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Cost benefit analysis of the 2022 FIFA World Cup

November 2010

Report by Access Economics Pty Limited for

Department of Resources, Energy and Tourism

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Cost benefit analysis of the 2022 FIFA World Cup

Contents
Key messages ..................................................................................................................................i Executive summary ........................................................................................................................ii 1 2 3 4 Background ......................................................................................................................... 1 The FIFA World Cup ............................................................................................................ 4 Framework of the analysis .................................................................................................. 8
3.1 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Some key preliminaries .......................................................................................................... 9 Infrastructure ....................................................................................................................... 12 Bidding costs ........................................................................................................................ 13 Security ................................................................................................................................ 13 Transport.............................................................................................................................. 14 Costs to Government ........................................................................................................... 14 LOC Budget .......................................................................................................................... 14 Impacts on other sporting codes ......................................................................................... 16 Broader impacts ................................................................................................................... 17 Summary of the costs of staging the World Cup ................................................................. 18 Tourism ................................................................................................................................ 20 Tourism and sporting infrastructure legacy benefits ........................................................... 23 FFA friendly matches............................................................................................................ 24 Other benefits ...................................................................................................................... 25 Ticket revenue ..................................................................................................................... 25 Economic welfare impacts of staging the World Cup .......................................................... 26 Broader impacts ................................................................................................................... 28 Economic welfare and labour market assumptions ............................................................. 29 Summary of the benefits of staging the World Cup ............................................................ 32 Quantification of costs ......................................................................................................... 33 Quantification of benefits .................................................................................................... 37 Results summary .................................................................................................................. 38 Key uncertainties ................................................................................................................. 39

Costs of the World Cup ..................................................................................................... 10

Benefits of the World Cup ................................................................................................ 19


5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9

Weighing up the impacts of the World Cup ..................................................................... 33


6.1 6.2 6.3 6.4

7 8

Risk analysis ...................................................................................................................... 40 Concluding comments ...................................................................................................... 46

Appendix A: Key analytical assumptions ..................................................................................... 47 Appendix B: Key results ............................................................................................................... 49 Appendix C: Net tourism impact of the World Cup .................................................................... 51 Appendix D: Principles for assessing major events ..................................................................... 54 Appendix E: The Access Economics CGE model .......................................................................... 57
While every effort has been made to ensure the accuracy of this document and any attachments, the uncertain nature of economic data, forecasting and analysis means that Access Economics Pty Limited is unable to make any warranties in relation to the information contained herein. Access Economics Pty Limited, its employees and agents disclaim liability for any loss or damage which may arise as a consequence of any person relying on the information contained in this document and any attachments.

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Cost benefit analysis of the 2022 FIFA World Cup

Charts
Chart 6.1 : Costs and benefits of hosting the World Cup Scenario 1: All stadia ..................... 34 Chart 6.2 : Costs of hosting the World Cup Scenario 1: Full stadia ........................................ 34 Chart 6.3 : Costs and benefits of hosting the World Cup Scenario 1: All stadia ..................... 35 Chart 6.4 : Costs of hosting the World Cup Scenario 2: Partial stadia.................................... 35 Chart 6.5 : Costs and benefits of hosting the World Cup Scenario 3: Overlay costs .............. 36 Chart 6.6 : Costs of hosting the World Cup Scenario 3: Overlay costs ................................... 36 Chart 6.7 : Benefits of hosting the World Cup ............................................................................ 37 Chart 6.8 : Costs and benefits of hosting the 2022 World Cup ................................................... 38

