Title: Circus Maximus: The Economic Gamble Behind Hosting the Olympic and World Cup
Author: Andrew Zimbalist
Scope: 3 stars
Readability: 4 stars
My personal rating: 4 stars
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Topic of Book
Zimbalist examines the economic costs and benefits of hosting an Olympic games or World Cup championship.
In honor of the 2022 Winter Olympics, I am posting this book on the economics of hosting the Olympic games. As much as I love the Olympics, it is hard not to agree with Zimbalist’s conclusion.
The Olympics are rapidly becoming financially unviable for host nations. The best solution that I have seen would be a truly global Olympics where each sport (or discipline) is hosted in a different city or nation while still occurring at the same time. This would radically reduce the need for infrastructural investments and give every nation a chance to host. Each discipline could take place in a city or region where the sport is most popular to generate local interest.
You might, for example, have Track & Field in Los Angeles, Rugby in Auckland, Mountain Biking in Switzerland, Swimming in Sydney, Volleyball in Rio de Janeiro, Gymnastics in Moscow, Archery in Bhutan, and distance-running in Kenya.
I think this would solve the financial problem, generate greater local support for hosting events and align with the supposed international nature of the Olympic movement.
Are you listening, Thomas Bach?
- The competition to host the Olympics games has shifted from a furious competition to gain national prestige by hosting the Olympics to a realization by most cities that it is a big economic loser.
- Private interests and the International Olympic Committee (IOC) have conspired to drive the costs of hosting so high and leave cities with the bills.
- Now only mega-cites in wealthy nations and authoritarian regimes want to host the Olympics.
- The vast majority of the costs are to build the sporting, transportation and hotel infrastructure.
- These costs keep increasing as the Olympics add more events and athletes.
- Little of massive infrastructure improvements is useful afterwards. The primary beneficiaries are construction contractors and their temporary employees.
- The vast majority of the revenue comes from television rights fees, which increased rapidly in the 1980s. The host’s share keeps shrinking, while the IOC’s share keeps growing.
- Where the IOC is spending all that money is very unclear, due to lack of transparency.
- IOC and construction contractors have strong incentive to make Olympic as big as possible to maximize revenue. For them, massive construction for one-time use is a revenue generator.
- Only a few cities in the world has the sporting, transportation and hotel infrastructure to host an Olympics without major construction.
- The 1984 Los Angeles games was the only financially successful Olympics (i.e. very little debt left over afterwards).
Important Quotes from Book
I had been working in the field of sports economics for over a decade. Some of my work had explored the economic impact of sports teams on cities.1 Independent scholarly investigation was virtually unanimous: stadiums and teams could not be expected to have a positive impact on a city’s employment or output. Part of this conclusion rested on the fact that most of the money fans spent at an arena or stadium was leisure budget money that they would otherwise spend at other entertainment venues within the city. Hence, spectator sport spending substituted for spending elsewhere in the local economy.
No city wanted to host the 1984 Olympic Games. Mexico City’s games in 1968 were marred by violence and political protest. Munich’s games in 1972 ended in wrenching tragedy as eleven Israeli athletes were killed by terrorists. Montreal’s games in 1976 cost 9.2 times more than initially budgeted and yielded a debt that took the city thirty years to pay down.
There was no glory associated with hosting the Olympics back then, and the International Olympic Committee (IOC) was desperate to find a venue. With no competition, Los Angeles stepped forward and made a deal. Los Angeles would not have to provide the typical financial guarantee, and the city could basically get by with its existing sports infrastructure, part of which came from having hosted the 1932 Olympics.1 This favorable deal, together with some clever and aggressive marketing of corporate sponsorships by Peter Ueberroth, led the L.A. Organizing Committee to realize a modest profit of $215 million.
The Los Angeles experience turned the tide. Shown the alluring path to possible profits, cities and countries now lined up for the honor of hosting the games. The competition to host the games became almost as intense as the athletic competition itself.
With each bidder trying to outdo all the others, expenditures on hosting the games rose to over $40 billion for the Beijing Summer Games in 2008 and reportedly topped $50 billion for the 2014 Sochi Winter Games. Developing economies have jumped into the bidding in recent years. They require more substantial investments owing to inadequate transportation, communications, energy, hospitality, and sporting infrastructure. Other sports mega- events have experienced similar cost escalations.
The bids by cities are driven by major private economic interests within the city’s political economy, such as construction companies, construction unions, insurance companies, architectural firms, hotels, local media companies, investment bankers (who will float the bonds), and the lawyers who work for these groups. These groups in turn hire a public relations firm and a consulting firm to generate interest and excitement around the hosting prospect and to make elaborate claims of the potential economic benefits to the city.
