Economic impact of World Cup, Olympics can be a two-way street
Edith Noriega | Thursday, Aug. 23, 2018
When countries bid for the Olympics or World Cup, two of the largest sporting events in the world, it presents a grand opportunity to showcase a city or region that can have a multidimensional impact on the host city and countries.
For both, potential hosts begin the bidding process years before the events are scheduled to take place — and for good reason.
According to the 2026 FIFA World Cup Guide to the Bidding Process the FIFA administration and bid committee requires an assessment level of compliance of each bid, determining the risks and benefits that include cost, revenue and human rights impact as well as a technical evaluation covering key infrastructural and commercial components needed to stage a successful World Cup.
Through extensive data, researchers have said a host’s biggest failures are often seen in cost and revenue and in infrastructure diminishment after the event ends.
Take the 2006 FIFA World Cup in Germany for example. The country spent more than “1.4 billion euros building or rehabilitating 12 stadiums in 12 cities for the World Cup of which at least 35 percent was provided by local, state and federal taxpayers,” according to Victor Matheson, economics and accounting professor at the College of the Holy Cross.
“It is common error in cost-benefit analysis for the costs of infrastructure improvements to be counted as a benefit and not a cost. While construction expenditures for sports infrastructure undoubtedly have stimulative effects on the economy, the opportunity cost of capital must also be considered,” said Matheson.
John Siegfried and Andrew Zimbalist, authors of “The Economics of Sports Facilities and Their Communities” wrote the reason cost of capital must be considered is “sports facilities are not expected to generate additional net output in a metropolitan area and no systematic empirical analysis ever finds evidence that they do, sports facilities cannot be counted on to augment tax collections.”
So, if technology, labor or materials have to be obtained from outside of the local economy, this results in an outflow of money away from the host city.
“Even if all monies spent on construction stay in the local economy, there is nothing to suggest that stadium building is the best use of government funds and that the return on sports infrastructure exceeds the return on the next best alternative,” said Matheson.
The stadium built in Cuiaba, Brazil, which cost $215 million, featured in numerous negative reports ranging from faulty construction to “homeless people squatting in its unused locker rooms,” according to NPR.
Other stadiums built around Brazil for the World Cup have been put up for sale because of the $233,000 monthly bill to operate them or because of cash flow problems.
Brazilian sports reporter Jose Cruz told NPR, “the stadiums have become a mark of shame.”
“I don’t see any World Cup legacy to Brazil except the debts we have inherited and the problems we now have,” Cruz said.
Additional negative factors include a significant decrease in regular tourism from abroad and/or displaced internal tourism by residents.
Professors Swantje Allmers and Wolfgang Maennig, at the University of Hamburg, Germany, found the effects of lost tourism during the 1998 World Cup in France and 2006 World Cup in Germany were significant.
“Tourists who are less WC-enthusiastic, for example, might postpone a planned trip to the host nation or even cancel it on account of the event; mega-events often carry consequences that are undesirable for normal tourism, such as noise and traffic jams, higher prices and potentially compromised security,” the professors wrote.
Allmers and Maennig’s research data found that in June 1998 — the time period of World Cup pool play — France experienced a decline in the number of non-resident overnight stays by about 925,000 (13.4 percent) compared with June 1997. In July 1998 — the time period of the World Cup knockout rounds and final — the number of non-resident stays increased by 513,000 (6.2 percent) over July 1997.
“In the case of Germany 2006, 708,000 overnight stays by non-residents translate into fewer than than 100,000 hotel tourists who visited Germany for the WC,” according to Allmers and Maennig.
While tourism leaves a small dent in an economy, the 2010 FIFA World Cup in Johannesburg, South Africa, found a path for major success before and after the games.
According to The Washington Times, South Africa spent more than $3 billion getting the country ready for the games.
“Infrastructure received a huge boost in the run-up to the World Cup. Domestic public transportation was created, roads were repaired and hosts cities received renovations. All of which created jobs and helped boost the economic activity in South Africa,” according to Forbes.
