SOCHI 2014 AND THE 2018 WORLD FOOTBALL CUP: ECONOMIC STAKES
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Sochi 2014 and the
2018 World Football
Cup: Economic Stakes
W
240 hen Sochi was chosen as the host city in 2007 1 for the 2014 Winter Olympics
(over Pyeongchang and Salzburg) and in December 2010 Russia was selected
to hold the 2018 World Football Cup (FIFA 2018), both candidates held
the promise of economic benefits. Yet, almost all major world sports events
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are doomed to largely exceed projected budgets during their candidacy, due to an economic
phenomenon called the winner’s curse. Will the 2014 Olympics and the 2018 World Cup escape
the curse? It is unlikely. On the other hand, we tend to forget that the athletic performances during
these international events raise enthusiasm for these sports increasing public appetite for training
facilities and events, and eventually stimulating the sports markets, especially in the host country.
An economic forecast model predicts that the Russian team is going to win many more medals in
Sochi than in did in Vancouver in 2010, so enthusiasm in Russia is a very good bet.
Wladimir Andreff, Professor Emeritus at the University of Paris-I Panthéon-Sorbonne
1. After the failure of its preceding candidacies in 1989, 1993 and 2003. The first ski lift was built in Sochi in 1993.Expected Economic Benefits
Promoters of the 2014 Sochi project anticipate the usual economic benefits
from the investments in the Olympic Games, in particular, a stronger tourist
attraction of the region. Investments are expected firstly in sports facilities:
11 Olympic stadiums and ski resorts for the Alpine ski tracks, two Olympic
villages, outdoor skating rinks to be built at the seashore and the mountains,
sports complexes, plus additional infrastructure not directly connected to
sports. The investment for developing the Sochi site was heavy and included
the renovation of entire neighborhoods and the Rodina hotel; construction of 241
a new terminal in order to double the previous capacity, a new port for cargo
ships, a second 67-kilometer railroad along the coast, 580 kilometers of roads, an
expressway between the airport and the Olympic site (63 kilometers), a highway
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circumventing Sochi, a monorail (50 kilometers long) going from the city to the
Olympic site, a press center, five luxury hotel complexes, two shopping centers,
a tourist attraction area; the digging of a new road tunnel; investments to reach
a hotel capacity of 48,000 rooms, increasing the area’s electricity production and
sochi and its regional environment
Railroad ROSTOV
UKRAINE to Rostov
Azov Sea KRASNODAR
a n
Kerch Kub STAVROPOL
Crimea Krasnodar
ADYGEA
Novorossiysk
Maykop
Tuapse Cherkesk
Greater Sochi
Sochi Krasnaya Polyana
Adler
Black Sea Sukhumi
KARACHAY-
CHERKESIA
GEORGIA
TURKEY
Krasnaïa Poliana
Sotchipurchasing plots from 3,000 expropriated small landowners against compensa-
tion, in order to create the Olympic park.
It will be necessary to wait in order to count how many extra non-resident
visitors will be attracted to Sochi during and after the Games, in addition to the
usual seaside tourists 2. A fund for the Olympics’ legacy is planned to ensure the
maintenance of the facilities after the Winter Olympics. In September 2013,
the sports minister, Vitaly Mutko, anticipated benefits of over 1 billion dollars
for Russia. Two months later, the minister of economic development, Alexey
Ulyukaev, announced that Russia’s growth in the GDP would not exceed 2.5
242 to 3% in the next few years, whereas it had fallen from 3.4% in 2012 to 1.3% in
2013… despite the investments in Sochi 2014. These investments are not large
enough to lessen the decline in the Russian economy.
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The Winner’s Curse
Cost overruns are inevitable given the current allocation method of the
Olympics. The International Olympics Committee (IOC) has exclusive rights
to the event and Olympic symbols. Every four years, it launches the call for
candidacies (similar to an auction) making candidate cities compete for this
honor. The IOC takes full advantage of this process since its members can
vote for the most extravagant project while offloading the expenses onto the
host city, apart from those covered by the budget of the OCOG (Organizing
Committee for the Olympic Games), while the IOC does not cover the
expenses of non-sports-related infrastructures. In voting for the most impressive
project, members of the IOC generally choose the most expensive. After the
financial disaster of Montreal 1976 and the success of Los Angeles 1984, the
IOC attempted to counter this excessive cost by stating that, henceforth, “The
Games will pay for the Games,” a formula that guarantees that the Olympics
will be locally financed, including, in the end, by the taxpayers. This does not
guarantee however, that the costs will not go through the roof.
Since the objective of each candidate city is to be chosen as the host, they
compete to outbid rival projects by offering the most attractive Olympic
2. The number of visitors hoped for was 6 million in 2014, against 3 million previously.ceremonies and non-sports-related facilities, thereby increasing the actual costs.
