Effect of Major Events on Host Community

Do major events bring lasting benefit to host community?

Introduction

Most promoters of bids for major events, such as the Olympic and Commonwealth Games or the world cup, submit as part of the reasoning behind the decision to bid the lasting benefits that it will bring economic benefit to the host community in the short and long term. Furthermore, this argument is used as a justification for the considerable involved in staging such events. For example, as can be seen from the budget and capital cost reports from Beijing, which is hosting the 2008 Olympics Games, whilst the operation of the games itself is targeted to make a small profit (see appendix 1, table 1), the construction and infrastructure costs have been estimated at over $1.4 billion (see appendix 1, table 2), which the BOCOG^[1] and Chinese government state will be recovered as a result of the longer term economic benefits that these costs will bring to the area, in terms of increased trade, employment, tourism, international and local trade and other local social community benefits.

However, whilst researchers of this issue appears to agree, at least for the immediate area where the event is located, for example Beijing, there is an immediate economic benefit during the staging of the events, there is a significant difference of opinion as to a) whether there is a economic benefit for the wider geographical area and b) whether there is a lasting economic benefit for the host community subsequent to the event. Within this paper it is intended to concentrate upon the latter of these two questions in an effort to prove or disprove the following hypothesis: –

“Events provide no lasting benefit to the host community.”

To assist with this analysis, it is intended to use data from the Olympics in Atlanta (1996), Sydney (2000), Athens (2004), together with brief references to the Beijing 2008 Olympics. To assess whether the case is true in relation to other major events, which may not have such a global attraction, the Manchester Commonwealth Games of 2002 have also been included within the selection.

Overview of Events

As can been noted earlier the operational costs of hosting a major event is sizable and, due to increasing concerns in areas such as security, which includes prevention of terrorism, these have increased significantly over the years (Baade and Matheson. 2002a, p.5). In terms of this expense Baade and Matheson (2002a, p.6) with Salt Lake City as spending $300 million, which must cast doubt on the appropriateness of the $50 million Beijing is planning to spend on this item (see appendix 1, table 1). Thus, it is not surprising that there has been a chequered history in terms of the profitability of staging such massive events. In recent history an example of these extremes can be foun, with Montreal recorded a $1 billion loss for the 1976 games whilst Los Angeles made a profit of $250 million for hosting the same event in the 1984. Nevertheless, in most cases the majority of these operational costs, with careful planning, marketing and promotion, are expected to be recovered from sponsorship and TV rights, which has the potential of bringing in over $1 billion in revenue in today’s terms, if measured against the past expectations CBS (1998).

These figures pale into insignificance when compared to the capital and infrastructure cost, which runs into Billion’s of dollars, the return on which cannot be so easily calculated. Thus, in order to achieve a national government commitment to assist with the funding of the event, it is the task of the promoters to attempt to show that these costs will have long-term economic benefits for the community. The following is a brief overview of the capital and infrastructure costs incurred by the four locations chosen for analysis.

Based upon 1996 prices, the total direct cost of the Sydney Olympics was calculated to be around A$8.4 billion, (Madden 2002, p.9), which relates to around US$4 billion, although when final figures were available this showed a similar increase against budget as Atlanta. In his study into these costs, Madden (2002, p.9), allocated them over a 12-year period from 1994/95 to 2005/06 as indicated in the following graph: –

As can be seen from this the majority of the monies post the event was spent on international tourism. Of these costs about $600 million was spent directly upon games visitors, and these would therefore have been recoverable from the games revenues. This leaves approximately $7.8 billion to be quantified as costs that should have a lasting economic benefit, in addition the benefits incurred during the event.

Athens 2004

The cost of the games in Athens, originally budgeted to cost $5.6 billion, actually rose to over $8.5 billion Associated Press (2004). Part of this additional cost was caused by an exceptionally large security costs which, being the first games to be held post the 9/11 tragedy, soared to $1.5 billion.

With Beijing budgeting to spend $14.25 billion on capital and infrastructure and $1.625 billion on operating costs making a total of just under $16 billion, although many experts are predicting that this figure will increase to over $20 billion, it is clear from the following graph that the costs of the games will have doubled with every staging of the event over a twelve-year period (see figure 1).

