Arguments Against Hosting A Mega-Event: Winner’s Curse · Web viewIt is theoretically proven fact that mega-events impact on the economy of the host country. Recent mega-events

III. İQTİSADİYYAT VƏ İDARƏETMƏ SAHƏSİNDƏ MAGİSTR VƏ DOKTORANTLARIN BEYNƏLXALQ ELMİ

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GƏNCƏ / AZƏRBAYCAN

Evaluation of Mega Sport Events Beyond the Borders of Just Sport Event: Azerbaijani Case Study in Terms of Economic and Political Implications

Bahruz Huseynzade

Azerbaijan State University of Economics

[email protected]

Abstract

The paper analyses hosting mega-events beyond the borders of just sport events. The paper clearly defines the terminology of mega-mega events. It is imperative for hosting country to understand true cost-benefit analysis of hosting international mega-event. For that reason, the paper describes the importance of the impact of mega-events on host countries and the current international methodologies that used to evaluate or monetize the impact of such mega-events. The paper also outlines hot debate topic among almost all scholars as to whether it is worth to host mega-events or not, by explaining arguments for and arguments against hosting mega-events by introducing winner’s curse in hosting mega-events. Furthermore, the paper explores how hosting mega-events by developing and developed countries differ from each other from economic impact perspective. In the second part of the paper, the author describes economic and political implications of mega-events on Azerbaijan. Paper argues that, it could be useful for Azerbaijan to continue to host comparable small-scale mega-events as they require relatively small-sized investments on infrastructure which Azerbaijan already established during last years though hosting numbers of mega-events. Also, it is advisable for Azerbaijan to invest more on general infrastructure than specialized infrastructure. It will boost long-term impact of mega-events and increase total economic impact.

Keywords: sport, mega-event, Economic Impact Study, Azerbaijan economy.

A Conceptual Definition Of Mega-sport Events

Sport is huge industry with its health and social aspects. Sport is good for health, it is pleasurable and amusing. But it is not enough to massively spread around the world. Sport can also widely accept as social mediocre and the mass communication tool. For that reason, sport became an interesting to the parties besides from sportsmen and clubs.

It is not surprising that nowadays, countries acknowledge the sports events social a ideological, social, political and ideological instrument as well as huge investment. In addition to this, they are aspiring for various national and international sports events in or-der to obtain financial income and to revive the tourism by promoting their countries (Yildiz, 2010:7). Nowadays, sport events can be a fueling factor for economic and urban development.

There are different definitions of mega-events in different literatures. For example, Richie and Brent (1984) describe such events as “major one-time or recurring events of limited duration, developed primarily to enhance awareness, appeal and profitability of a tourism destination”.

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The Aim and Approaches Used In Economic Impact Assessment

Bidder countries consider mega-events as an investment. Governments spend hundred million of dollars investment to host a mega-event by assuming to get even more return on investment. Government consider the amount spend for hosting mega-events as investment, not expenditure. As they spend huge amount of money, it is very crucial for governments to understand true impact or return on the money invested to host mega-events. The major approach considered to evaluate Economic Impact is Input-Output approach. Input-Output approach divided into direct, indirect, and long-term impacts.

Direct impact

The direct impact is the change in sales in the industries directly providing goods and services to the event guests and participants (e.g., hotels, restaurants, transportation, etc.). The calculation of the direct impact was based on the behaviour of key stakeholder groups: spectators, participants, and event organizers. These individuals used hotels, restaurants, and transportation, purchased goods and services from other suppliers, as well as did sightseeing around the city. While the indirect economic impact calculation was based on the degree to which the behaviour of key stakeholders affected the surrounding economic environment.

Indirect impact

The indirect impact was calculated based on an input-output (I-O) model (a mathematical model that describes the flow of money between industries within an economy and based on which Type I multipliers can be calculated. These multipliers provide information about the change in sales for industries down the value chain, caused by a USD 1.00 change in demand in a specific industry).