Tables
Table 2.1 : Government guaranteesError! Bookmark not defined.Error! Bookmark not defined. Table 4.1 : FIFA World Cup scenarios .......................................................................................... 10 Table 4.2 : Costs of the 2022 World Cup ..................................................................................... 11 Table 4.3 : Estimated stadium infrastructure costs .................................................................... 12 Table 4.4 : Budgeted expenditure of the 2006 World Cup Organising Committee .................... 15 Table 4.5 : Quantified costs of the World Cup and Confederations Cup .................................... 18 Table 5.1 : Benefits of the 2022 World Cup ................................................................................ 19 Table 5.2 : Fixture allocation ....................................................................................................... 20 Table 5.3 : Net tourism effect ..................................................................................................... 21 Table 5.4 : World Cup ticket allocation ....................................................................................... 25 Table 5.5 : Economic welfare benefits of staging the 2022 World Cup ...................................... 30 Table 5.6 : Sensitivity of economic welfare benefits to labour market assumptions ................. 31 Table 5.7 : Quantified benefits of the World Cup and Confederations Cup ............................... 32 Table 6.1 : World Cup costs ......................................................................................................... 33 Table 6.2 : World Cup benefits .................................................................................................... 37 Table 6.3 : Net benefits of hosting the 2022 World Cup............................................................. 39 Table 7.1 : Key risks of hosting a World Cup ............................................................................... 41 Table 7.2 : Sensitivity analysis of key inputs ............................................................................... 44 Table 7.3 : Impact of additional labour market capacity ............................................................ 45 Table A.1 : World Cup CBA key assumptions .............................................................................. 47 Table C.2 : Net tourism effect ..................................................................................................... 53

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Cost benefit analysis of the 2022 FIFA World Cup

Figures
Figure 4.1 : Stadia development scenarios ................................................................................. 11 Figure 4.2 : FIFA financial platform ............................................................................................. 15 Figure 5.1 : Macroeconomic expansionary effects ..................................................................... 30 Figure 7.1 : Risk analysis framework ........................................................................................... 40 Figure 7.2 : NPV of costs and benefits of the World Cup ............................................................ 43 Figure C.1 : Host nation net tourism effect ................................................................................. 51 Figure E.1 : Key components of AE-RGEM .................................................................................. 57

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Cost benefit analysis of the 2022 FIFA World Cup

Acronyms
AFL ARU BCA CA CBA CGE DRET FIFA FFA GDP GNP GST LOC NPV NRL PwC RWC TRA Australian Football League Australian Rugby Union Business Club Australia Cricket Australia Cost benefit analysis Computable general equilibrium Department of Resources, Energy and Tourism Fdration Internationale de Football Association Football Federation Australia Gross Domestic Product Gross National Product Goods and Services Tax Local Organising Committee Net present value National Rugby League PricewaterhouseCoopers Rugby World Cup Tourism Research Australia

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Cost benefit analysis of the 2022 FIFA World Cup

Key messages

This analysis examined the economic benefits and costs of Australia hosting the 2022 FIFA World Cup, with a focus on the direct financial aspects of the tournament. The study is intended to help governments better understand the nature and scale of the impacts of Australia hosting the event. Three distinct cost scenarios were examined, based on a different allocation of stadium infrastructure costs.

These stadium cost scenarios reflect underlying uncertainty regarding the nature and extent of stadium infrastructure commitments currently in the development pipeline, and therefore which stadium costs can be attributed to the tournament. In moving from scenarios 1 to 3, an increasing level of stadium development is not contingent on the tournament, therefore reducing the costs of the event.

The headline estimates for staging the 2022 World Cup under the three scenarios are presented below. Scenario
Scenario 1 Full stadia costs Scenario 2 Partial stadia costs Scenario 3 Overlay costs

Net benefit
-$1,477 million -$305 million $266 million

Stadia costs
$2,748 million $1,137 million $346 million

Note: Net benefit estimates expressed in net present value terms. Stadia costs are in real dollars (2010 prices).

By far, the major cost factor for the tournament relates to the development of stadium infrastructure. (Under Scenario 2, for example, stadium related costs comprise around 55% of all costs.) The financial benefits of the tournament arise predominantly through international tourism. Accordingly, the main uncertainties relate to these two dominant cost and benefit drivers.

In particular, a key risk of staging the tournament concerns cost overruns for major infrastructure works (irrespective of the different stadium scenarios). For example, a 10% increase in infrastructure costs will lower the net benefit by $81 million for Scenario 2.

