Mega events – Mega debts

The stunning displays of athleticism and the passion displayed by the fans during global sporting events like this year’s FIFA World Cup often give the impression of a great party in a global village that nobody would dare rain on. However, despite the self-congratulation of organisation committees and local officials, some have argued that behind the cheers lies a grimmer reality: one of unsustainable debt, unfulfilled promise for the local industries, and general lack of awareness in regards to the lives of the host country’s residents. Because of this mounting criticism toward mega-events, the campaign for the organisation of the 2024 Olympics saw candidates drop one after the other, leaving only Paris and Los Angeles.  Why then do cities and countries still bid for organising such events? Have their reasons changed over time? What is the expected economic impact of such events, and does this change with the type of event?

To answer these first two questions, one can take the case of the Olympic Games, an event with a capacity to attract bidders that have greatly varied over time. Traditionally, the Olympics were awarded to developed countries and were mostly driven by political factors, with countries not expecting to turn a profit before the dawning of the age of television. However, the number of participants and events increased by a third during the 1960s. As a consequence, the cities were increasingly ambitious, and the explosion of costs left citizens to wonder on the utility of such events.  It is also during this time that concerns like the environment and social justice appeared to be increasingly incompatible with the Olympics. In addition, the disastrous events in both Mexico City, where student protesters were shot days before the opening, and in Munich, where Israeli athletes were held hostage and shot by a terrorist group, contribute to further harm the credibility of the Olympic Committee (IOC). Finally, it is during this period that Denver refused to host the Winter Olympics despite a successful bid. The huge debt contracted by the city of Montreal to host the 1976 Olympics was the “coup de grâce” that ended an era for the Olympics. This unpopularity, however, would not last, and being the only candidate for hosting the 1984 Olympics, Los Angeles was able to reuse much of its facilities and to negotiate favorable terms with the IOC resulting in the city being the only one to ever turn a profit. Television revenues became an increasing source of revenue for the Olympics, although the IOC keeps more than half for itself. After the success of the LA games, Olympics were back in fashion, and over the following years bids once again grew and multiplied.

The second era, spanning the 1990s and the 2000s, also saw the emergence of new actors, as emerging and developing countries began to successfully bid to the IOC, with the ambition to prove to the world that they had achieved their transition and deserved a place in the public eye. Some of these games achieved just that, like Barcelona in 1996, where the Olympics helped transform a forgotten city into a tourism hotspot, or like in Beijing in 2008, where the colossal budget of $45Bn was mostly used for transports infrastructure and depollution operations. However, the euphoria didn’t last, as every edition’s increased spending has put pressure on candidates to put forward increasingly ambitious and costly projects. The lack of positive impact from the games has been most obvious for Athens in 2004, whose costs contributed to the ruin of Greece, and for Rio, whose 2016 event followed the 2014 World Cup, forcing the Rio governorate to be relieved by the federal government twice. This second case is particularly emblematic, as the city had to subsidise the construction of hotel rooms and failed to deliver any of the improvements it had promised to the people of Rio, among which was a depollution of the waterways and improved standards of living in low income areas.

The issue with the Olympics seems to stem from two main sources. The first comes from the distorted incentives that encourage bidders to put forward extravagant propositions, including facilities for exotic sports that will not be fully used during the games and never reused after – think bobsleigh and indoor cycling tracks – instead of more useful infrastructure investments that will at least partially benefit the population. The second issue is the poor ex-ante evaluation of the Olympics’ impact. Despite the bidders paying for everything, the IOC keeps the lion’s share of television revenues. In addition, during the selection process, costs are often underestimated by the promoters, resulting in massive unplanned spending. The job opportunities advertised by Olympics officials often fall short, the increase in employment is only temporary (Matheson et al.), and those extra hours of labour usually go to people who are already employed. Finally, the Barcelona example is often quoted to argue that Olympics at least benefit the tourism industry. However, findings suggest it is not always the case as tourists might delay their presence in a city if it is hosting such an event, as they fear bigger crowds and increased costs. For instance, London, Beijing and Salt Lake City all had fewer visitors the year they hosted the Olympics.

While it seems that organising the Olympics is rarely beneficial for a city and country from a purely economic standpoint, they might produce a feel-good effect for the population or an increased visibility for a country on the diplomatic stage. Do the adverse effects also happen for other types of competitions? Studies made on the FIFA World Cup, by Allmers and Maennig, and the Superbowl, by Matheson, also find that benefits are largely overstated, although they at least seem to exist in the case of the Superbowl. This is likely to be because cities in the United States already invest in huge stadiums for the purpose of prestige, so they usually have few direct costs to bear if they are selected to host a major sporting event.

Mega-sport events usually seem to be a bad deal if measured only in terms of direct economic impact, but these could potentially be mitigated by strategies such as reusing existing infrastructure, filing a bid only when the organising committee is desperate to find organisers or sharing the event between countries or cities, as is explored in another article in this issue.

by Joel Bréhin

800px-Beijing_national_stadium
Beijing National Stadium

 

 

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