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Hosting mega sporting events – a boost for the host nation’s economy?

10 October 2018

Major sporting events such as the FIFA World Cup and the Olympics are recognized as a symbol of glory not just for the winning nation but for the host country as well. Research finds that a total of USD 47 billion has been spent on the last five World Cups, including the recent one held in Russia. The expenditure includes stadium development, infrastructure costs and spending to facilitate tourism. The popular event was watched by close to 2.6 million fans in Russia. However, this is a small figure in comparison to the estimated 3.5 billion fans who watched it on TV and via online streaming. Similarly, 3.6 billion people watched the 2016 summer Olympics.

 

total cost of fifa world cups

 

Benefits for the host nation
Hosting large sporting events requires countries to undertake mega projects and events, resulting in direct economic impact. This leads to an increase in activity and employment in the engineering, procurement and construction sector related to infrastructure spending, along with increased employment and spending in the tourism sector resulting from the inflow of tourists into the country (though this might displace non-event tourism because of congestion costs), as well as an increase in consumer spending during the event.

 

comparitive cost for each of the last 6 fifa worldcups

Hosting the event provides several “intangible benefits” such as the opportunity to demonstrate their ability to undertake complex projects for nations hosting these mega events, along with a chance to build and/or promote their “brand name”. The valuable brand name could then attract foreign investment and increased international trade and tourism.

For FIFA, the other immediate benefit of hosting the World Cup is that the host nation automatically qualifies for the tournament and must include massive tax exemptions for the FIFA association and its corporate partners. Germany, for example, offered FIFA an estimated USD 272 million in tax exemptions when it hosted the 2006 World Cup.
The true winner of the World Cup, however, is neither the country with the winning team nor the host country – it is FIFA. The organization is said to have generated USD 3 billion in revenue from broadcasting rights alone, which is said to be a 25 per cent increase compared to the 2014 figure. A further USD 1.6 billion sum is said to have been generated from corporate sponsorships, according to KPMG findings.

 

Fifa earnings from fifa worldcup 2018

Cost of organising events
In addition to the large capital outlays: stadiums, sports facilities that are built, modernised or upgraded and hotels and lodging for visitors and participants; investments must be made in transport and logistics to move millions of people: roads, trains, stations and airports have to be built or expanded to absorb the influx of millions over short periods.

Furthermore, the non-recapturable security costs are increasing. For instance, the World Cup in 2018 had a declared bill of USD 14.2 billion, which comes second to Brazil’s USD 15 billion figure. Most of this money was invested in transport infrastructure (USD 6.11 billion), stadium construction (USD 3.45 billion) and accommodation (USD 680 million).

 

organizing cost components for fifa world cup 2018

The Oxford Olympics Study in 2016 found that direct sports-related costs for the summer games since 1960 are around USD 5.2 billion and the winter games costs are approximately USD 3.1 billion. These costs, however, exclude the wider infrastructure costs like roads, urban rail and airports, which often cost as much as or more than the actual sports-related costs. Tokyo’s budget for the 2020 Olympics is quite high in comparison – standing at $12.6 billion, after several budget cuts and revisions.

 

Olympics organizing cost over the years

 

Economic impact on Russia
FIFA estimates suggest that around 570,000 foreign fans and 700,000 Russians attended World Cup matches in Russia. The latter gave the tourism sector, ranging from hotels to restaurants, a short-term boost. Visiting fans are estimated to have spent between USD 5,000 to 8,000 on an average, thereby contributing an additional USD 2.5-4 billion to consumption. It is also estimated that the countries which host certain events welcome approximately 25%more tourists the following year.

 

Fan attending fifa world cup matches

 

Euromonitor findings suggest that inbound arrivals in Russia are expected to record a compound annual growth rate of 4 per cent by 2022, reaching 37.5 million trips. Euromonitor also forecasts a 1.4 per cent increase in the number of total arrivals to Russia in 2018, as a direct result of hosting the major sporting event.

 

growth of inbound travellers in russia over the next 5 years

growth of inbound travellers in russia during fifa world cup

Research from rating agency Moody’s finds that the food, hotel, telecoms and transport industries would see a temporary boost in revenue, adding that Moscow airports would also benefit because upgraded facilities will support higher passenger flows even after the event. The report also mentioned that much of the economic impact has already been felt through infrastructure spending, and even there the impact has been limited. World Cup-related investments in 2013-2017 accounted for only 1 per cent of total investments.