To avoid impacting the quality of its candidacy with prohibitive extravagance,
each city is encouraged, if it wants to win, to “cheat,” in other words, to conceal
certain information by knowingly underestimating the costs and overstating the
expected benefits. The London 2012 candidacy lessened security expenses, over-
looked the cost of the Paralympics and “forgot” to attribute value-added tax to
certain expenditures.
Overbidding among candidate cities results in their paying too much to
obtain the Olympic Games from the IOC, confirming a known outcome found
in the economic theory of auctions: each time a bid is made on an object whose 243
exact value is unknown 3, but the same for all bidders, the winner is the one that
has overestimated the object’s value the most 4. This phenomenon is called the
“winner’s curse.” The city that wins agrees to incur expenses that are too high.
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Insofar as it underestimated its costs in its candidacy bid, much higher real
costs will be imposed between its designation as the host city and the opening
ceremony.
Underestimation of costs is especially found in the non-sports-related
facilities, which the city often uses to stand out from its competitors, and this
is where, for the most part, it will pay the bulk of the winner’s curse. Moreover,
the attribution of the Olympic Games is done in a context of asymmetrical
information context. Each candidate city knows its Olympic project down to
the slightest detail and presentations highlight the most advantageous features,
leaving certain details in the shadow, especially, the costs. The IOC has no way
of checking the details for each candidate city, or to detect how much they
have underestimated. By the time the IOC sends its representatives to visit the
Olympic site of the designated host city, it is too late. They can verify that the
project is advancing properly, that it is or is not behind schedule, but they cannot
do anything about exceeding the previously underestimated budget, nor can
they verify that such underestimation had taken place. Once the cat is out of the
bag, the winner’s curse cannot be stopped.
3. No one knows a priori the fair market value of a city resulting from its being designated host of the Olympics, and especially
not the members of the IOC.
4. R. H. Thaler, The Winner’s Curse: Paradoxes and Anomalies of Economic Life, Princeton University Press, Princeton, 1994.greater sochi
Cross-country
KRASNAYA POLYANA skiing
SITE Gorky
Gorod Laura
KRASNAYA POLYANA
Coastal road ESTO-SADOK Rosa
Khutor
Sank
(luge)
Road circumventing iver
aR
Sochi
y mt Russia Gorky Olympic
City of Sochi Mz (ski jumps) slopes
Vladimir Putin’s
residence SOCHI
Doubling of the
244 coastal road
Sochi port
Stalin’s dacha
MATSESTA
ABKHAZIA
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KHOSTA
Abkhazia’s independence was not
recognized by either Georgia or
the international institutions
Black Sea AIRPORT
IMERETI PLAIN
SITE 0 5 10 km
Adler OLYMPIC VILLAGE
Adler port OLYMPIC PARK
Olympic sites
to
Olympic village Sukhumi Sports installations
and stadiums Future Sochi ”Olympic” railroad stations
amusement park
Systematic Cost Overruns
All the Games of the last 30 years have been more expensive than antic-
ipated. After the designation of a host city, the winner’s curse is materialized by
a constant increase in estimates, expenses and costs, beyond the 30-50% increase
in nominal expenses usually due to inflation over a seven-year period. The
result is that the effect ex post cost ends up being clearly higher than the one
expected ex ante, presented in the candidacy bid. A second clue of the winner’s
curse is the revisions of the Olympic project: the building of a structure that
had not been forecast during candidacy, which increases costs, or elimination
of a planned facility that turned out to be too expensive. A third indicator is adelay in the execution greater than that mentioned ex ante. This is the indicator
that the IOC monitors most closely, because everything must be ready for the
opening ceremony. Meanwhile, it is more costly to hastily make an investment
that has been put off; the 2004 Athens Games are the best example for this.
Two additional clues reveal the winner’s curse: an extension of public funds or
an additional subsidy from the municipal, regional or state budget; an increased
budget deficit or transforming a budget excess into a deficit with the host city
amassing debt in order to finance the Olympic project.
As for the first and principal clue of the winner’s curse, the costs have always
exceeded projections, most often by over 30% by all the Summer Olympics 245
since Munich 1972 and all the Winter Olympics since Lake Placid 1980,
with one exception 5. Subject to information that is not detailed enough for
Sarajevo 1984 6, Lillehammer 1994 and Nagano 1998 did not exceed projected
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expenses as much as the other host cities of the Winter Olympics. The OCOG
even showed a deficit (overrun of the organization cost) in Lake Placid 1980,
Albertville 1992, Lillehammer 1994 and Turin 2006. Albertville and Turin bene-
fited from budget extensions. With over twice the cost between candidacy and
the opening ceremony, Lake Placid 1980, Calgary 1988, Albertville 1992, Salt
Lake City 2002, Turin 2006 and Vancouver 2010 perfectly illustrate the theory
of the winner’s curse.