A year after the games ended, Grant Thornton estimated South Africa saw up to 350,000 arrivals specifically for the World Cup.
“June 2010 retail sales were up 7.4 percent on June 2009. South African restaurant group Famous Brands recorded a 24 percent increase in sales in June 2010 compared to the same month the previous year,” according to the advisory firm.
The transformation of South Africa’s cities and rise in tourism ended up leaving a long-term impact on business.
When it comes to The Olympic Games, the International Olympic Committee operates a little differently.
According to the 2020 Olympic Agenda, the IOC process includes: strategizing the games unique to the candidate city, legal and financial funding and ensuring a successful delivery of games and a sustainable legacy.
The IOC’s complete self-branding effort during the Atlanta 1996 Olympics led to changes in everything from broadcasting rights, sponsorship deals and a rise in global Olympic revenue. The 2002 Salt Lake City bidding scandal altered the landscape even more, requiring greater oversight to the bidding process.
In the Sports Business Journal, reporter Ben Fischer wrote “those changes put in motion a pattern that is still going on today as the IOC steadily exerted more central control over key aspects of the Olympics, leaving local host cities with less power.”
“The IOC retains control over the games, pockets the revenues from broadcasting rights and corporate sponsorship but is neither responsible for hosting and paying for the games nor at risk if any losses occur. It provides less than 13 percent of the direct cost of the games,” wrote author of The Conversation article, John Rennie Short, a professor at the University of Maryland Baltimore County School of Public Policy.
It can cost a great deal of money to host the Olympics, beginning with the bidding process.
Michael P. Overmyer, then an undergraduate researcher at Grand Valley State University, conducted an analysis on Olympic host-cities in 2017 and found that cities must create a National Organizing Committee (NOC) and submit a reasonable bid to the IOC.
IOC Media Relations confirmed in an email that no fees have to be paid by the cities for the Candidature Process for the 2026 Olympic Winter Games. However, cities in the candidature process for the 2024 Olympic Games during Stage 1 and Stage 2 require a fee of $50,000 and during Stage 3 require a fee of $150,000.
Up to the 2022 Olympic Games, candidature processes required applicant cities and candidate cities to pay $150,000.
“Between the 1984 and 2006 bid procedures, the deposit/fee was an amount of Swiss franc/USD 100,000, refundable for cities not elected. For 2006 a USD $25,000 portion of the deposit/fee would not be refunded should any candidate city withdraw from the bid procedure,” the IOC Studies Centre wrote in an email.
The IOC Studies Centre wrote the candidature fee was increased to $500,000 for the bid procedures for games between 2012 and 2022. Additionally, a stipulation was added that the fee was non-refundable.
The New York Times reported in 2002 that to develop and promote the New York bid for the 2012 Olympic Games an estimated $13 million in private funding would be raised and spent, more than any of the three other candidates had budgeted.
“While the developers say none of it will come out of the city or state operational budgets, any commitment of bonding capacity or future tax revenue could be dicey for local governments that are already reeling under heavy debt and shrinking revenues,” according to The New York Times.
New York City did not end up making it past the second round; London was awarded the 2012 Games.
So, is hosting the Olympics a good investment?
In a comprehensive analysis titled “Going for the Gold: The Economics of the Olympics” by economists Robert Baade and Victor Matheson, they specifically looked at the costs of hosting the Olympics from 1968 to 2012 and found that every Olympic Games ended up costing more than originally estimated. The median games cost 150 percent over the original budget.
One of the worst offenders was the 1976 Montreal Olympics, which ended up costing $1.5 billion. Baade and Matheson reported costs “exceeded initial estimates by more than ten-fold.”
One could argue that Montreal was doomed from the beginning. Cleveland State University researchers Ashish Patel, Paul A. Bosela and Norbert Delatte wrote “it was a case of project management failure.”