In 2002 Manchester played host to the Commonwealth games. Originally the budget for this event was set at around £25 (approximately $50), but the final amount climbed to between £70-80 million ($140-160 million). Of this amount £17 million was spent on a performance legacy programme, deliberately targeted to produce long-term benefits for the community.

As the Olympic Games increases are significantly higher than the rate of inflation that any of these areas have suffered during the same period, it is apparent that the accuracy of forecasting the longer term economic benefits is becoming even more critical to both the organisers and the regional and national governments that are being asked to help fund these costs. Furthermore, as has been demonstrated with all of these events, the calculations of initial budgeting show considerable under-estimation when compared with the final costs, which suggests that the reliability of the organisers costs in relation to the longer term benefits

Long-term Economic Benefits

To determine whether the capital and infrastructure cost of an event has a long term benefit to the host community, the assessment of this process can only bet determined by the future economic development that occurs within that geographical location (Fort and Fizel 2004, p.91). Therefore to evaluate the hypothesis set at the commencement of this research, it is intended to use three of these factors, these being increase in GDP, employment and tourism activity.

GDP

Growth domestic product is an indicator that shows how well the economy is growing, usually based upon a per capita figure. One of the main arguments of those promoting the benefits of hosting an event is that it will contribute significantly towards improving that figure over future years. In reality, this does not appear to be the case when analysing the result for the events indicated.

In all cases there were economic improvements in terms of GDP during the periods leading up to the staging of the events, although in some instances, these were not as high had been projected. Similarly, in the longer term, these increases were not sustained. For example, taking Sydney and New South Wales as an example, as can be seen from the following graph, whist there was a significant rise in GDP during the years from 1994/05 to 2000/01, immediately the games were over, this fell back sharply to a year on year decrease.

Studies conducted by researchers into the Atlanta and Athens games, including Baade, Robert A. & Victor Matheson. (2002) and Gratton and Henry (2001) have shown a similar reaction in relation to the GDP in each of these cases, with rising levels during the build-up period to the games, but little to no benefit for the following periods.

This position also appears to be relevant to the economic effects of lesser events, as can be evidenced by the research into the benefits of the Manchester Commonwealth Games in 2002 (Eurotec 2007). The initial impact was encouraging, as was noted by one of the organisers at the time, who said: –

“We estimated that £22m in business benefits across the northwest derived from the Games at the time,” says Rosin. “There was £2.7m added value for every £1m invested. There has been investment in the financial sectors, in the city centre and in particular in east Manchester. Associated retail development and the creation of employment for local people in this area can be directly attributed to the Commonwealth Games” (Editorial (2007).

However, a graph of the impact on output of the games and legacy programme in this case (see figure 4) shows that, as with the Olympics, despite the initial benefits achieved prior and during the time the event was staged, in this case exceeding expectations, the longevity of this was short, with it falling away rapidly within one year.

It is apparent from these findings that the significant improvement to GDP would only be temporary in nature and as a result contributes little to the long term improvement of the local community environment (Fizel et al 1999, p.75). Assuming that a study of other events of a similar magnitude to those identified operated upon a similar basis, it is therefore apparent that the GDP benefit would be condensed into the period of the event and limited thereafter,

Employment

Tourism

Tourism is another area against which the success of the games can be measured. Whilst, in most cases there is an increase in the physical numbers of tourists visiting the area in the years leading up to the event and subsequently, the benefit of this has to be evaluated against the additional facilities that have been provided as a part of the capital and infrastructure costs. For example, if one looks at the Beijing games, the intention is to build sufficient hotels in the area to be able to offer 130,000 (BOCOG 2007). As this represents an increase of around 20% of the number of rooms that are available, whilst an increase in tourism will have an impact upon the local economy in some areas, unless it is in excess of 20%, it will have a detrimental impact upon the hotel and catering sector, which will either force down the unit price per room or result in a decrease in occupancy, either of which will reduce the fiscal benefit.

Thus the measurement of costs can be evaluated by either their socio-economic, environmental or the estimated direct future impact they will have on a countries gross domestic product (GDP). For Beijing, all of these improvements will therefore provide a useful economic legacy of the games if managed correctly. However, in addition to the intangible benefits, there are the intangible costs that also need to be measured, both in real terms and potential. These can be defined into two main areas being, local but external to the event, future but unanticipated.