Nevertheless, there is one exception: the 1984 Summer Olympics in Los
Angeles ended with a financial gain and, above all, without exceeding costs.
Production cost was 546 million dollars and the total cost, all investments
included, 1.592 billion dollars ex post. But, ex ante, Los Angeles 1984 had not
made any commitment to the IOC on this point. It is therefore logical that costs
were not exceeded. The decision of these Games had been made in 1977, just
after the revelation of the Montreal 1976 financial disaster. Not a single candi-
date wanted to hold the 1984 Games. The IOC had to convince Los Angeles
to be the sole candidate. As it did not take part in bidding against competitors,
it did not fall victim to the winner’s curse and did not exceed costs. It is the best
example possible to confirm the theory of the winner’s curse.
5. W. Andreff, “The Winner’s Curse: Why Is the Cost of Mega Sporting Events So Often Underestimated?”, in W. Maennig
and A. Zimbalist (eds.), International Handbook on the Economics of Mega Sporting Events, Edward Elgar, Cheltenham, 2012, pp. 37-69.
6. B. Tihi, XIV Zimske Olimpizhske Igre kao factor razvozha Sarajevskog regiona, Bosne i Hercegovine i sire zazhednice, Eknonomski
Institut Sarajevo, Sarajevo, 1983.Table 1: Cost ex ante and ex post of recent Winter Olympics
City, year Cost ex ante (candidacy) Cost ex post (at the opening) Other indicator
(number of candidates)
Nagano 1998 Total cost in 1992: $450 m Total cost: $875 m Debt: $11 M
(5 candidates)
Salt Lake City Operating cost: $400 m in 1989; $1 Operating cost: $1.9 M Olympic
2002 M in 1996; $1.3 M in 1998 deficit: $168 m
(4 candidates)
Turin 2006 Investment cost: €3.5 M Investment cost:€13 M Olympic deficit:
(6 candidates) OCOG operating cost: $660 m OCOG operating cost: $1,357 m $38 m
246 Vancouver 2010 OCOG operating cost: $846 m; OCOG operating cost: $1.88 M Olympic deficit:
(3 candidates) In 2007: $1.63 M Investment cost: $4.3 M $37 m
Construction cost: $1.22 M Total cost: $7 M
Sochi 2014 Organization cost: €1.2 M
(3 candidates) Investment cost: $9 M
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2010: $33 M; 2013: $52 M
m = million, M = billion
Source: Andreff (2012) updated.
The Rise in Costs of Sochi 2014
Sochi got chosen in 2007 largely because it underestimated its costs at least
as much, if not more than Pyeongchang and Salzburg. It definitely embarked
upon an unavoidable cost overrun process. The candidacy bid announced an
organization cost of 1.2 billion euros for which the members of the IOC voted.
But it was expressed that the OCOG would not cover the cost of investments.
In 2006 this amounted to a projected 6.4 billion euros (9 billion dollars 7), of
which 60% was incumbent on Russia, bringing the total cost to 7.6 billion euros.
We stood at the outset above the total cost reported in the candidacy bids of
Turin 2006 (4 billion euros) and Vancouver 2010 (2 billion euros).
In order to update the total cost of 7.6 billion euros reported ex ante in 2007
and take into account the inflation 8 that preparation for hosting the Games
7. A federal investment program of 12 billion dollars to develop the Sochi region for the Olympic games was adopted when
the city was preselected, with Salzburg and Pyeongchang, in June 2006.
8. In Sochi’ s candidacy bid, the inflation rate was estimated at 5.9% a year from 2007 to 2014, corresponding to an increase of
50% of the cost in current euros over seven years. In the residential housing sector, inflation has already exceeded 100%.always creates, it is necessary to increase it by 50%, corresponding to a total
predictable cost of 11.4 billion current euros by 2014, as compared to a total
effective cost ex post of 7 billion dollars in Vancouver 2010. An appropriate
calculation would also factor in the expense of maintaining new facilities
throughout their life span, which is for the moment unknown. Despite the
financial crisis that struck Russia in 2008, followed by a recession, the investment
cost of the Sochi Games had been growing at a steady pace to reach 33 billion
dollars at the start of 2010 and 52 billion dollars in February 2013, four times the
initial cost. The preparation of Sochi 2014 experienced, like the earlier Olympic
Games, a cost spike. The city was subject to the winner’s curse. There is nothing 247
surprising in that a cost-benefit analysis estimating both the costs and benefits
results in a negative net social cost (a net social loss), over the 2006-2016 period,
of -5.8 billion in constant 2006 dollars 9.
