods and services because this influences the method by which goods and services should be funded. Economic characteristics The Treasury guidelines describe four main types of good. Private goods Most goods and services produced in the economy are private goods. The key characteristics of private goods are that, firstly, the consumption of the good by one person conflicts with its use by another (or more formally, consumption is said to be rival in nature) and, secondly, that there are costs incurred in allowing one more unit of the good to be consumed. Where these characteristics exist, there is a strong case for recovering the costs of the good/service directly from those who benefit from its provision by way of some form of user charge. Ticket sales are an example of a user charge. User charges help to ensure that the good or service is provided to those who value it most and, moreover, that it is only provided to those who are willing to pay at least the marginal costs involved in providing the good/service. Public goods Public goods have characteristics that are in direct contrast to those of private goods. In particular, public goods are those for which consumption is said to be non-rival (ie one person s 3 The Treasury (2002) Guidelines for Setting Charges in the Public Sector sections 3 and 4. 2

7 consumption of the good/service does not diminish the availability of the good/service for someone else to consume). Public goods also have the characteristic that it is either not possible, or economically sensible, to try to exclude someone s consumption of the good. In short, once a public good is provided for one, it is generally available to all. This matters from a funding perspective. If the good is not excludable, then the benefits of its provision flow to those who have not paid. Since everyone receives the benefit, nobody has an incentive to pay for it. At that point, the market fails and the market left to itself would not produce the goods. Taxpayer or ratepayer funding is one way of getting around this problem. Pure public goods are relatively uncommon. National defence is an example. It meets the twin tests of being non-rival and non-excludable. Performances by orchestras do not, however, meet the stringent definition of a public good. Concert performances may be non-rival, at least up to the point where venue capacity is exhausted. However, exclusion is feasible through limiting access to performances to those who have purchased an admission ticket. Accordingly, one of the two defining characteristics of a public good does not hold. Externalities Externalities are said to arise where the actions of one person or organisation have impacts on others that are not taken into account by, or captured by, the person/organisation. The activities of the orchestras have spill-over effects that are felt by people other than those who directly benefit from provision of the activity. Some examples illustrate the point. Orchestras may provide a source of national prestige, pride or international recognition which is a benefit to all New Zealanders. Similarly, orchestras contribute to the development of a distinctively New Zealand cultural environment. Benefits of these types are both non-rival and non-excludable. This example illustrates that public goods are, in effect, an extreme form of externality. In general, examples of externalities and public goods tend to overlap with one another. The availability of orchestra performances may attract residents, tourists and other visitors to the city in which an orchestra is based thereby contributing to the vibrancy and economic fortunes of that city. For this reason, a city may decide it is appropriate to provide funding for the orchestra as one way of spurring growth. Possibly, the same sort of argument could be made at a national level. Future generations benefit from today s preservation of orchestral capability. The work of the orchestras includes an educational function. Society as a whole benefits from the provision of education because of the feedback effects on social discourse and economic, social and cultural enhancement. 3

8 From society s viewpoint, if there are externality benefits, such as those noted above, arising from provision of a good or service that are not captured in the price paid for the good/service, under-provision of the good/service can result. In this situation, a case can be made for government (central or local) funding to encourage more of the good/service to be produced. 4 While the case for central government funding of pure public goods is a strong one, the case for central government funding for less extreme forms of externality is less strong. For example: there are examples of goods and services that contribute to international recognition but which do not receive government subsidy (eg New Zealand export lamb) attracting residents and tourists to one city may be at the expense of another implying no case for central government funding (although a case for local government funding may still exist) whether subsidising an arts organisation to achieve educational outcomes is sensible relies on being able to argue that this is a better use of money than subsidising other educational institutions. In short, although the presence of externalities potentially provides a case for government funding, externalities of themselves are not necessarily a sufficient reason to resort to government funding. Club goods Club goods are defined to be those where it is possible to exclude people from benefitting from the provision of the good service, but consumption is non-rival in nature. As noted above, orchestral performances can be seen as an example of a good that is excludable but non-rival in consumption. Because user charges are potentially inefficient (because consumption is nonrival), club goods often involve membership fees or subscriptions that allows access to the club goods. Membership fees that must be paid in order to join a sports club are a good example of this. Orchestra membership subscriptions are a similar example. Club goods can also involve levy funding where there is an identifiable group or constituency that benefits from the provision of the good but use of the good is essentially non-rival. Levies are essentially a form of tax targeted at specific groups in the economy. Fuel excise duty that helps to fund the nation s road network is an example. Merit goods Merit goods are defined as goods/services that the community as a whole desires more of than would be provided as a result of the normal interaction between customers and providers. They 4 A funding subsidy is not the only possible solution for example, government provision or regulation can be other mechanisms for dealing with the presence of externalities. 4

