Economic and sporting legacy of Olympic 2016

The financial impact of the mega-events hosted by Brazil is analysed by the economists Marcelo Weishaupt Proni and Raphael Brita Faustino from UNICAMP (State University of Campinas). They question the optimism that is traditionally delivered by event organizers.

By Marcelo Weishaupt Proni and Raphael Brito Faustino

The preparation for the Olympic and Paralympic Games in Rio de Janeiro has caused controversy about the extent and importance of the Olympic legacy and the expected return on public investment for the population. The Olympics can leave some sporting legacy,   especially for high performance sport, but there are disagreements about economic impacts and which priority should be given to urban mobility projects.

As the Olympic Games requires high public spending, the organisers of the Rio 2016 Olympics  has been repeating a speech that seeks to legitimize the involvement of local, state and federal governments based on optimistic projections about the possible benefits of the Olympics, especially for the population of Rio de Janeiro.

Of course, this debate is not new. Since 1992, the International Olympic Committee (IOC) has been trying to prove that the investment in this mega-event offers a secure economic return and a significant sporting legacy, but there is evidence that these promises often are not fulfilled (DaCosta et al, 2008; MacAloon, 2008; Mangan and Dyreson, 2010; Poynter, 2012; Chappelet, 2012; Coakley and Souza, 2013; Zimbalist, 2015).

The purpose of this work is to contribute to the debate about the legacy of the Olympic Games in Rio de Janeiro and Brazil. First, we intend to highlight the economic impacts of the mega-event. Then we present the investment in sporting legacy.

1. Overestimated economic impacts
As a candidate city for the 2016 Games, the Rio de Janeiro’s candidature estimated that total investments related to the Games would reach US$ 11.6 billion, 80% for urban infrastructure projects and 20% for sports facilities (Comitê Olímpico Brasileiro, 2009). The government was responsible for funding most of the works. In addition, the Organizing Committee of the Olympic Games would spend an additional US$ 2.8 billion with operational costs, amounting to a US$ 14.4 billion budget.

At the time, some very optimistic projections about the direct, indirect and induced impacts were released about the mega-event in the Brazilian economy (FIA, FIPE, 2009). For example, for every US$ 1.00 invested another US$ 3.26 would be moved in related supply chains. Thus, by the Olympics, more than US$ 60 billion would be moved over the period of preparation and in the years after the completion.

According to the official promises, a wide spectrum of economic activities (at least 55 branches) could benefit from the realization of the mega-event. In particular, the following fields of activity would be encouraged: construction, real estate and rentals, business services, oil and gas, information services and transportation services. Until 2016, the Games could create 120,800 jobs per year (direct and indirect jobs across the country), reaching 131,000 per year between 2017 and 2027.

So, although they would be expensive, the Olympics would have great potential to boost economic activity because of the multiplier effects of spending. There would be a boost in GDP growth: US$ 11 billion between 2009 and 2016, plus US$ 13.5 billion between 2017 and 2027. Thus, “it can be said that if the benefits of the Olympic Games were anticipated for today, GDP in the metropolitan area of Rio de Janeiro would be 10% higher [...] and Brazil’s GDP would be 1.7% higher” (FIA, FIPE, 2009, p. 28). Furthermore, with the largest movement in economic transactions, there would be an increase in tax revenues during the period, representing a return of about 40% of public expenditure in the Olympic Games.

These initial projections were based on very optimistic assumptions about the effects of an autonomous additional expense in an input-output model (a quantitative economic technique that represents the interdependencies between different branches of a national economy). They also assumed that the Brazilian economy would continue on a sustained growth path in the next decade. However, analysis parameters have been changing over time, and the institutional arrangements and macro-economic environment have been modified.

Spending decisions of economic agents were postponed, at least in part, due to events not foreseen in the model. Thus, the effective contribution of the Olympic Games to the GDP growth was much smaller than expected (Proni, Faustino e Silva, 2014).

Since the total cost of preparing the 2016 Olympics would be very high for the City Hall in Rio if standing alone, it was important to involve the federal government and the state government. It was necessary to avoid an excessive public debt for the city.

In turn, the impact of the Games on the national economy would be small, since such spending accounted for less than 3% of the planned investments in the Growth Acceleration Program (PAC) for the period 2011-2014, which covered all governmental and state enterprises investments in strategic areas. In fact, the GDP of the country would not be affected significantly by the Olympics, but the city’s economy would.

Economists often use the term “opportunity cost” to discuss whether a financial investment provides returns higher than alternative application as well as to assess whether public spending is efficient. In the case of a mega-event, the opportunity cost refers to the allocation alternatives of public money (Preuss, 2000). As public resources are scarce, the option of spending on the Olympics should be evaluated in comparison with investments that could be made in priority areas for the population such as health, education, basic sanitation, among others.