While the 12-year tournament lead time adds considerable uncertainty to all benefit and cost elements, it also provides some important practical advantages. It potentially allows greater time and scope to put in place smarter, more integrated and cost effective solutions for tournament related developments, including in response to changing economic and market conditions. Hosting the World Cup will involve operational disruptions and financial costs to certain professional sports (the AFL, ARU, NRL and Cricket Australia) which use various stadia and facilities allocated for the event. The memorandum of understanding between the FFA and relevant sports will help frame ongoing discussions. These impacts are not expected to be large relative to other event costs but are potentially sensitive. The tournaments long lead time will also provide greater opportunities to manage these commercial issues. Many cost estimates and development schedules adopted in the analysis are based on preliminary assessments chiefly because of FIFAs 12-year bidding timetable. Over time, more information regarding event costs and other key policy parameters will help provide greater surety to the estimates.

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Cost benefit analysis of the 2022 FIFA World Cup

Executive summary
The FIFA World Cup is the biggest sporting event in the world, attracting a wider audience and following than the Olympics. The 2006 World Cup in Germany had a total cumulative television audience of over 26 billion, and, while official estimates from the 2010 tournament in South Africa are yet to be released, FIFA has anticipated a similar television audience. The FFA is currently bidding for Australia to host the 2022 FIFA World Cup and the Australian Government has committed $45.6 million in financial support (an earlier bid to host the 2018 tournament has been formally withdrawn). If Australia is successful, the event has the potential to deliver considerable benefits to the community. But it will also involve a range of significant costs and risks, many of which will be directly borne by government. The FFA submitted its bid book to FIFA for consideration on 14 May 2010. The proposal includes 12 stadia across 10 host cities nationwide, and would see World Cup matches played across six states and territories. A successful Australian bid would see the World Cup held in an Asian Football Confederation member nation for only the second time in the tournaments 80 year history. This report, which was commissioned by the Department of Resources, Energy and Tourism, examines the economic benefits and costs of Australia hosting the 2022 World Cup. The analysis aims to inform ongoing policy decisions regarding the Commonwealths involvement in staging the tournament and accordingly takes a national whole-of-economy focus.

Framework of the analysis


Mega events such as the FIFA World Cup typically confer a range of important economic benefits. These include additional tourism activity and improved infrastructure and transport systems. More indirect benefits are also potentially available through showcasing a city or country as a business and tourism destination and building a sense of community pride and cohesiveness. But there are also major costs and risks involved in hosting large events. These principally involve the actual costs of constructing necessary infrastructure and providing security, the real risks of significant cost overruns and underutilisation of facilities following the event. Further, costs can arise through displacement of non-event visitors and added inconvenience for residents during the period of the tournament. The analysis focuses on the direct financial aspects of the 2022 World Cup. Many important social costs and benefits have not been quantified. There are a range of practical and technical challenges to quantifying such impacts and, under agreed framework principles (see Appendix D), Access Economics considers these are best treated in a qualitative sense. Among other things, this approach avoids the potential overestimation of non-financial benefits a common issue with event related analysis. It is also consistent with a conservative framework which allows relevant decision-makers to gauge the veracity of broader social impacts within the overall context and dimensions of market-based costs and benefits.

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Cost benefit analysis of the 2022 FIFA World Cup

Impacts of the tournament


Revenue and cost arrangements for the tournament
Under the commercial arrangements of the tournament, most of the key revenues from the World Cup flow to FIFA. The arrangements guarantee FIFA exclusive rights to media, broadcasting, ticketing and relevant merchandise revenues. However, FIFA provide significant funding to the World Cup host nation as part of a financial platform. Under this platform, the primary source of funds is generated through ticket sales, which initially flow through to FIFA. Much of this revenue is then returned to fund the operations of the Local Organising Committee (LOC), which is established as a FIFA subsidiary. In previous tournaments, the LOC budget has been primarily funded by FIFA using this system of financial support. The analysis in this report assumes this arrangement will continue. LOC organisational and administrative expenditure in Australia in the lead up to the World Cup provides a considerable welfare gain for the Australian economy. However, expenditure by international visitors attending the event is the most tangible financial return from the tournament. The welfare gains for Australia through tourism are primarily accrued in the tournament year (2022) and far outweigh other benefits potentially generated from hosting the World Cup. Like other mega events, the costs of hosting the World Cup are considerable. A requirement of the World Cup bidding process is for bidding nations to sign various guarantees to FIFA that cover a range of commercial, legal and operational arrangements. These guarantees commit governments to substantial costs, such as providing necessary infrastructure, security and transport requirements. In particular, the host nation is required to provide 12 stadia to FIFA standards. These facilities are underwritten by a comprehensive suite of guarantees and transfer significant development risk onto government, especially as stadium infrastructure represents a significant share of overall tournament costs.