9 can combine elements of both public and private gods. Inherently, merit goods rely on government taking a view that it is a better judge of the optimal level of provision of a good than is the market. It follows that merit goods can require government funding to bridge the gap between the total cost of production (at production levels desired by society) and the revenue recovered from users/beneficiaries of the good. Summary Table 1 below summarises the different four main types of good/service, their economic characteristics and the implication for funding sources. Table 1: Funding sources Private good Public good / externalities Club good Merit good Economic characteristic Excludable Rival in consumption Non-excludable Non rival Excludable Non-rival Can combine elements of public and private good Main funding source(s) User charges Taxpayers / ratepayers Subscription Levy Taxpayers / ratepayers Activities The functions undertaken by the orchestras extend beyond that of performances. The different functions have different economic characteristics and, therefore by implication, potentially funding arrangements. To assist with the analysis, it has been useful to break down the activities of the orchestras into their main component parts. For each activity we have then considered where each sits on the spectrum of good/service types summarised in Table 1 above. The range of activities undertaken by the orchestras is summarised in Table 2 below. 5

10 Table 2: Overview of orchestra activities Performances Live concerts (other than commercial hires) performed in the home location of each city-based orchestra and in Wellington for the NZSO Commercial hires (excluding support for the creative arts which is covered later in the table) Within-region touring (APO, VWO, CSO and SS only) Nationwide touring (ie NZSO touring anywhere in New Zealand outside of Wellington and city-based orchestras touring outside of the regions covered by the four city-based orchestras) International touring Recordings and broadcasts (including commissions) Performance of music to an international standard Other activities Encouraging New Zealand music and composition (and composers) and contributing to New Zealand s distinctive culture through: Investing in composer residencies Workshops Commissioning of new works Performance and recordings. Education (structured): Master classes Mentoring programmes Coaching of players Training (eg NZSO National Youth orchestra) Academies Scholarships. Community engagement programmes: School concerts/visits Free concerts (eg Christmas in the park) Outreach services (eg to the young and elderly). Support for the creative arts: Support for visiting performers Soundtracks for movies Accompaniment for dance and musical theatre (including NBR New Zealand Opera, the Royal New Zealand Ballet and some choral and other performances). 6

11 The output from this process is an assessment as to whether a case exists for providing central government funding for each of the activities and, more generally, a qualitative assessment of the sources that should be considered in relation to the funding of each activity. It is important to note that demonstrating the existence of public good/externality and merit good characteristics is a necessary, but not sufficient, condition for central government funding. This is because in order for central government funding to be warranted, there must also be a benefit cost assessment to confirm that the activity confers net benefits. Central government faces competing demands for its funding. Resources are limited and, accordingly, priorities have to be established so that scarce funding is directed to its highest value use. By implication, some goods/services might not be funded, even if they confer positive net benefits, because the opportunity cost is forgoing some other good or service with an even higher level of net benefit. Formally, to make the best use of resources, goods and services should be ranked according to their benefit/cost ratio and the projects with the highest ratio chosen first. 5 For those orchestra activities for which there are public good/externality or merit good characteristics and, hence, for which a case for central government funding exists (subject to the value-for-money benefit/cost ratio test), we have also considered whether it makes sense for central government to direct funding to all of the orchestras or to some of them, but not others. This has involved consideration of whether or not there is any material difference in the bundles of services offered between the orchestras that might justify differences in the approach to the funding of each orchestra. In part, this involves a qualitative assessment of value-formoney. 5 We note that a formal and quantitative assessment of the benefit/cost ratios associated with orchestra activities has not been part of our brief. 7

