Andrew Zimbalist 2016-11-18 00:18:13
WHILE EXPERIENCED SPORTS EVENTS PLANNERS POSSESS a wealth of knowledge about the intricacies of choosing a destination, and the caveats of hosting certain types of events are well-known by the host cities, looking through a wider lens can help broaden one’s perspective. With that in mind, we lead into this special annual awards issue by delving into the essentials of destination selection with an article that takes a macro view, before narrowing our focus to a micro view of the tremendous results that can be seen when event organizers and host cities come together to execute successful events. We begin with the macro perspective of Andrew Zimbalist, chair, Robert A. Woods professor of economics at Smith College. Dr. Zimbalist is an expert in economics who has published several articles and 25 books, focusing primarily on comparative economic systems, economic development and sports economics. With wide acclaim, Dr. Zimbalist has been lauded as “the top sports economist in the country,” by Paul Weiler, Henry J. Friendly Professor of Law, Emeritus, expert in sports law, Harvard University; “One of the best writers among economists working today,” by Lesley Visser, CBS Sportscaster, and “a hall-of-famer in the economic analysis of sport,” by Frank Deford, Sports Illustrated. Zimbalist’s book, Circus Maximus, was selected by The Economist as one of the Best books of 2016. As you will see, we did not enlist Dr. Zimbalist to provide a “feel good” piece; we retained that pleasure for ourselves. Instead, we tasked Dr. Zimbalist with a broad perspective on the economic impact of sports tourism. As expected, he pulled no punches. Every event is not a fit for every destination, and he unapologetically drives that point home. Success is only achieved when both sides win, as a result of the event and host destination coming together to form a true partnership. What is the economic impact of sports tourism? Unfortunately, there are no easy answers. One-off sports events come in many dimensions (size, time of year, popularity, fan culture), as do the host cities (location, population, economic and demographic characteristics). In what follows, I write about general tendencies, not inevitable outcomes. The core issues are: (1) how does the sports event affect the economic activity in the host city, both in the short and long runs, and (2) how much does it cost to put on the event. Because they are prototypes and the same basic factors operative for the Olympics and the World Cup also impact all market-to-market sports events, we’ll start with the world’s two largest sport mega-events and work our way down. The first thing to observe about the Olympics and the World Cup is that they are governed by unregulated global monopolies, the IOC and FIFA. The IOC and FIFA are able to exercise an enormous amount of market power which works to the disadvantage of the host city or country. Smaller market-to-market events are not put at the same disadvantage. The Cost Side This is roughly how it works. The IOC and FIFA auction off the right to host the Winter and Summer Games and the World Cup. Prospective host cities/countries bid against each other. The competitive bidding, in theory, leads the would-be hosts to bid up to the point where the expected marginal incremental benefit from the Games equals the expected incremental cost; or worse, if the winner, due to imperfect information, bids beyond the benefit. This is known as the Winner’s Curse. Or worse still, the bidding committee may be dominated by interests in the private sector (such as construction or hospitality sector companies and unions) that expect to gain financially from hosting the event. Because of their anticipated private gain, they push the bid well beyond any level that would make sense for the city. This dynamic may also help to explain why the advertised costs often bear little resemblance to the final cost of hosting. The private interests promoting the event are motivated to present a scaled-down budget to ease the proposal’s way through the necessary political bodies. Once passed at this level, the bid committee then, and particularly under competitive pressure during the bidding process, finds new facilities to be built or new bells and whistles to be added. Typically, organizers fall behind in their timetable and, ultimately, must pay premiums and/or even bribes to get the work done. According to a recent study out of the University of Oxford, the average cost overruns at the Summer Olympics since 1976 is 252 percent. Cost overruns (and revenue shortfalls) are the responsibility of the host city and, hence, its taxpayers. The seemingly inevitable outcome of the competitive bidding process is the production of white elephants. The competition to win the bidding process for host selection often leaves in the dust rational city planning for long-term land use and financial prudence. Olympic stadiums are proposed with seating capacities of some 80,000 that will be too large for any regular future use. Athlete villages, velodromes, oversize stadiums, bobsled tracks, elaborate, oversize soccer facilities in South Africa where rugby is the leading sport, surplus hotel construction and so on seem to be telltale characteristics in a city that the Olympics or the World Cup has been there. The notorious Birds’ Nest Olympic Stadium in Beijing serves as an infrequently visited Olympic museum. Many of the sporting edifices from the Olympic Stadium in Sydney, Green Point Stadium in Cape Town, or the immense soccer stadiums in Manaus and Brasilia go unused or underutilized for most or all of the year, while they require millions of dollars of maintenance and operations expense, and they occupy valuable urban land. Athens, host of the 2004 Olympic Summer Games, is particularly tragic. While most of the Olympics sports fa cilities sit idle, half of the 10,000 apartments in Athens’ Olympic Village are unoccupied, a majority of the 27 commercial properties on the site have closed and promised schools were never finished. The white elephant list goes on and on. Post-9/11 security expenses run in the $1.5 billion to $2.5 billion range. Summing up: these days, hosting the Summer Games costs between $15 billion and $25 billion, the Winter Games roughly half that (though Sochi spent between $50 and $70 billion) and the World Cup between $10 billion and $20 billion (though Qatar is reportedly on track to spend over $200 billion). The Revenue Side The perennial claim is that hosting the Olympics or World Cup “puts a city (or country) on the map.” The implication is that the city was not on the map beforehand, that the television and media publicity it receives from hosting will be positive, and that the positive branding will increase tourism, trade and foreign investment. Of course, many host cities (e.g., London, Vancouver, Beijing, Athens, etc.) are already well-known, and, not infrequently, a city’s or country’s image is tarnished rather than burnished by the additional publicity. The notion that successful businesses decide to trade with or invest in a city because it has hosted a sport mega event is far-fetched. There is virtually no empirical evidence to support such an effect. What about tourism? It depends. Again, let’s start with the Olympics and World Cup. Travelers to London fell five percent in August 2012 and to Beijing they fell over 20 percent in August 2008. Other cities have either seen no significant change or a small uptick. Sydney saw tourism increase modestly from 2.5 million in 1999 to 2.7 million in 2000, the year the city hosted the Summer Games. The more troubling news was that the city anticipated a tourism surge of 27 percent more than it received and overbuilt hotel rooms. The number of tourists to Sydney then fell steadily over the next three years, to 2.3 million in 2003. The problem in each of these cases is that regular tourists, concerned with congestion, high prices and possible security incidents, decide to stay away. (And often local residents decide to skip town as well for the same reasons.) Even when the increase in Olympic or World Cup tourism fully replaces the reduction in normal tourism, it can still negatively impact a city’s tourist fortunes. The European Tour Operators Association claims that word of mouth is the best way to promote tourism. A regular tourist returns from London and tells her friends, neighbors and relatives about the glorious English theatre, the Tate Galleries, Hyde Park and more. The Olympic tourist regales her friends with tales of the gymnasts’ floor exercises or sprinters’ 100-meter dash — exciting events that are no longer available on a trip to London. Of course, there is an occasional exception. Barcelona transformed itself from an unpopular tourist destination into one of Europe’s most popular destinations following the 1992 Olympics. The conditions in Barcelona, however, were unique: among other things, the city was an undiscovered jewel and the Olympics were used to implement a previously existing vision for the city. Counting all revenue from the host’s share of ticket, television, sponsorship and memorabilia sales, the Summer Olympics usually generates $4 billion to $4.5 billion (though Rio’s take was closer to $3 billion), the Winter Olympics about half that, and the World Cup close to $4 billion. When the revenue inflow is compared to the cost, deficits on the order of $10 billion to $15 billion are to be expected. Overall, scholarly econometric work has found that spending in hosting these mega events is not a good investment. Other Sport Tourism The list of one-off sport tournaments and events other than the Olympics and World Cup is long: tennis, golf, horse and car racing, track and field, biking, boxing, bowl games, March Madness, regional soccer championships, bowling, and so on. What can be said about the impact of sport tourism connected to these events? The good news is that these events do not require the construction or renovation of 35 sport venues, an athletes’ village, a media and broadcasting center, a media village and hundreds of acres of ceremonial green space. As such, the costs of preparation and the complexities of planning are diminutive relative to the Olympics or World Cup. It is also good news that, unlike the situation with team sports leagues, a substantial share of the attendees at one-off sporting events come from outside the area and, hence, bring new money to the local economy, rather than recirculate leisure spending within it. In the United States, the biggest annual sport event is the Super Bowl. Because of the game’s renown, it also chases away some tourists and also some local residents who want to avoid the football crowds and high prices. The NFL precedes the actual game with a week of football-themed activities. These activities can be disruptive to normal business activity by shutting down the streets and snarling the traffic around the NFL Experience streets, as was witnessed in spades in San Francisco last February. Many employees are told to stay home for the week. The NFL, similar to the IOC and FIFA, requires that sales and other taxes related to the sports event be forgiven, lowering fiscal revenues. But another element of Super Bowl impact is important to consider: the Super Bowl is held in early February. If the game is held in Florida or Arizona, where golfers, tennis aficionados, fishermen and swimmers travel during the cold winter months, it is likely that the Super Bowl visitors will displace normal tourist traffic. If, however, the game is held in Indianapolis or another city where hotel capacity utilization is low in February, then the Super Bowl may bring an appreciable net increase in tourism. Another feature of Super Bowl economics is that hotels often require customers to stay for a minimum of three or five days. Many visitors, then, will sign up for the required number of days (and pay the bill), but will only stay in the room for one or two days. In such cases, the auxiliary business in restaurants, taxis or rental cars, and other retail will be reduced. An important caution is that when hotel occupancy and room prices do rise, the incremental profit is typically repatriated to the home office rather than remaining in the local economy. It is noteworthy that, on average, independent scholarship on the economic impact on the Super Bowl finds it to be minimal. For market-to-market sports events of lesser magnitude, the displacement effect is less likely to be a factor. In such cases, the question is the net amount of additional tourism, bed nights and spending that is engendered. This quantity should be compared to the incremental costs for hosting these events, including facility preparation, utilities, traffic control and security. In most cases, the net amount of incremental spending is likely to be very modest relative to the size of the local economy. The impact of the event should not be oversold to the public. The lessons from experience are clear. The devil is in the details. Any event must be planned with a knowledge of a city’s economic and demographic characteristics. Infrastructural investments should only be made that are congruent with the local development and environmental needs. The timing of the event should be articulated to complement patterns of capacity utilization in the hospitality sector. Sober and effective management should prevail through the planning and operations phases. Follow this advice and the local economy may experience a modest boost and the local residents will enjoy the pleasures of fun sporting competition.
Published by Due North Consulting, Inc.. View All Articles.
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