It is important to note that the existence of opportunity costs makes it very relevant that the private sector take part in investments into Olympic Games, because the higher spending financed with private funds, the bigger the positive economic impact of a mega-event. So from the start, there was a concern of the government and the Brazilian Olympic Committee (COB) to say that the private sector would play an important role in Rio 2016.

This became even more relevant as of 2014, when the Brazilian economy began to slow down. Since 2015, the state government of Rio de Janeiro is going through severe financial crisis, with serious consequences for health (hospitals are unable to meet all patients) and difficulties to pay the salaries of public servants.

As the pace of the Brazilian economy was slowing, the argument about the economic impacts became empty. Instead, the main argument to justify the high public spending has become the urban legacy that needed to reach broad sectors of society to ensure social legitimacy of the mega-event.

The official plan then was to use the preparation of the Olympics to accelerate changes that improve the quality of life of Rio’s residents and create a spatially integrated city. The guiding principle was that the Games should serve the city, boosting its development. According to a document of the City Hall (Prefeitura do Rio de Janeiro, 2014, p. 3), “the 2016 Olympic Games are the Olympics of the Legacy. For every R$ 1 invested in Olympic installation, other R$ 5 are used in legacy works, that is, works that will improve the daily lives of those who live in the city”. The priority, it was stated, it was to “relieve the public coffers through partnerships with the private sector” and avoid the appearance of “white elephants”.

In April 2015, an updated version of the Plan of Public Policies – Legacy was released, with projects that were made possible and/or accelerated by the Olympics. The document expresses the commitment of the three governments (municipal, state and federal), in partnership with the Olympic Public Authority (APO) and the Rio 2016 Committee, to provide benefits to the population.

They list 27 projects of infrastructure and public policies in the areas of mobility, environment, urban renewal and social development. The 14 projects run by the City Hall totaled US$ 3.61 billion[1] (64% through partnerships with the private sector and 8% of federal government resources); 10 run by the state government totaled US$ 2.5 billion (14% with private resources); 3 executed by the federal government amounted to US$ 66 million (in addition to US$ 300 million given to the city projects). Investments totaled US$ 6.2 billion, 43% (US$ 2.7 billion) banked by the private sector.

In addition to the urban infrastructure projects, the Olympic legacy also includes the construction of sports facilities and the athletes’ village, at a cost estimated at US$ 1.77 billion. According to the “Matriz de Responsibilidades” (list of projects which identifies those responsible and the estimated costs – January 2016 version) $ 1.06 billion comes with private funds and US$ 0.71 billion with public funds.

In turn, the Organizing Committee of Olympic Games (OCOG) announced a budget of US$ 1.85 billion with opening and closing ceremonies, transportation and accommodation of delegations and other competitions expenses. Therefore, the total amount of expenses incurred due to the Olympics reached US$ 9.75 billion[2].

Also the expected spending of tourists (foreign and Brazilian) during the mega-event should be added, as it will help to drive the local economy in August 2016. Rio de Janeiro is expected to receive at least 350,000 foreign tourists, which could generate an input of extra income of US$ 1 billion.

But it is not known if the current epidemic of dengue and zika virus will affect this tourist flow. And it is difficult to estimate the benefits of the Games for the development of international tourism in Rio de Janeiro and other tourist areas around the country. It’s possible that the 2014 FIFA World Cup has fulfilled this function.

On the other hand, there has been an increase in the supply of rooms, for example, but the unfavourable horizons for the evolution of tourism demand in the coming years caused the postponement of many investments that had been announced.

Some economists argue that the Olympics may have had a countercyclical effect on the local economy, slowing the effects of national crisis. However, with the proximity of the completion of the works, it has already provided a negative impact on the economy of the city, following the downward trend in economic activity in the country.

According to estimate published in January 2016 35,000 jobs should be terminated upon completion of the works (Pamplona, Villas Bôas and Vettorazzo, 2016). By the 2015, the works related to the mega-event partially ensured the maintenance of jobs in the construction sector, unlike what happened in  in Brazil’s largest cities, where the sector is suffering the consequences of the economic crisis. But unemployment is already rising in Rio de Janeiro in 2016.

In summary, economic impacts were overestimated. Gains were concentrated in some sectors of the local economy and did not justify the expenses incurred. It is very likely that the money spent on the Olympics would have provided better economic results if it were addressed on priority issues.

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These values consider an undervalued exchange rate: US$ 1.00 = R$ 4.00.

[2] If the exchange rate used in the dossier of the application (US$ 1.00 = R$ 2.00) had been maintained, the total cost would be US$ 19.5 billion. That is a significant increase of the total cost, even if some projects related to urban legacy have been abandoned.



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