12 3 Findings The case for central government funding In summary, there is a case for central government funding for most, but not quite all of the activities undertaken by the orchestras. Below, the basis of the case for funding is discussed firstly with respect to performances and then with respect to the other activities undertaken by orchestras. Performances There is a strong private good aspect to the various forms of orchestra performances (live concerts as well as recordings and broadcasts) in that there are clearly identified audiences who benefit from the performance and who are willing to contribute toward its cost through prices paid for concert tickets and purchases of recordings. There is also a club good dimension to performances (people can be excluded but enjoyment of the performance in most instances is non-rival) that provides support for subscription funding. In addition, there are other benefits captured by people and organisations that are sufficient to entice them to contribute funding through sponsorship, donations and the like. It is important to note, however, that revenue from tickets sales, membership subscriptions and sponsorship generally does not fully recover the full cost of performances. Notwithstanding that performances have a strong private good and club good characteristics, there is a case for government funding (local and/or central) because of the presence of significant externality effects as described below. Performances are a mechanism through which culture and national identity is fostered and promoted. They convey or transmit messages about culture and identity to the population at large and not just to those who attend performances. Orchestras are generally viewed as being an important part of cultural life and their role imparts benefits well beyond just those who attend concerts. Performances in towns and cities throughout New Zealand attract visitors to those centres and this provides flow-on economic benefits for those communities. Because the benefits are felt locally or regionally, this particular example of externality benefit argues for local government funding. It is harder to make this case for central government funding for the reason that attracting visitors to one city will, in many cases, be at the expense of another city and, hence, there is no national impact. 8

13 Notwithstanding the last point, however, it is possible that having one or more high quality orchestras may be a factor in attracting migrants including professionals and high income earners 6 and academics for tertiary institution music schools. It can be argued that there is an element of merit good associated with orchestras. This follows from the points above inasmuch as it is reasonable to contend that society generally deems it desirable to have a level (and quality) of performances over and above that which could be supported solely on the basis of ticket sales, subscriptions, sponsorship and so on (ie the revenue sources which capture the private good element of performances). This desire is explicitly recognised, for example, in the NZSO Act which requires the NZSO to provide a touring orchestra thereby enabling access by New Zealanders to international standard orchestral music irrespective of whether or not such performances can be sustained on the basis of private funding. 7 In summary, orchestra performances have private good characteristics, a range of beneficial externality impacts (which are felt both locally, regionally and nationally) as well as an element of merit good. As a result, there is a basis for both private funding (through ticket sales, subscriptions, donations and sponsorship) and government funding (local and central). The balance between private funding and funding from central and local government will vary according to the nature of the performance. Three types of performance are considered. Commercial hire performances Commercial hires involve negotiations between the orchestra and the hirer to determine the price paid for the service. The price paid can be assumed to reflect at least the minimum benefits the hirer perceives from purchasing the services. Provided that the price paid covers the cost of providing the performance, there is no case for government funding. If the commercial hirer is not willing to pay the costs, then the case for any form of local or central government funding would need to rest firstly on demonstrating that there are material externality impacts (eg contributing to New Zealand s overall quality of life) and, secondly, subsidising the commercial event was a better use of public funds than subsidising something else. Domestic touring performances One of the functions of the NZSO is to be a touring orchestra. On the assumption that promoting access by New Zealanders to orchestral performances of high (international) standard is a government objective, it follows that the underlying externality benefits and merit good associated with this desired outcome, provides a case for central government funding. 6 7 There is evidence that the typical audience profile includes people with a tertiary education and above average income (Review Discussion paper page 14). We use the term private funding to encompass ticket sales, subscriptions, donations, sponsorships and commercial hires. 9