An input-output table for Azerbaijan was taken from the Eora MRIO database*. Based on this table, we calculated Type I multipliers using the following formulas:

1. X=(I-A)(-1), where(I-A)(-1) – the Leontief inverse matrix,I – the nxn identity matrix (n=25 industries),I – the nxn transformed matrix (n=25 industries),X – the nxn matrix of industry output (n=25 industries)

2. Xj =∑iⁿxij, wherei – the supplying industry, j – the receiving industry, Xj – Type I multipliers.

The indirect impact was calculated based on the following formula:

Indirect impact = Direct impact * Type I multiplier – Direct Impact

For example, city X attracts an additional 1,000 delegates, each spending USD 30 per day, for a total of USD 30,000 in new spending per day. If the delegates stay six days, the city will accumulate USD 180,000 in new sales. This USD 180,000 would be distributed among the


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hotel, restaurant, social, transport, and retail trade sectors in proportion to how individual delegates spend their USD 30. These industries then buy goods and services from other local businesses, which creates an indirect impact.

Induced impact

The induced impact can be calculated as the change in economic activity in the region resulting from employees spending income earned through the direct or indirect impact of spending by Formula 1 Grand Prix™ guests or organizers. For example, hotel employees spend their income on housing, food, education, and other goods and services. However, because the Formula 1 Grand Prix™ is a short-term event, restaurants, hotels, and shops are unlikely to hire additional employees or pay them additional money for work related to the Formula 1 Grand Prix™. Therefore, we have not included this type of impact in our study.

Long-term impact:

The long-term impact was considered separately and was not included in the calculation of economic impact, because it would be inappropriate to attribute expenditures on improving transport infrastructure and similar objectives solely to hosting the Formula 1 Grand Prix™. The construction of such facilities is aimed at meeting broader objectives for improving the quality of transport services for city residents. Moreover, the benefits from such construction projects are felt over a much longer period than those derived from Formula 1 Grand Prix™-related operational expenditures.

Limitation of Input-Output model:

The Use of multipliers to assess indirect economic impact has its limitations. These include:

Lack of supply-side constraints

Fixed prices

Fixed ratios for intermediate inputs and production

No allowance for purchasers’ marginal responses to change

Less applicable for small regions

Arguments for Hosting a Mega-Event

There is mixed view in the academic literature about the net outcome of hosting mega events. Some scholars argue that it worth to host mega events because they are economically, socially and politically beneficial, while others believe that real and opportunity costs of hosting mega events outweigh its benefits and those benefits are only short-term, temporary benefits such as increase in employment, trade and tourism.

First of all, hosting huge mega-events is prestige for home country. Hosting mega-events strategically important, because is highlights global image of the country, attracts huge investments and leads to improvement in labor market by creation of new jobs (may be


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temporary or permanent). Among these, the economic value that could potentially accrue to the city or country is the most commonly used rationale for gathering public backing for these events (Tien et al, 2011).

Mega-events, if successful, can potentially lead to “long-term positive consequences in terms of tourism, industrial relocation, and inward investment” (Roche, 1994). Long-term impact can be newly constructed event facilities and infrastructure, improved international reputation, increased tourism, urban revival, as well as increased employment rate, enhanced public welfare as well as local business opportunities. For example, Athene Olympics resulted a loss and huge debt burden for the city, however subway system was increased by 174 % and 90 km bus and tram was built within the city and a 67 km highway which is serving to 250 thousand cars was built due to the Olympics.

Mega events also impact financial markets of the host country. Observations shows that host country’s currency tends to appreciate during the mega event times. Hot money flows enter to the country and the country increases its FX reserves.

