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France, Russia or No One: Who Really Wins from Major Sporting Events?

August 1, 2018
Editor(s): Lachlan Hall
Writer(s): Matthew Trachevski, Kevin Wang, Alvin Hidayat

As Russia winds down a month of football festivities, we are left to wonder whether the World Cup, and major sporting events in general, enhance a host nation’s prospects or leave them with an economic headache.

Ever since Uruguay got the ball rolling in 1930, the World Cup has been pronounced on the calendars of sports fans, ambitious governments and construction contractors alike. And while the event might ultimately exist to determine which country is best at kicking a ball, let there be no mistake; the World Cup is big business. The main players involved are often overlooked labourers, (mostly) men employed to erect modern colosseums, and, so they are likely told, legacies for the local economy. Lined up beside them are broadcasters, advertisers, retailers, and, in all probability, that annoying guy who busks by performing acrobatic ball juggling. But the World Cup is so much more than a fleeting get-together of opportunistic merchants. It’s a chance to provide a country with new and improved public facilities, an injection of tourism money, clout among trading partners, and a camera to its culture. Right?

The Price of Hosting

The World Cup, and all major sporting events for that matter, brings immense financial commitment and risk to the country tasked with hosting it. Figure 1 shows the significant amount of money spent by host nations in recent years, with Russia’s estimated US$15 billion making it the most expensive World Cup to date. However, this outlay is relatively modest compared to Russia’s Winter Olympics 4 years earlier in Sochi, where a lavish US$51 billion was spent.

The costs of hosting major sporting events aren’t just exorbitant; they’re unforeseeable. The budget for this year’s World Cup was US$11 billion; for Sochi it was US$12 billion. Frighteningly, the average cost overrun for Olympic Games in the last half century is 150%. It is this disconnect between budgeted and actual outcomes that makes you wonder whether investing in major sporting events is informed by evidence and models or pure speculation. The apparent blindness of governments supporting these events is perhaps best reflected by former Montreal mayor, Jean Drapeau, who had such an exaggerated view of the financial gains that would flow from the 1976 Olympics that he famously declared “The Olympics can no more lose money than a man can have a baby”. The Montreal Games ran 720% over budget, creating debt that took 30 years to pay off.

The unexpected cost of major sporting events is mainly attributable to the variance involved in developing infrastructure. Infrastructure setbacks are a usual thorn in the side of host countries and arise for numerous reasons including design changes, construction delays, new laws requiring stadiums to have high-resolution camera technology and high-speed Wi-Fi, workers’ rights disputes and corruption. The Krestovsky stadium in St Petersburg, one of the recent World Cup’s major venues, was completed eight years behind schedule and came in 540% over budget. In Sochi, the skating palace budgeted at $44 million ultimately cost $272 million.

Figure 1. Recent World Cups Have Cost A Small Fortune for Host Nations

And while the cost of constructing infrastructure is one thing, operating a profitable stadium post-event presents a whole new set of challenges. The potential for so-called ‘white elephants’ – unused sport stadiums that cast a post-apocalyptic aura over locals – is real and can become burdensome for local economies’ long-run growth. In Brazil, the most expensive stadium (US$550 million) built for their 2014 World Cup has since become a bus parking lot; another stadium has been taken over by homeless squatters. Beijing’s iconic “Bird’s Nest” Stadium has rarely been used since its 2008 Games and the swimming facility next door dubbed the “Water Cube” was repurposed as an indoor water park at a cost exceeding $50 million.

There are also costs associated with major sporting events that are not so obvious. Many locals avoid their city for the duration of these events due to congestion and increased prices; a crowding out effect that reduces the local economy’s post-event capital stock. In both Beijing and London, year-on-year visits decreased in their Olympic years, while the UK’s most popular museum, the British Museum, saw 22% fewer visitors during the month that the games were held. And while having thousands of cameras broadcast your country’s unique culture to the world might seem like a guaranteed way to lure in tourists and investment, it can actually backfire. When members of one of Russia’s most notorious hooligan groups, Pussy Riot, stormed the pitch of the final between France and Croatia in protest against the Russian government’s repression of human rights and freedom of speech, the World Cup suddenly didn’t say ‘Russia: come and do business’ so much as it said ‘Russia: remember that revolution?’

Figure 2. Despite the Cost, Tourists Still Flock to See the World’s Best in Action

Notably, World Cups have been found to have a negative effect on the markets of host nations relative to the MSCI world index. Over the past 11 World Cups (since 1974), while the hosts outperform other markets by 1.7% in the first month following tournaments, they underperform by 11.2% one year after the event. Moreover, bidding for major sporting events is a notably wasteful process. Australia’s failed bid for the 2022 FIFA World Cup cost Australian tax payers $46 million in the form of flights, accommodation and gifts purchased to influence FIFA.

All of these costs beg one overriding question: what is the opportunity cost of hosting these events? Couldn’t Russia, a country hampered by sluggish GDP growth, low levels of industrial automation and a poverty rate up 3 per cent since 2013, have allocated funds more practically? Or are major sporting events a rare moment for bureaucrats to take their foot off the fiscal agenda and give their country something to cheer about?

It Does Feel Good to Celebrate

There are, of course, benefits to hosting a party. Despite Pussy Riot’s incursion, many believe Russia’s image has been bolstered by hosting the World Cup, and that sanctions may, in time, be lifted as Russia makes a case for itself as a reliable and relatively benign neighbour.

The Russian government predicts that the tournament will boost GDP by up to US$31 billion over the 10 years from 2013 to 2023 through induced tourism and construction spending (see Figure 3). The Government also claims the World Cup will increase labour productivity by encouraging more Russians to exercise.

Figure 3. The Transport Infrastructure Industry Generated Significant Revenue from the 2018 World Cup in Russia

Figure 4 shows that benefits are also reaped by Russian businesses through increased demand for food, alcohol and consumer electronics. Other winners include airline groups as customers are more willing to pay peak prices to take a certain route rather than choose their destination based on pricing factors during the tournament.

Figure 4. Visitors Spent Big on Hospitality during the 2014 World Cup

Sharing is Caring

While there is global attention and, arguably, ‘legacy effects’ to be won from hosting major sporting events, most sports economists agree that they are becoming an increasingly unwise investment. An alternative might be for nations to jointly host tournaments: South Korea and Japan did it for the 2002 World Cup, and several European Championships have been jointly hosted, so there is already a precedent. This way, the resources can be pooled so that the load of building new stadiums, roads, railways and airports can be spread. It is also politically expedient, as hosting nations would be invited to build strong relationships and facilitate freer trade. Of course, whether or not countries like Russia would be able to co-host with their neighbours (who are, in many cases, fending off Russian annexation) is another story.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Lachlan Hall
Editor

Matthew Trachevski
Writer

Kevin Wang
Writer

Alvin Hidayat
Writer