14 There is scope to also make a case for local government funding for NZSO touring costs on the basis that the NZSO is a significant draw card that attracts visitors to the centres in which the orchestra performs. This generates spin-off economic benefits for local/regional communities. Each of the city-based orchestras undertakes touring within the regions in which they are located. There are externality benefits that stem from this but the scope of these are likely to be local or regional, rather than national, in nature. It follows from this that there is a case for local government funding of the additional costs associated with within-region touring by the citybased orchestras. Local communities and city-based orchestras are likely to be best placed to assess the trade off between the regional externality benefits that stem from touring and the extra costs that touring involves. Touring by the city-based orchestras may also be viewed as helping to achieve an outcome of enabling access by New Zealanders to professional orchestras. In this regard, it could be argued that there is an element of merit good associated with touring and, hence, a possible basis for central government funding support. We note that concerts performed in smaller provincial centres may require a relatively higher proportion of local government funding because of the smaller audience base and venue size 8 (and, hence, smaller ticket revenues). The extent of this impact needs, however, to be assessed in terms of any differences in the costs involved in touring to smaller centres compared to larger centres (eg lower venue costs). In this regard, we note that the idea of population-based funding for orchestras has been raised (for performances in general rather than just in the context of touring). If access to orchestral music is an objective, then on a per head of population basis, government funding (local and central) would need to be higher in smaller centres than in larger metropolitan centres, other things being equal. This is because for a given size and quality of orchestra, the costs associated with it are spread over a fewer number of residents in smaller centres. Performances of international standard We have considered whether there is a case for proportionately higher central government funding for performances of international standard. In short, we consider that there is for the following reasons. It can be argued that society generally has a desire for top quality (international standard) orchestra capability and this is explicitly recognised in the NZSO Act. There is a strong merit good aspect accordingly. Having an international standard orchestra provides the pinnacle of career development for the most accomplished of New Zealand s musicians. In turn, this helps to maintain the top 8 Although there are some small centres with large venues which may enable a wider population base to attend concerts. 10

15 quality nature of the orchestra for future generations and, in this regard, there is an element of externality benefit. Maintaining a high international standard also assists inbeing able to attract top overseas performers and musical directors and retain New Zealand s leading musicians. In turn this has spill over benefits that flow beyond concert audiences including, for example, opportunities for these people to contribute to music education in schools and tertiary institutions and the community generally. Cities and New Zealand generally also are likely to derive benefit from having international standard orchestras in terms of promoting cities and New Zealand generally as a desirable place to live. The recognition that comes from performing to international standard feeds on itself to create opportunities to further lift orchestral capability the benefits of which a felt more widely than just concert audiences. Other activities The orchestras perform a wide range of other activities that, to varying extents, are performance related. These also have a mix of private good, public good/externality and merit good characteristics. Accompaniment services Orchestras provide accompaniment services for other cultural performances including support for the Royal New Zealand Ballet and the NBR New Zealand Opera. At one level, the nature of the service provided can be viewed as being essentially private in nature; the commissioning agent (ie Ballet or Opera) negotiates with the orchestras to agree on a price paid for the service performed. At another level, however, the Ballet and Opera are part of the arts and culture sector that orchestras are also a part of. Many of the public good/externality and merit good arguments that provide a basis for government funding of orchestras are also likely to apply to the Ballet and Opera (eg promoting cities and New Zealand generally as a desirable place to live and helping to foster a distinctively New Zealand cultural environment). Education-related services A significant part of the other activities undertaken by the orchestras and their individual players is education-related. These activities include structured educational support including master classes, mentoring and coaching, academies, scholarships and, in the case of individual players, tutoring in tertiary settings. The activities also provide support for New Zealand music and composers through initiatives such as composer residencies, commissioning of new works and workshops. 11

16 Education is generally seen as having both private and public good characteristics. Structured education and other forms of support provided by orchestras have an element of private good inasmuch as players, musical directors and conductors benefit directly through gaining added capability and experience that in turn assists with their employment and career development. Audiences also benefit directly from experiencing higher quality performances. As noted earlier, orchestra performances have a private good element. In addition, education/training and related activities undertaken by the orchestras also confer a range of externality benefits and these give rise to the public good aspect of education. For example, education-related services help to maintain and enhance musical capability for future generations. They also contribute to ongoing cultural enhancement that of itself has a strong public good dimension. We understand that a significant number of former students who have received tuition from the NZSO are still contributing to New Zealand s culture. There is also the potential for some local/regional externality benefit stemming from the interplay between orchestras and tertiary education institutions that create centres of learning excellence for music that then attracts teaching professionals and students. There are benefits from having musicians resident in a city who are available to contribute through the school system, university tutoring, playing and leading community music etc as well as benefits in that the musicians are in that city because there is an orchestra to play in (for their own development and satisfaction). Community engagement The orchestras engage in a wide range of community engagement activities, a major element of which includes working with schools to support and augment the delivery of the music-related part of the curriculum (the APO s Partnership with Schools programme extends to 50 schools). Also included are community concerts (and special visits to aged care and hospice facilities) and out-reach initiatives (eg the APO's programme based on El Sistema) in support of community development. These activities all give rise to externality benefits. The benefits are primarily at the local/regional level and, accordingly, there is a good case for community engagement activities to receive local government funding support. The localised nature of the benefits may also give rise to sponsorship/community trust funding opportunities. In the case of engagement with schools, the fact that compulsory sector education is funded by central government argues for an element of central government funding. 9 9 We note that some community engagement activities attract sponsorship funding (eg NZSO). 12