Stadia development scenarios


The Department has provided three scenarios in which to analyse costs associated with stadium construction (see Table i). Stadia development costs are separated into construction and overlay costs. Overlay costs refer to more temporary costs of preparing stadia to ensure they meet FIFA requirements for example changing seating arrangements for a rectangular pitch and are assumed to occur in the tournament year. All other (non-stadium) costs of staging the tournament are consistent across all three scenarios.

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Cost benefit analysis of the 2022 FIFA World Cup

Table i: FIFA World Cup scenarios Scenario


Scenario 1 Full stadia costs Scenario 2 Partial stadia costs

Details
All stadium construction, upgrade and overlay costs associated with the 12 stadia in the bid book allocated to the World Cup. Stadia costs incurred directly as a result of Australia hosting the World Cup, specifically upgrades to stadia in Townsville and Newcastle, and new stadia in Blacktown and Canberra. Includes all overlay and temporary costs for other stadia required to become FIFA compliant. Overlay costs for the 12 stadia nominated in the bid book.

Scenario 3 Overlay costs

The three scenarios considered in the analysis reflect current uncertainty regarding how infrastructure costs can be attributed to the tournament. Under the FFAs bid, a suite of 12 stadia has been proposed: some of these are yet to be built, others will require substantial upgrade and refurbishment and all will require a level of overlay for the tournament. Almost all the major greenfield stadia contained in the bid are under some degree of active development consideration independent to the World Cup process (for example, Perth and Adelaide Oval). The three scenarios considered reflect the likelihood of those stadium works being developed irrespective of Australia staging the World Cup in 2022. Moving from scenarios 1 to 3, a greater level of stadium development is essentially pre-committed and not contingent on the tournament, therefore reducing the cost of the event.

Analytical findings
The three stadia cost scenarios have a substantial bearing on the net financial impacts of hosting the 2022 FIFA World Cup. Staging the event is expected to result in a net cost under Scenario 1 and 2, and provide a net benefit under Scenario 3 (based on the allocation of stadia costs outlined in Table ii above).

Scenario 1 (full stadia costs) results in a net cost of $1.5 billion. Scenario 2 (partial stadia costs) results in a net cost of $305 million. Scenario 3 (overlay costs) provides a net benefit of $266 million.

The significant differences between each scenario are driven by the allocation of stadia costs, with all other aspects of the tournament common to each scenario. For example, the significant difference between Scenario 1 and 2 (which both involve a net financial cost) is due to around $1.6 billion of stadium construction being allocated away from the tournament. Scenario 3 provides a net gain of $266 million from hosting the tournament. This is due to all permanent stadium construction costs being allocated to the baseline, with only overlay costs of $346.2 million allocated specifically to the World Cup. Stadium infrastructure and security costs account for the majority of costs under each scenario, with security being the major cost component under Scenario 3. Stadium costs vary from $2.7 billion under Scenario 1 to $346.2 million under Scenario 3.