With multiple bidders from around the globe and only one seller (the IOC or FIFA), it is almost unavoidable that the winning city or country will have overbid. This outcome is made even more likely because the groups pushing each city’s bid are representing their own private interests, not the city’s. And these groups will not have to pay the construction bills; rather, they will be the ones on the receiving end, getting the lucrative contracts. Economists believe the outcome of such a bidding process is likely to result in a “winner’s curse”— an outcome in which the winner has bid above the object’s true worth.
The 1936 Games were the first televised Olympics, though on a limited basis and only within Germany, and this pattern of limited transmission remained in place for a time.
The 1960 Summer Games in Rome were the first televised live throughout Western Europe.
The 1964 Summer Games in Tokyo were the first to be carried by satellite transmission and to be broadcast live around the world.
The only candidate city to host the 1984 Summer Games was Los Angeles, and the L.A. bid did not come from the city but from a private group.
Four ingredients made the L.A. games a financial success: one, television rights grew by almost $200 million above the fees paid for the Moscow games (and L.A.’s share grew accordingly); two, Peter Ueberroth, head of the L.A. Organizing Committee, followed an energetic and innovative marketing strategy, creating exclusive product categories34 and raising another $130 million in corporate sponsorships; three, most of the athletic, transportation, and communications infrastructure was already in place; and four, the few new, smaller facilities that were built for the games were privately funded.
The L.A. games marked a watershed for the Olympic Games. After sixteen years of a weakening reputation, the financial success of the L.A. games (which produced a $215 million operating surplus) turned the IOC’s fortunes around.
Table 2-2 depicts the remarkable escalation in television rights fees. The largest percentage increase occurred between the Moscow and the Los Angeles games (and their Winter games counterparts, in Lake Placid and Sarajevo).
The other substantial transformation that occurred at the time was the jettisoning of amateurism.
A final step toward commercialization was taken in 1992, when the IOC decided not to have the Winter and Summer Olympics in the same year.
One of the problems facing developing economies when they host mega-events is that their existing transportation, communications, lodging, entertainment, and sports infrastructure is lacking. Thus, the amount of investment necessary to properly host a mega- event is extraordinary.
At these investment levels, a positive economic return to hosting in the short run is improbable.
Television revenue is the largest source, accounting for 47.8 percent of revenue during the Vancouver games and the London games. Of the $3.85 billion from television rights, 56 percent came from U.S. rights fees.
The new policy is to share a fixed amount, not a percentage, of worldwide television revenue with the host city. As television rights have skyrocketed, the IOC has kept payments to the host basically flat. Today the host’s share of the total revenue from the games is at its lowest level ever.
In either democratic or authoritarian countries, the tendency is for event planning to hew closely to the interests of the local business elite. Construction companies, their unions (if there are any), insurance companies, architectural firms, media companies, investment bankers (who float the bonds), lawyers, and perhaps some hotel or restaurant interests get behind the Olympic or World Cup project. All stand to gain handsomely from the massive public funding. Typically, these interests hijack the local organizing committee, hire an obliging consulting firm to conduct an ersatz economic impact study, understate the costs, overstate the revenues, and go on to procure political consent.
Inevitably, there are some short-term employment gains from the extensive construction required for the Olympics or World Cup. The problem is twofold: first, the government has to pay back the money it borrowed over the ensuing decades, which reduces funding for other government projects and reduces public employment; and second, the typical pattern has been to import thousands of workers from other areas, often from out of the country, and pay them a pauper’s wage. Further, when used after the games, the stadiums, ski slopes, golf courses, and road networks are more likely to serve the consumption habits of upper- income groups. Hosting sports mega- events, then, tends to reinforce the existing power structure and patterns of inequality.
The IOC and FIFA have a lot of market power or leverage that enables them, within bounds, to extract excessive bids from prospective hosts. Yet if either body overplays its hand and if consecutive hosts have bad experiences, then the demand for hosting diminishes and the IOC and FIFA lose leverage. In the extreme case, no prospective hosts bid, as in the case of the Los Angeles Games in 1984, when the IOC lost all leverage.5
At least since Beijing in 2008, as the BRICS began to dominate World Cup and Olympic hosting, the youthful exuberance of the developing countries has led to outlandishly expensive games. What may have been more subtle miscalculations and losses in Atlanta, Sydney, Salt Lake City, and Athens became glaring missteps in the cases of Beijing, South Africa, Sochi, and Brazil.
In short, there are a variety of options for FIFA and the IOC to lessen the burden on their hosts. It is questionable, however, whether as monopolies, with little competitive challenge in the mega- event marketplace, they will yield much of their market power.
The current process for selecting the candidate cities and then the winning city involves 115 people, called IOC members. These members include fifteen active athletes who are elected by their peers at the Olympic Games; fifteen individuals chosen from NOCs and fifteen from the International Federations; and seventy individual members, who are self- perpetuating. Thus, a solid majority (60.9 percent) of the IOC members belongs to a self- generating elite and is accountable to no one, other than to the Olympic Movement and the IOC president.