17 Summary The funding picture for orchestras is diverse and comprises multiple funding sources. This is consistent with the mixed nature of the economic characteristics that underlie the activities undertaken by the orchestras. For almost all of the activities, there is a case for central government funding based on public good/externality or merit good grounds. There are, however, two potential exceptions. The benefits associated with commercial hires are predominantly private in nature and, accordingly, are unlikely to warrant central government funding (and certainly do not warrant government funding if the private benefits captured are at least as much as the cost involved). Within-region touring by each of the city-based orchestras generates externality benefits that are locally or regionally felt rather than national in nature. It follows that there is a case for local government funding to help offset the additional costs of within-region touring. Possibly, a case could be made for matched central government funding on the basis that within-region touring by the city-based orchestras assists in promoting access by New Zealanders to professional orchestras. The merits of the case would rest on whether this was seen to be the best use of central government orchestra funding in value-for-money terms. Appendix 1 provides more commentary on the economic characteristics of orchestra activities and what this implies for funding sources. Allocating central government funding Where a case for central government funding is established, there is a subsidiary question as to whether that funding should be made available to all orchestras or only some of them. In large part, the response to this question rests on an assessment of value-for-money (ie relative benefits and costs). With respect to most activities, where the case for central government funding can be made, we consider that the case extends to providing funding for all of the orchestras. There are, however, a few instances where, on value-for-money grounds, we doubt that it is cost effective for central government funding to be directed to all of the orchestras. International touring A good case for central government funding support for international touring exists. International touring by the NZSO showcases what many New Zealanders would consider to be the country s premier orchestra (a status that the NZSO may well consider is supported by the international benchmarking it has through overseas CD reviews and European concert reviews). 13

18 The benefits that stem from this are world-wide recognition and acclaim that help to promote New Zealand generally and to maintain and attract the highest levels of orchestral talent and, hence, maintain high standards of orchestral performance that is made available to New Zealanders through the national touring programme. On value for money grounds, it is difficult to envisage that promoting multiple New Zealand orchestras on the world stage could be justified in benefit cost terms unless each of the orchestras was able to perform repertoire that was demonstrably unique or different in some way from the others. In general, providing funding for international touring by multiple orchestras would end up spreading funding resources far too thinly given the significant gross expenditure (ie leaving aside any private funding offset) involved in international touring. Performing to international standard One of the statutory objectives of the NZSO is to perform to an international standard. As discussed earlier, there is a case for providing central government funding in support of achieving this objective. We doubt, however, that there would be justification, on benefit/cost grounds, in a country the size of New Zealand in having two or more orchestras performing to an international standard. Conceivably, having two orchestras performing at the highest standard might afford more opportunity to provide New Zealanders with access to international standard performances but that would be conditional on having more funding available to offset the costs. In the current economic and fiscal environment, that seems unlikely. From a value for money perspective, it would almost certainly be better to direct funding to just one orchestra for this purpose. There might be a view that as New Zealand s largest city, and as a city that is explicitly trying to compete with other international cities, Auckland should have an orchestra of international standing. On first principles, having a world class city does confer wider benefits for New Zealand as a whole. By extension it could, therefore, be argued there is a case for funding an international class orchestra in Auckland. In our view, this issue is one of value-for-money and affordability rather than one of first principles and there is an underlying question as to which of a national versus city-based orchestra matters more. For example, consideration could be given to the option of the NZSO touring more frequently to Auckland. Community engagement All of the orchestras are involved in community engagement. There is a case for central government funding and we consider that this case extends across the four city-based orchestras. We are not convinced, however, that funding should be provided to the NZSO for this purpose. Our reason for this is based on our analysis of the marginal costs associated with community engagement. For the most part, the NZSO s community engagement activities are scheduled 14