Not only FX market, but also stock markets are positively affected by hosting mega events. ). In a study by Veraros et al (2004), it was found that there was a significantly positive effect on the Athens, Greece stock exchange in general as well as infrastructure-related industries in particular upon the announcement of Athens’ successful bid to host the 2004 Games. In a similar study, Dick and Wang (2008) found a significant and positive announcement effect of hosting the Summer Games, with a cumulative abnormal return of about 2% over the course of a few days. Research results shows that small economies have greater abnormal return due to hosting mega-events.

Arguments Against Hosting A Mega-Event: Winner’s Curse

Bidding a mega-event is an auction-like procedure and sometimes it can turn out to trigger a winner's curse. The winner's curse concept is the unexpected low returns on investments for organizers that engaged in competitive bidding with very high a price. This concept first used in oil and gas sector and later used for all the different auction-like bidding events.

In the sports economy, a winner's curse may occur in different ways. One of the frequent occurrences of winner’s curse occurs for bidding for hosting a mega-sporting event which nearly always comes out with cost overruns for the winner (Andreff, 2012).

There are many indicators that can be tested to verify whether winner’s curse should be expected or not. Below table list those points:


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Table 1: Indices of a winner's curse in sports auctions

Mega sporting event Hosting a team franchise

Bidding for broadcasting rigths Overbidding for players

Cost overruns Subsidies for new facilities

Swift TV rights fees increase

Growing number of bidders

Ex post project revisions Luxurious increase in subsidies

TV company financial losses

Salary overpayment/bonus

Delayed completion Stadium cost overruns TV company post-bid bankruptcy

Acquiring a “lemon” player

Extra public subsidy Slow economic growth Sport event unknown details Bid disappointing return

Host city fiscal deficit / debt

Stagnating urban development Outbidding newcomers Superstar effect

Lower number of visitors Lower attendance than expected TV rights re-packaging Team's deficit due to

payroll

Source: Andreff, 2014

Mega events create additional demand in the economy. Thousands of visitors spend several days in the country. Effects of visitors total spending in the host city create additional demand for the economy. This additional demand may “crowd out” prices in the economy and lead to price increase in the economy which may harm to residents.

Cost of hosting mega-events is extremely high. As an example, 1948 London Games cost around 30 million USD in today’s dollars. Moreover, 2008 Beijing Games and Sochi Winter Games cost roughly around 40 billion USD and 50 billion USD, respectively. Requirement of mega-event organizing bodies boost this investment. For example, FIFA, organizing body of World Cup, requires every host country to have minimum ten modern stadiums with quite high seating capacities (around forty thousand to sixty thousand). This requirement forced South Korea to spend 2 billion USD for constructing ten new stadiums with determined standards. Also, Japan allocated 4 billion USD for building ten stadiums. The main point here is that developed countries to some extent has already established infrastructure. The financial burden lies on developing host countries, where almost all the required infrastructure must be constructed which is huge and risky investment.

Another critic that frequently cited by scholars is exaggerated multipliers used to evaluate economic impact of mega-event. This exaggerated multiplier overstate true economic impact of the mega-event. Matheson (2002) states that beyond theoretical reasons to the contrary, ex-


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ante estimates of economic benefits far exceed the ex-post observed economic developments of host communities following mega-events. Moreover, the funding being devoted to subsidizing an event is very likely to be misallocated (Dwyer et al, 2005). In most cases critics argue that it is not a good idea to use scarce tax revenues to the event from which the return is not guaranteed. In some cases, when the games are over, the host cities left with massive debt and little lasting economic benefit.

Like benefits of mega-events, some costs of hosting mega-events are non-quantifiable. Scholars state that in addition to required infrastructure, hosting mega events require additional public transportation, public safety and sanitation. Non-quantifiable costs include traffic jams, vandalism, disruption of residents’ lifestyle and environmental degradation. For example, there are great concerns in many communities regarding hosting F1 Grand Prix. People consider that F1 Grand Prix pollute the environment. In addition, mega-events could serve to exacerbate social problems and deepen existing divides among residents (Ruthheiser, 2000).