In addition to the determinants outlined above, there are others than need to be taken into the equation to provide a more detailed analysis. For example, there is the potential displacement issue related to local residents at the time of the event, where homes are lost to make way for the additional infrastructure projects (Fizel 1999, p.72). Secondly, there is the long-term use of the facilities. In the case of Sydney, the authorities are still paying around $46 million a year to maintain facilities that have remained uneconomic since the event (Owen 2005). Finally, the impact that the event has on trade outside of the area also needs to be considered. Research has show that, whilst the immediately area businesses benefit from the event, others further away from its location tend to show a downturn during that period when events are being staged. (Owen 2005). These represent hidden costs that are a) not always taken into account by the bid promoters and b) difficult to quantify in terms of amount and the length of time that they should be calculated over.

Conclusion

The research conducted for this paper has been limited in terms of the events covered and the timescale over which these have been studied, being restricted to five events over a 12 year period from 1996 to 2008. However, from the analysis of the events used within this paper it can be seen that in the main, the hypothesis set at the commencement of this paper has been proven. Whilst most of the events showed an immediate economical benefit, this did not last for a significant period. Therefore, on balance of probabilities. we would agree with the statement made by Baade and Matheson (2002, p.28) which stated that “the evidence suggests that the economic impact of the Olympics is transitory, onetime changes rather than a ‘steady-state’ chane.,” Similarly, with the increasing costs of operating and staging these events showing every sign of continuing to escalate, the opportunity to reverse this trend will become even more difficult in the immediate to long term future, especially when one takes into account the fact that even the cost of the London Olympics has exceeded the budgeted estimates.

There appears to be two main reasons for the differential between the projected benefits and the actuality. The first of these relates to the accuracy of initial estimates, which as has been shown within the costings of the events studied, is significantly lower than they should be, which could be result from an effort to make the bids more attractive to the community and nation hosting the event or as a result of problems being experienced within the project management process. Secondly, it would appear that the economic determinants being used by the organisers are failing to pay enough attention to the results of previous events when creating their own model. All of these issues need to be addressed when making such projections and it will be interesting to revisit the issue following the Beijing games in 2008 to see whether any lessons have been learned in this respect. These issues have to be managed correctly if they are to stand a chance of producing a long term economic benefit (Humphreys and Hummer 1995, p. 6).

References

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Associated Press (2004). Games cost Athens over $8.5 Billion. Retrieved 30 November 2007 from http://www.msnbc.msn.com/id/5761646/

Baade, Robert A. & Victor Matheson. (2002). Bidding for the Olympics: Fool’s Gold? In Transatlantic Sport, edited by Barros, Ibrahim, and Szymanski. Edward Elgar Publishing. New York, US.

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CBS (1998). Television, sponsorship revenue could top $800 million. CBS Sportsline wire reports. Retrieved 27 November 2007 from http://cbs.sportsline.com/u/olympics/nagano98/news/feb98/revenue2398.htm

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Finance (2007). BOCOG Budget. Retrieved 26 November 2007 from http://images.beijing-2008.org/upload/lib/bidreport/zt5.pdf

Fizel, John., Gustafson, Elizabeth and Hadley, Lawrence (1999). Sports Economics: Current Research. Praeger Publishers. Westport, US.

Fort, Rodney D and Fizel, John (2004). International Sports Economics. Praeger Publishers. Westport, US.

Gratton, Chris and Henry, Ian (2001) Sport in the City: The Role of Sport in Economic and Social Regeneration. Routledge. London, UK

Humphreys, Jeffrey L and Plummer, Michael K (2003). The economic impact of hosting the 1996 summer Olympics. Retrieved 1 December 2007 from http://www.selig.uga.edu/forecast/olympics/OLYMTEXT.HTM

Humphreys, Jeffrey M. and Michael K. Plummer (1995). The Economic Impact of Hosting the 1996 Summer Olympics. Atlanta Committee for the Olympic Games. Atlanta, US..

Madden, John R (2002). The Economic Consequences of the Sydney Olympics: The CREA/Andersen Study. Current Issues In Tourism. Vol 5, No 1, pp.7-21.

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Appendices

Appendix 1

Table 1 BOCOG operating Budget

Source: from http://images.beijing-2008.org/upload/lib/bidreport/zt5.pdf

Table 2 BOCOG Construction costs

Source: from http://images.beijing-2008.org/upload/lib/bidreport/zt5.pdf

1

Footnotes

^[1] Beijing Organising Committee for the Olympic Games