19 around its touring programme. Our understanding is that community engagement activities are woven around touring commitments and not the other way around. Furthermore, they are structured in a way that seeks to avoid compromising the availability of resource for rehearsals and other orchestra activities. This approach means that the marginal costs associated with community engagement is very small for the reason that the resources involved have little or no opportunity cost (there is a small element of administration such as liaising with schools to confirm timing etc). Given the negligible level of cost, it follows that there is no, or little, funding required. In effect, New Zealand generally, and communities in particular, obtain benefit from community engagement that can be provided by the NZSO at very low marginal cost. In contrast, in the case of the city-based orchestras, the marginal costs are generally not zero and, accordingly, there is a need for funding. There is no shortage of demand on the orchestras, including the NZSO, to undertake community engagement activities. In the NZSO s case, its ability to respond to this is constrained by the demands of its touring schedule and its scheduling of community engagement also takes into account the community engagement of other orchestras. It would not make sense to fund the NZSO to extend its community engagement services beyond those that can be accommodated within its touring schedule. The marginal costs at that point would become very high because community engagement would then displace performances and other activities and we doubt that such an outcome could be justified on benefit/cost grounds. Furthermore, it would not make sense to fund the NZSO to extend its community engagement services if this resulted in a doubling-up of services provided by the other orchestras. Nationwide touring by the city-based orchestras Earlier we concluded that there is not a particularly strong case for central government funding for the extra costs that city-based orchestras incur in touring within their regions. For much the same sets of reasons, we also consider that there is not a strong case for providing central government funding support to any one of the city-based orchestras to tour in the regions served by the other three city-based orchestras. This leaves open, however, the issue of whether funding support should be provided if one of the city-based orchestras wanted to tour to a community not otherwise served by any of the citybased orchestras or other local orchestra (eg the Nelson Symphony Orchestra). On benefit cost grounds, it s difficult to see that a case for central government funding could be made on the assumption that the number of direct beneficiaries would be too small to warrant the costs involved. The only possible exception to this could be if one of the four city-based orchestras was able to perform a repertoire that was substantially different in quality or nature to that which could be performed by a local alternative. 10 Even in this situation, there would need to carefully consider the opportunity cost implications of directing central government funding to a performance that is likely to confer modest benefits. 10 This line of argument supports nationwide touring by the NZSO. 15

20 Table 4 in Appendix 1 provides more discussion on the issue of whether all, or only some, orchestras should receive central government funding in situations where, on public good/merit good/externality benefit grounds a case for government funding could be made. 16