Difference between a Developing vs. a Developed Country Hosting an Event

All the nations, both developing and developed, in the world, is highly ambitious to host a mega-event such as World Cup or Olympics with the expectation of receiving great monetary and non-monetary returns. However, past track of experience has clearly demonstrated that in some cases hosting countries falled short of expectation of hosting mega-events.

Analysis show that experience of hosting mega-event is different between industrialized, developed and developing countires and success story of hosting the mega event depends on the economic development stage of hosting country. Some scholars thinks that real return of hosting mega-events is not high for developing nations because opportunity-cost of establishing modern infrastructure for one-time temporary event is very high, and the resources can be allocated to more efficient ways. One of the obvious example is Brasil which hosted soccer World Cup during the summer of 2014 and the Olympics during the summer of 2016. Actually, Brasil was one of the best places to be selected for host country due to its social and economic potential, natural beauty and growing importance. However, Brasil could not turn this excellent opportunity to real return. Brasil made a huge investments in several years to built up modern infrastructure. However, misappropriation, misuse of the funds and physical structures, fraud and waste before, during and after the events resulted huge costs for Brasil. The investments on dormitories, training facilities, stadiums and other structures just wasted never being used again after the events are over. Brasil, as a result, lost billions of dollars to host those mega events. However, there are also many success stories of the countries that hosted maga events and not only generated real returns from such mega-events, but also catapulted onto the world stage and have enjoyed a permanent rise in world prestige.

Mega-Events in Azerbaijan

Economic implications of mega-events on Azerbaijan economy


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It is theoretically proven fact that mega-events impact on the economy of the host country. Recent mega-events hosted in Baku, in fact, impacted the local economy. It is specifically worth to note the recent Formula 1 Grand prix, which has been held in Baku since 2016 and expected to be held until 2023. The organizer of the Formula 1 Grand prix is Baku City Circuit (BCC). According to the press conference held by BCC and PwC Azerbaijan which calculated Economic Impact Study for Formula 1 Grand Prix, the total Economic Impact of the event on local economy during 2016-2019 (four races) is USD 506.3 million, which is equivalent of more than AZN 800 million, out of which USD 300.6 million is direct impact and USD 205.7 million is indirect impact.

Table 2: Economic impact by industries, 2016-2019, USD million

Industry Total impact Direct impact Indirect impact

Accommodation and catering services 88.4 49.0 39.4

Transport and customs operations 38.4 24.8 13.6

Construction 181.4 92.6 88.8

Manufacturing 43.1 24.9 18.2

Marketing and PR, B2B services, workforce 152.4 107.6 44.8

Social and cultural services 2.6 1.7 0.9

Source: Public information.

Based on the public information, direct and indirect impact stimulation the creation of new short-term workplaces. During 2016-2017, 5-10 thousand new short-term workplaces were created, while this indicator surged to 7.5 thousand during 2018-2019 races. Every year approximately 3 thousand volunteers and around 1000 marshals are joined to the races.

Political implications of mega-events on Azerbaijan economy

As a country being around 30 year in war condition, of course, political dividends of the mega-events is crucial. In 2012, due to Eurovision Song Contest almost all European community was informed about Azerbaijan, its history and rich cultural background. Our historical realities were delivered to European community through this Song Contest. First European Games was also very influential in this manner. Azerbaijan was able to deliverer Azerbaijani realities to the world community. Recent Formula 1 Grand Prix multiplied political benefits of the mega-events. According to public information, global media exposure also contributed to the enhancement of the positive country image. In 2018, the global cumulative audience of 82.3 million individuals viewed the Formula 1 Azerbaijan Grand


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Prix™ 2018 on television. This indicator increased by 10% to reach 90.2 million audience in 2019. Furthermore, within the 2016 – 2019 period, the total number of articles through all the media channels reached 225.1 thousand. During this period, news on Azerbaijan Grand Prix™ reached 247 billion people in the world, resulting in the total media value of USD 274 million. All those figures directly and indirectly demonstrated political benefits of the mega-events to Azerbaijan community.