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The 2018 World Football Cup
The 2010 World Football Cup in South Africa had a large cost overrun for
infrastructures, mostly paid for out of public funds: 2.3 billion rands anticipated
in 2003, 17.4 billion in 2007, and 30.3 billion spent in 2010, as well as 9 billion
contributed by the cities and provinces concerned, for a total of 39.3 billion rands
(3.7 billion dollars), 17 times the initial cost. This was not all: three stadiums built
for the event were not used, while the maintenance cost of the others is high:
4.5 billion rands per year for the one in Cape Town. The 2010 Cup contained
an opportunity cost: with nearly 40 billion rands, South Africa could have built
476,180 housing units of the reconstruction and development program, at 84,000
rands per unit, for 2.4 million out of the 12 million poorly housed South Africans 10.
A cost-benefit analysis reveals costs outweighing benefits, or a net social cost of -8.9
billion rands 11. The 2014 World Football Cup in Brazil was even more costly: 14.5
9. I. Pilipenko, “The Sochi 2014 Winter Olympics – The Cost-Benefit Analysis and Ways to Improve the Project Efficiency, ”
Electronic Publications of Pan-European Institute, University of Turku, April 2013.
10. E. Cottle, A Preliminary Evaluation of the Impact of the 2010 FIFA World Cup TM: South Africa, Swiss Labour Assistance,
September 2010.
11. M. G. Menezes, Considerations on the Economic Impact of the 2010 FIFA World Cup on South Africa, Master of Economics,
Rhodes University, 2010.billion dollars have already been devoured, 3.9 billion in the construction of five
new stadiums and the enlargement of seven others, mostly financed out of public
funds. Nearly 45 billion dollars, 85% of which are state-financed, must be invested
in airports, new transportation systems and the tourist sector. The cost of the 2014
Cup surpasses all past records.
Russia won the bid for 2018 FIFA World Cup, over England, Australia,
Belgium and the Netherlands, Spain and Portugal, the United States, Indonesia
and Japan. The economic benefits to be expected are less and more scattered
than those of Sochi 2014 12. The investments, however, are not quite as gigantic.
248 The flow of tourists into Russia for the 2018 Cup has little chance of turning
into a steady flow of tourism comparable to that expected at the new ski resorts
around Sochi. The cost of renovating existing stadiums and the construction of
eight new 45,000-seat stadiums (3.8 billion dollars), 113 training sites and infras-
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tructure to access them is offset by the fact that two stadiums would already be
up and running in Sochi and Kazan (which hosted the Summer Universiades
in 2013). The cost of this amounted to 22 billion dollars in 2013, twice the
initial cost projected during candidacy. Six host cities must be linked by high-
speed trains (Sapsan) to the Moscow-Saint Petersburg and Moscow-Nizhny
Novgorod lines, the road system and capacity of airports should be improved,
and 62 hotels and tourist infrastructures should be built, bringing the planned
total cost of the 2018 World Football Cup to 43 billion dollars. It will be
exceeded.
An independent study of the economic benefits of the 2018 World Football
Cup 13 estimates that the total social benefit, calculated ex ante, at 510 million
euros, taking into account the contributions of FIFA to the local organization
(175 million euros), housing expenses for the teams, media and sponsors (194
million euros), spending of foreign visitors (220 million euros) and residents
(249 million euros), less an eviction effect 14 (-193 million euros) and locals choo-
sing to travel abroad 15 (-179 millions euros). The cost ex ante of the stadiums
12. The 2018 World Football Cup stadiums are located in Moscow, Saint Petersburg, Kaliningrad, Yekaterinburg, Nizhny
Novgorod, Samara, Saransk, Volgograd, Yaroslavl, Rostov-on-Don, Krasnodar, Sochi and Kazan.
13. M. de Nooij, M. van den Berg, C. Koopmans, “Bread or Games? A Social Cost-Benefit Analysis of the World Cup Bid of
the Netherlands and the Winning Russian Bid.” Journal of Sports Economics, 14 (5), 2013, pp. 521-545.
14. Non-resident tourists will avoid going to Russia during the World Cup due to fear of traffic jams, noise, the hooliganism of
supporters, etc., while Russian residents will go on vacation in places other than the Cup sites for similar reasons.
15. Such as imports from abroad used to build or renovate stadiums or infrastructures.(908 million euros), infrastructure (1,000 million euros), security and organi-
zation (294 million euros) would amount to a total of 2,202 million euros, or a
negative net social benefit 16 (a net social loss) of 1,692 million euros, or 12 euros
per Russian inhabitant. Hosting the 2018 World Football Cup would be socially
positive if, and only if, the nonmonetary benefits (national pride and identity,
media impact and reputation) for Russia would reach the estimated over 1.6
billion euros, or if each Russian citizen would be ready to pay more than 12 euros
so that his country would be the theater of this event. Of course, any economist
would suggest that, before 2018, a survey be conducted in Russia to estimate
the monetary value of Russians’ consenting to pay for having (or submitting to, 249
according to some) the World Football Cup in their country.
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16. Equal to: total social benefit minus total cost.You can also read