21 Appendix 1 Funding framework Two sets of tables are presented below. The first of these (Table 3) sets out the various roles performed by some, or all, of the orchestras 11 that are within scope of this review. The roles/functions are assessed in terms of their economic characteristics (ie extent to which each activity has private, public good/externality or merit good characteristics). Depending on where each role/function sits along this spectrum will help to guide the way in which that role/function should be funded. It should be noted that the graphs showing funding shares are indicative only. The actual share of funding depends on further analysis of costs and benefits and judgements regarding societal preferences. The second of the tables (Table 4) focuses on those functions for which there is a case for central government funding and addresses the issue of whether central government funding across these functions should be directed to all, or only some, of the five orchestras that are within scope. Table 3: Assessment of the economic characteristics of orchestra activities Role/function To what extent does the role/function have private, regional or public good benefits? Comment Indicative funding implication Live concerts (other than commercial hires) performed in the home location of each city-based orchestra and in Wellington for the NZSO Predominantly a form of entertainment where the immediate/direct benefits are captured by ticket holders/subscribers. Live concerts can be a way of attracting visitors to the host city/town and, accordingly, there are potential regional economic spill-over benefits. Similarly, city-based orchestras can be part of the wide mix of factors that help to attract people to live in that city. This also extends to helping to attract music staff and students to tertiary education institutions that are located in the same city as the orchestra. Live performances are one channel through which national culture is promoted promotion of national culture is seen as having public good/externality characteristics. In general, the benefits of orchestras extend beyond just the paying audience. Performing, and the frequency of performance, is a key part of maintaining high standards of performance for the benefit of current and future generations. Concerts (and concert programmes) are often supported by sponsorship funding. The mix of private, public good/externality, club good and merit good characteristics points to a mix of funding comprising ticket sales/subscriptions, sponsorship, local government funding and central government funding. The determination of funding shares depends on further analysis of benefits and costs but in general would see the approach being based on: Total costs Less ticket sales, subscriptions and sponsorship Equals balance to be funded by local and central government With balance split between central and local government based on relative benefit levels. An implication of promoting access by New Zealanders to orchestras is that for a given level of cost, government funding on a per capita basis will be higher in smaller centres and lower in major centres. Central government Local government Audiences Sponsorship, donations, grants Commercial hires (excluding support for the creative arts which is covered later in the table) By definition, the benefits of a commercial hire are essentially private in nature. Potentially there may be spill-over benefits of a regional nature (eg people who come to the event from other parts of New Zealand and spend money on accommodation). However, the existence of spillover regional benefits does not warrant local government funding if the private benefits are sufficient to offset the cost of the event. Funding for a commercial hire should be determined by the outcome of negotiations between the orchestra involved and the hirer. Audiences Within-region touring (APO, VWO, CSO and SS only) Private benefits are captured by the audience. Possibly there are some regional spin-off benefits as a result of attracting visitors to towns/cities where the touring orchestra is performing. Possibly some element of merit good in the sense of promoting access by New Zealanders to performances and New Zealand culture. The main issue is who pays for the additional costs of within-region touring (ie costs over and above those involved with a home location performance). The benefits of within region touring are predominantly a local issue with local government and the city-based orchestra best placed to determine the trade-off between the additional costs and benefits involved. On access to performance/culture grounds, the case for central government funding is not particularly strong. By implication, the extra costs associated with within-region touring fall on local government. Local government 11 Not all of the roles described in the table apply equally to all of the orchestras. 17

22 Role/function To what extent does the role/function have private, regional or public good benefits? Comment Indicative funding implication Note that within-region tours may also attract sponsorship funding. Nationwide touring (ie NZSO touring anywhere in New Zealand outside of Wellington and city-based orchestras touring outside their normal catchment area) Private benefits are captured by the audience. There are regional spin-off benefits through attracting visitors to cities where the touring orchestra is performing (the strength of regional benefit is directly related to the quality/appeal of the orchestra). There are also elements of merit good in the sense of promoting access to live orchestral performances for New Zealanders who live outside of the four regions covered by APO, VWO, CSO and SS. With respect to the NZSO, the objective of promoting access by New Zealanders to high quality (international standard) orchestra performances would argue for government funding support for the NZSO s touring programme within New Zealand. The extra costs of national touring (ie excluding performance-related costs) would fall on central and local government reflecting the mix of regional and national externality benefits. The case for central government funding for touring would not extend to supporting touring by any of the APO, VWO, CSO and SS in the regions covered by the four orchestras (ie, it would only apply to touring outside of these four areas). Central government funding for NZSO would extend to any touring assuming NZSO is considered to be of higher standard. Note that national tours may also attract sponsorship funding. Note also that the NZSO receives no local government funding to support national touring notwithstanding that there are regional benefits stemming from NZSO performances outside of Wellington. Central government Local government International touring Direct private benefits are conferred on concert audiences in overseas countries. In addition, there are other (indirect) benefits in terms of: Enhanced artistic competence. Some of the benefits of this are private good in nature because they are captured by musicians (ie lifting their own capability) and by concert audiences (both here and overseas). Equally, some of the benefits are more public good /externality in nature in terms of helping to recruit the highest standard players on the international market and maintaining the quality of the orchestra for future generations. Helping to promote New Zealand on the world stage and raising New Zealand s reputation. There is little doubt that successful international tours enable the best of New Zealand s creativity and cultural achievement to be demonstrated. Although hard to measure, enhanced reputation can assist in attracting high net worth investors and migrants to New Zealand. There is an issue regarding who pays for the extra costs involved with international touring. Some contribution is likely to come from ticket holders (eg if willingness to pay among international audiences is higher than domestic audiences and/or if there is access to larger venues) as well as sponsorship for example the NZSO obtained sponsorship from Pacific Blue specific to its Shanghai/European tour in A case for government funding to bridge the gap between total costs and third party revenue (ticket sales and any sponsorship) can be made on the basis of the externality benefits conferred as a result of international touring. There is no obvious case for local government funding. Central government Sponsorship, donations, grants Audiences Recordings and broadcasts (including commissions) Strong element of private good (eg over one million NZSO CDs have been distributed internationally in the last decade - Review paper page 39 refers). Some broadcasts receive sponsorship. The mix of private and public good characteristics points to a mix of funding comprising CD and download sales/sponsorship and central government funding. The general approach to determining funding shares would be based on: Central government There is no regional benefit. Total costs Sponsorship, donations, grants Recordings and broadcast performances are channels through which national culture is promoted and, hence, there is an element of public good/externality benefit. Less sales/royalties and sponsorship Equals balance to be funded by central government. Audiences Performance of music to an international standard There is an element of private good through the performance itself. However, the issue of international standard serves other purposes in terms of: Being a peak organisation Being the pinnacle of career development (pathway for elite musicians) Providing a mechanism for attracting top overseas-based soloists and musical directors and, hence, maintaining the international high standing of the orchestra Audiences and central government should pay for the additional quality, and marginal cost, that is associated with performing to an international standard. In practical terms, that means that central government will fund orchestras that perform to international standard at a higher level than other orchestras. Central government Audiences New Zealanders' access to live performances to the world s best artists, attracted here because there is a top-quality orchestra to perform with. 18