Conclusions and Recommendations

The article concludes that short-run and long run impacts of mega-event should clearly be distinguished to understand true net benefits of the mega-event on Azerbaijan economy. The analytical research of Wonho Song (2010) shows that to enhance tourist visit, it is important to host mega-events repeatedly. This may partly explain why developed countries, that have hosted a mega event once, try to host other mega events. In this regard, Azerbaijan should continue to host those events which held previously and already established all required infrastructure for hosting those mega-events. However, hosting new mega-event which require establishing new types of infrastructure with significant amount of investment, is not advisable.

Hosting mega event where the representatives will arrive to the host city from all over the world required significant strategic planning both before, during and after the event. Although the net benefit of hosting mega-events is bigger in small scale developing countries such as Azerbaijan, developing countries cannot be deprived from hosting mega-events. This research suggest that it is more economically beneficial for Azerbaijan to host a “lesser” mega-event (such as F1 Grand Prix or Winter Olympics).

During the planning the strategy for the events, it is strategically important to limit the additional new infrastructure that is built for the event. Through this way, Azerbaijan can increase the net benefit of the event. Second, while specialized infrastructure (i.e. stadiums or other specialized venues that will likely be only used during the Games) is generally now recognized as wasteful and economically harmful, general infrastructure spending (i.e. for the development of roads, outer-ring highways, etc.) is likely to lead to long-term benefit (Matheson, 2006). It means that Azerbaijan should focus on increasing general infrastructure spending, rather than specialized spending. It will lead economically successful results for Azerbaijan.

References

1. Residents Perceptions of the Impacts of Hosting National and International Sporting Events, Engin UNGUREN*, Yasar Yigit KAQMAZ, Murat YETKiN,

2. Mega-Event Sporting Opportunities: The Case of Developed vs. Developing Countries, Carroll Howard Griffin, PhD, Valdosta State University, Valdosta, Georgia, USA


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3. Impacts Of Olympics On Exports And Tourism, Wonho Song, Chung-Ang University, Journal Of Economic Development, Volume 35, Number 4, December 2010

4. The Cost of Hosting International Sport Events, Wladimir Andreff, Universite de Paris Pantheon-Sorbonne, January 2014

5. Matheson, V. (2006). Mega-events: The effect of the world’s biggest sporting events on local, regional, and national economies. Col-lege of the Holy Cross, Department of Economics, Faculty Research Series, Working Paper No. 06-10.

6. Matheson, V. (2002). Upon further review: An examination of sporting event economic impact studies. The Sport Journal, Vol. 5(1), pp. 2.

7. Richie, J. and Brent, R. (1984). Assessing the impact of hallmark events: Conceptual and research issues. Journal of Travel Research, Vol. 23(1), pp. 2-11.

8. Dick, C and Wang, Q (2008) The economic impact of Olympic Games Evidence from stock markets ZEW- Centre for European Economic Research Discussion Paper No. 08-060.

9. Dwyer, L, Forsyth, P and Spurr, R (2005) Estimating the impacts of special events on an economy Journal of Travel Research, Vol. 43, pp. 351-359.

10. Ruthheiser, D. (2000). Imagineering Atlanta. Verso, New York11. Tien, C., Lo, H.C., and Lin, H.W. (2011). The economic benefits of mega-events: A myth or reality? A

longitudinal study on the Olympic Games. Journal of Sport Management, Vol. 25, pp. 11-23.12. Veraros, N., Kasimati, E., and Dawson, P. (2004). The 2004 Olympic Games announcement and its effect

on the Athens and Milan stock exchanges. Applied Economic Letters, Vol. 11, pp. 749-753.

Documents

Arguments Against Hosting A Mega-Event: Winner’s Curse · Web viewIt is theoretically proven fact that mega-events impact on the economy of the host country. Recent mega-events