 

cost of constructing and renovating housing and medical infrastructure for fifa world cup 2018

transport infrastucture development cost for fifa world cup 2018

 

The World Cup in Russia took place at a time when the country’s economy was slowly recovering from economic sanctions and low oil prices. Organisers estimated that the 2018 World Cup would have an impact of USD 15 billion on the GDP in Russia. German bank Commerzbank mentions that despite the prestige element for the host country, the economic impact of the event is negligible. They also mentioned that there was a sentiment boost associated with the tournament. Commerzbank studied GDP growth in winning countries and found that the quarter after the World Cup experiences more rapid growth in most cases.

 

impact of fifa world cup 2018 on GDP of Russia

 

The real impact
A Russian government survey estimated that the World Cup would boost the country’s GDP to reach between USD 26 billion and USD 30.8 billion over 10 years between 2013 to 2023. The estimates were based on expected revenue from tourism, construction and government investments. In Japan, research by Bank of Japan estimates that the 2020 Olympics are expected to bring a GDP increase of 1 per cent.

 

boost in Russia's GDP between 2013 to 2023 due to fifa world cup 2018

 

impact of 2020 olympics on GDP of Japan

 

The argument is typically that hosting a major event of the sort possesses the ability to attract tourists, initiate major infrastructure projects and showcase a country’s business potentials. It is, however, often found that the costs of achieving those goals outweigh the economic benefits due to several reasons.

1. Opportunity cost
The money spent by the host country on new infrastructure may otherwise be used on long-term investments relating to critical areas of the economy. Sporting infrastructure is expensive to construct and maintain. It requires large, high-value real estate and has high maintenance costs. In addition, it is not used very frequently once the sporting event it is created for is over and it often impacts the lives of residents in the area. Prior to the 2010 World Cup in South Africa, for instance, low-income residents living in settlements near tournament sites were evicted to improve the country’s image.

Furthermore, what was once Brazil’s most expensive World Cup stadium is now a parking lot. Keeping in mind that the nation spent USD 15 billion in World Cup preparations, the large sum of money could have been used for better causes. Brazil’s National Court of Auditors mentioned that public spending on the World Cup would be enough to cover the entire country’s social welfare bill twice. Brazil also spent USD 13 billion on the Rio Olympics, USD 10 billion more than the figure initially estimated. To afford it, Rio de Janeiro had to cut down on healthcare and police spending. With an economic impact of USD 3-13 billion, it’s hard to argue that taxpayers saw a fair return on their investment.

 

2. Changing tourism patterns
In Beijing and London, year-on-year visits decreased in their Olympic years, in 2008 and 2012 respectively. The British Museum in the UK saw 22% fewer visitors during the month that the games were held. The British government concluded that “there was substantial displacement of regular visitors who were deterred by the potential for overcrowding, disruption and price rises”.

Even when tourism does increase, it doesn’t always benefit the country because there is a spend associated with attracting visitors. Before the 2010 World Cup in South Africa, 450,000 tourists were predicted to enter the country for the tournament. However, only two thirds showed up. Despite the reduced numbers, visitor spend increased by almost a quarter, but at a cost of acquisition to the South African government of up to USD 13,000.
Hotel prices rise during the event season, but wages of service workers do not always go up by the same amount, meaning the returns to capital are greater than those to labour.

 

3. Increasing share of revenue going to governing bodies
Advanced economies usually generate revenue from the events, as they only require minor upgrades to their existing sporting, hospitality and mobility infrastructure. The 1984 Olympics in Los Angeles are regarded as a successful and profitable competition, and the London Olympics were said to have generated USD 5.2 billion in revenue.

 

revenue from london olympics

 

Revenue streams for organizers include gate receipts, merchandise sales, sponsorships and licensing agreements, but by far the biggest income flow comes from television rights. However, the governing bodies behind sporting events are taking large shares, making it harder for local organizers to make money.

The Economist research suggests that the International Olympic Committee (IOC) now takes more than 70% of television revenue from the Games, up from 4% between 1960 and 1980. Soccer’s governing body FIFA generated almost USD 5 billion in revenue from the 2014 World Cup, about half of which came from television rights, despite them contributing nothing to the costs of staging the tournament.

 

FIFA generated revenue from 2014 world cup

 

Bottom-line
Other than the pride associating with hosting the event, the benefits for the host country are limited. With standards and expectations growing, countries are spending large sums of money. However, evidence suggests little to no economic benefits of doing so. Furthermore, the opportunity cost of these large-scale events should be considered – spending on social development and basic infrastructure. Unless the revenue sharing model changes, the event should be held in advanced economies only.