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Cost benefit analysis of the 2022 FIFA World Cup

The benefits of the tournament arise predominantly through international tourism. The event is expected to attract large numbers of overseas spectators, as well as officials and the teams themselves. The welfare gain from the direct expenditures from these arrivals is projected to be $726 million in net present value terms (estimation of the welfare gain from direct expenditures from overseas parties is discussed below). The next largest benefit is generated from the LOC, which is largely funded by FIFA. LOC expenditures in Australia for the 2022 World Cup are estimated to have a total welfare gain of around $173 million. Table ii below details the key costs and benefits of staging the World Cup. On a per capita basis, hosting the 2022 World Cup would involve a financial cost of around $66 per person under Scenario 1 and provide a benefit of around $12 under Scenario 3. Table ii: Net benefits of hosting the 2022 World Cup
Benefit / Cost Scenario 1 Full stadia NPV Benefits Tourism (incl. legacy) LOC expenditure Television broadcasting Other World Cup related Total Benefits Costs Bidding Infrastructure Transport Security Cost to Government Other Total Costs Net Benefit Benefit per person ($) 45.6 1,947.8 49.8 333.2 97.1 62.5 2,535.9 -1,477.2 -66.0 45.6 775.8 49.8 333.2 97.1 62.5 1,364.0 -305.3 -13.6 45.6 204.1 49.8 333.2 97.1 62.5 792.3 266.4 11.9
Australian Government contribution Based on FFAs Infrastructure Consortium estimates Based on transport assessment report by Arup Estimates provided by Attorney Generals Department Host city agreements and government guarantees Training facilities and costs incurred by other sports

Scenario 2 Partial stadia NPV $ million 726.1

Scenario 3 Comments Overlay costs NPV $ million 726.1


Major benefit but uncertainty regarding number of tourists, expenditure and length of stay LOC budget estimate provided by FFA FIFA broadcast partner expenditure in Australia Consumer surplus, GST revenue from international ticket sales and LOC operating surplus

$ million 726.1

172.7 45.9 113.9

172.7 45.9 113.9

172.7 45.9 113.9

1,058.7

1,058.7

1,058.7

Note: Per capita estimates based on a population of 22.38 million as at July 2010, Australian Bureau of Statistics.

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Cost benefit analysis of the 2022 FIFA World Cup

Other potential impacts


Hosting a major event also generates important benefits that are difficult to quantify and therefore need to be considered in a more qualitative sense. Major events are generally seen to confer a positive halo effect on the residents of the city and/or nation in which the event is held. These effects are generally attributed to several factors, including national pride and general public enthusiasm and can be usefully categorised as feelings of wellbeing. Importantly, such effects can be experienced broadly across the community and do not necessarily depend on individuals attending the event. Further benefits potentially generated by a major event involve a greater likelihood to winning other events and demonstrating the advantages of conducting business and trade in a particular locality. While these effects can represent legitimate positive spillovers from events, it is important to recognise that their magnitude can be overstated and any effects are extremely difficult to verify after the event. For example, benefits from trade gains rely on assumptions as to whether any benefit is truly incremental due to the World Cup being held in Australia versus another country, or whether it is a benefit that is merely brought forward. While these effects are no less important than the other quantifiable benefits discussed above, they are certainly less tangible. Including them in a cost benefit analysis (CBA) would require explicit quantification of the community wellbeing generated. Given the difficulty in assigning an economic value to these benefits, they have not been included in the analysis and would need to be considered alongside the market based costs and benefits.

Uncertainties and risks


Given the scale of the tournament, its national footprint and the costs involved, the decision to bid for the World Cup and the extent of government involvement are major policy issues. Importantly, these decisions should be made on the basis of robust up-to-date information. As part of preparing the bid, the FFA commissioned a number of specialist studies into the major infrastructure and operational requirements to stage the tournament in 2022. Many of these cost estimates have been adopted as part of this analysis. While these are based on recent specialised assessments, and represent the best available information at the time of writing, they are still greatly reliant on a range of assumptions and limitations. This uncertainty most heavily concerns the costs associated with stadium infrastructure, security and transport. In particular, security and stadium infrastructure costs are expected to have the greatest potential to increase the net cost of hosting the tournament. While the security costs were developed based on the current environment, how security is viewed and enforced over the next decade or so is dependent on many international factors and may change substantially. The cost of stadium construction is highly likely to change over time and cost estimates should be updated to reflect changes. There is also the possibility that stadium configurations may change or that there are changes to the actual suite of stadia proposed for the tournament. Such changes will have both cost and revenue implications.