“The potential embarrassment of missing the opening of the games provided a fixed construction deadline. The planning started about 2 years late, and scheduling fell apart because it was physically impossible to accommodate all the construction activities on the project site,” according to the Cleveland State researchers.
Because the city of Montreal was slow in preparing bid documents it resulted in “double crews, double shifts and overtime were used to attempt to increase productivity, but because of congestion, the increase in productivity was slight,” according to the Cleveland State researchers.
In 2003, Dick Pound, a former member of the IOC, wrote in Maisonneuve Magazine defending the legacy of the 1976 Montreal Olympics and said that “mayor of Montreal, Jean Drapeau, ran a brilliant campaign beating two other cities, Hamilton and Toronto, as the Canadian choice.”
But from a public perspective, Pound said “the most serious error made by Drapeau was to not separate the Olympic-specific costs from the basic infrastructure improvements, such as roads and the extension of the superb metro system, that Montreal needed with or without the Olympics.”
“The result was that the public, spurred on by the media, who appeared to willfully misunderstand the difference between the Olympic construction and the long-term infrastructure investment, was led to the belief that all such costs were Olympic costs,” Pound said.
It wasn’t until three decades later that CBC News reported Quebec finally paid off the debt from the Olympic Games.
In the 21st century, the 2004 Athens Olympics have been the most debated. Some argued the outcome had a negative impact on the economy while others said it had a positive.
According to a Time article by Josh Sanburn, those games cost Greece about $11 billion — at least double what the Greek government had initially budgeted — to host the Games. That doesn’t include the money the country has spent trying to maintain its seldom used Olympic facilities.
Sanburn wrote one of the reasons for the high cost was the city was forced by the U.S. and United Kingdom to spend $1.2 billion on security alone because of fears over terrorism. In the months leading up to the opening ceremonies, Athens had to rush just to get construction projects completed.
In Overmyer’s analysis on Athens economic costs, he said many investments by the Greek state had to be increased as the cost estimation in early years was drastically underestimated, and new investments had to be made to finish construction of projects.
“Massive state of the art athletic facilities, new roads, Olympic Village, and public transportation upgrades. The Athens 2004 Organizing Committee as a company reported total overall expenditures of 1.968 billion euros, with most of the difference going to the Greek State.” wrote Overmyer.
Nevertheless, strong evidence of a short-term positive effect from the Olympic Games remains in one of the smallest countries to ever serve as host.
The Foundation for Economic & Industrial Research looked at the impact on tourism and employment during and after the Olympics and found that “for 3 years after the Olympic Games, the visits to Attica were increasing every year by 4-9 percent (20 percent throughout the period 2004-2007).
“Growth was observed already from 2004 with the games, as the number of arrivals increased from 6.1 million in 2003 to 8.2 million in 2007.
A similar spike was seen in employment, most notably in 2002 and 2003, that ‘“interrupted a long period of rising unemployment (1990-1999),” according to the research.
“During that two-year period, the unemployment rate in Greece continued to fall, in contrast with unemployment in the European Union 15 overall. After a temporary hike in unemployment in 2004, perhaps due to the completion of the projects for the games, the unemployment rate returned to a path of decline in the four post-Olympic years,” according to the research.
Although the statistics and research used make up only a small sample, they have the potential to pave the way for future events. Predictions on the economic impact for the Tokyo 2020 Games and 2022 FIFA World Cup in Qatar have already begun to come out.
In a 2016 report, the Bank of Japan’s research and statistics department wrote “they can expect to have positive effects on the Japanese economy. Such effects will come mainly through the following two demand channels: an increase in foreign tourism, and an increase in construction investment associated with the event.
Oxford Business Group wrote as part of a 2015 report that “Qatar has not spent money on grandiose, but unnecessary, big-ticket projects. The large-scale investments that the World Cup entails will generate opportunities for contractors to help deliver projects that will benefit Qatar in the long term, and not just during the month-long tournament.”
Edith Noriega is a junior journalism major at Arizona State University