23 Role/function To what extent does the role/function have private, regional or public good benefits? Comment Indicative funding implication Encouraging New Zealand music and composition (and composers) and contributing to New Zealand s distinctive culture through: Investing in composer residencies Some private benefit is captured by musicians. There is an element of externality benefit stemming from the contribution to New Zealand s culture (developing cultural capital and public access to New Zealand content)and in supporting talented New Zealand musicians including by providing career development opportunities and domestic opportunities to perform in orchestras of international quality. Private and localised externality benefits are likely to be small relative to the wider externality benefits associated with promoting New Zealand s culture. Note that there is cross-over with universities that provide funding for residencies (eg Otago University s Mozart Fellowship for composers). Accordingly, there is an issue of whether decisions regarding funding for orchestras should take this into account. Central government Workshops Commissioning of new works There is potential for some localised externality benefit stemming from choices made regarding the location of composer residencies and workshops. Performance and recordings. Education (structured): Master classes Mentoring programmes Coaching of players Training (eg NZSO National Youth orchestra) Strong career development aspects to this. Benefits are captured by the musicians (the private good element of education) but, generally, there is a view that educational outcomes have a strong public good dimension. Mutual benefits conferred on orchestras and music schools within tertiary education institutions stemming from most if not all of these activities. Orchestra education programmes earn minimal revenue from users or participants and, accordingly, these functions rely more so than other activities on funding from private and community trusts as well as from philanthropists. Given there is a public good aspect to education services, the gap between costs and revenue provided from trust and philanthropic services should be met predominantly from central government. Central government Sponsorship, donations, grants Academies Scholarships. Community engagement programmes: Compulsory sector education is generally viewed as having strong public good characteristics. Of the three examples noted: School concerts/visits Free concerts (eg Christmas in the park) Outreach services (eg to the young and elderly). There are some benefits in terms of contributing to community well-being (implying a case for regional funding). Free concerts have regional, rather than national externality benefits and give rise to opportunities for sponsorship. Central government funding is appropriate for school concerts/visits Local government and sponsorship funding is appropriate for free community-based concerts A mix of central and local government funding for outreach services depending on the relative significance of community benefit compared to wider social/educational benefits. Central government Local government Support for the creative arts: Support for visiting performers Soundtracks for movies Accompaniment for dance and musical theatre (including opera and ballet). Private benefits are conferred in that there is generally an audience involved albeit that the orchestra is not the main event. Sponsorship of creative arts performances is common place. Maintaining a vibrant creative arts sector has public good characteristics and accordingly, warrants government funding for the cost of inputs, of which orchestras are a part. Regional benefits are likely to flow from creative arts performances/events at which an orchestra plays a supporting role. The relative share of funding from private sources (ie audiences, promoters and sponsors) and government (local and central) sources should be linked to funding arrangements for the headline performer/event (eg a movie that is funded entirely on a commercial basis should not benefit from government orchestra funding). Central government Local government Audiences Sponsorship, donations, grants 19