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Cost benefit analysis of the 2022 FIFA World Cup

At a higher level, the Australian economy will look very different in 2022 (just as it looked different 12 years ago in 1998). This adds to the uncertainty regarding the likely costs of hosting the tournament and the benefits which would potentially accrue across the economy as it is very difficult to project prevailing macroeconomic and labour market conditions this far ahead. However, the long lead time, which is a result of FIFAs joint bid process, does have some advantages in that it can potentially allow greater time and scope to put in place smarter and more integrated solutions to be developed. Where possible, information should be updated over time by reflecting the current economic and social environment.

Sensitivity analysis
As noted, the main uncertainties of the analysis concern the largest benefit and cost drivers of the event namely, the level of expected tourism revenues and overall stadium development costs. Table iii shows the sensitivity of these estimates to the overall analysis. For the 2022 World Cup, a 10% increase in the cost of stadium construction would lead to a $198 million decrease in the overall net result to negative $1,675 million under Scenario 1. The variance from the same percentage cost increase is less pronounced under Scenarios 2 and 3 due to a smaller construction cost component, with the net benefit lowered by $81 million and $24 million respectively. Should tourism revenue be 10% greater than projected, this would increase the overall outcome by around $72.6 million across all scenarios, resulting in a net cost of $1,405 million under Scenario 1 to a net gain of $339 million under Scenario 3. Table iii: Sensitivity analysis of hosting the 2022 World Cup
Expenditure / Benefit item

Scenario 1 Full stadia


NPV $million -1,477.2 -1,675.3 -1,279.2 -1,404.6 -1,549.9 -1,514.5 -1,440.0 -797.2 Variance $million -198.1 198.1 72.6 -72.6 -37.3 37.3 680.0

Scenario 2 Partial stadia


NPV $million -305.3 -386.2 -224.4 -232.7 -377.9 -377.9 -268.0 374.7 Variance $million -80.9 80.9 72.6 -72.6 -37.3 37.3 680.0

Scenario 3 Overlay costs


NPV $million 266.4 242.7 290.1 339.0 193.8 193.8 303.7 946.4 Variance $million -23.7 23.7 72.6 -72.6 -37.3 37.3 680.0

Base Case +10% construction costs -10% construction costs +10% tourism revenue -10% tourism revenue +10% transport & security -10% transport & security Long run labour supply

Note: NPV estimates use a real discount rate of 4.5%. The long run labour supply sensitivity test relaxes the full employment assumption and shows the economic impact in which spare capacity in the labour market can respond to increased demand generated by the tournament.

Another important analytical parameter is the full employment assumption adopted in the GE modelling. The labour supply condition has a large bearing on the economys ability to respond to increased demand from the World Cup through increased employment, and therefore the extent to which economic welfare can increase. Department of Finance and Deregulation guidelines state a full employment condition is to be taken when examining the general equilibrium impacts of policy proposals. Such a condition, which is consistent with the

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Cost benefit analysis of the 2022 FIFA World Cup

conservative approach adopted in the analysis, ensures that any expansionary impacts are more constrained than if there was excess capacity in labour and other factor markets. Relaxing the long run labour supply assumption improves the net result by around $680 million across all three scenarios. It results in a net tournament cost of $797 million under Scenario 1, and a net positive result of $374.7 million and $946.4 million for Scenarios 2 and 3 respectively.

Professional sporting codes


Hosting the World Cup will affect other professional sports in Australia, predominantly the AFL, NRL, ARU and Cricket Australia (CA), due to restricted access to major sporting venues and changes to normal operating schedules. While these impacts are not large relative to other cost components, they are potentially sensitive. To an extent, the nature of discussions between other professional sports and the FFA seen to date has some positive dimensions. Firstly, it is a direct expression of the dynamic and viable state of professional sport in Australia. Secondly, the keen interest shown by codes in securing key stadium access as a result of the tournament suggests future utilisation of stadium infrastructure will be healthy. The affected professional sports have entered into a memorandum of understanding (MOU) with the FFA that will be used as a basis for ongoing commercial discussions, including any compensation, should Australia succeed in winning the right to host the 2022 World Cup. A fundamental principle of the MOU is that the respective codes will not be any worse off as a result of Australia hosting the World Cup and Confederations Cup. It is important to note that no final decision or compensation has been agreed to between the FFA and any of the four affected sports and, as such, there is considerable uncertainty surrounding the respective costs. Following limited discussions with relevant bodies, an estimate of $50 million has been adopted in the analysis.

Concluding comments
Hosting a tournament the scale of the FIFA World Cup requires a significant commitment from government to meet the requirements set out by the governing body. Given the World Cup will not be held for 12 years, there is considerable uncertainty surrounding not only the overall costs of the tournament but which costs will be borne by State or Commonwealth governments. Once a host nation for the World Cup is selected, government (and thus taxpayers) would bear significant risk of either tournament cost overruns or that benefits are lower than expectations. It should be noted that upside potential also exists (that is, costs are lower and revenues higher than expected) but this is less likely and indeed has not been the general experience with staging mega sporting events. The fundamental conclusion drawn from this analysis is that, except under the most favourable cost conditions, the expected financial benefits from tourism, team and media spending are not sufficient to outweigh the significant costs of stadium construction and operational services required to host the event. These financial estimates would need to be

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Cost benefit analysis of the 2022 FIFA World Cup

considered in conjunction with the broader social and cultural benefits which the tournament is likely to yield. An important procedural aspect given high levels of uncertainty is to clearly establish responsibility for all costs of staging the event. This would include costs to be borne by the LOC and especially between States and the Commonwealth. Host city agreements are entered into by the States involved, but may present considerable risks for the Commonwealth for instance, to meet any funding shortfall from the States or LOC. Should Australias bid succeed, the general environment and relationship with FIFA will change as the bilateral engagement will no longer occur in the context of a competitive bid process. It is understood that a more inclusive process between FIFA and the host country will emerge in which there is likely to be some scope to modify or refine aspects of tournament commitments according to changing circumstances. Indeed, there is greater potential for such revisions given the long lead time for the tournament. Where this occurs, there may well be material cost and risk implications for government and any such proposals should be carefully scrutinised. Access Economics November 2010

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Cost benefit analysis of the 2022 FIFA World Cup

Background

Access Economics was engaged by the Department of Resources, Energy and Tourism to examine the costs and benefits of Australia hosting the 2022 FIFA World Cup. The Australian Government previously committed $45.6 million to the Football Federation of Australia (FFA) to proceed with a bid to host either the 2018 or 2022 FIFA World Cup. In June 2010, the FFA formally withdrew its bid to host the 2018 tournament and is only progressing its bid for the right to host the 2022 FIFA World Cup. This report is based on a broad framework and methodology for assessing the costs and benefits of hosting major events which is the subject of a separate companion report. An outline of this approach is provided in Appendix D.

Policy context
Australian governments have helped facilitate a range of high-profile sports and cultural events. The potential for events to generate considerable economic and social flow-on benefits across the community provides a legitimate basis for government support. This facilitation typically comes in a variety of forms from direct financial support for bid preparation, marketing campaigns and infrastructure to the provision of security, public transport requirements and improvements to civic amenities. Given this range of involvement, and as a matter of good public policy, it is important that major events are subject to a rigorous assessment of their overall costs and benefits. It should be recognised that bidding for the World Cup is not strictly a decision for the Australian Government but for the FFA. In practice, however, given the scale of the event, high levels of government sponsorship are necessary. Indeed, FIFA require a comprehensive range of formal guarantees be provided by national governments to support bids by respective football associations. The decision to bid can therefore be best considered a joint decision between the FFA and government. This raises a series of complex issues concerning how the costs and risks associated with managing the bid and potentially staging the tournament are allocated between private parties like the FFA and different levels of government. The broad costs and benefits associated with hosting the World Cup are outlined in Box 1. While a decision to bid is ultimately a yes or no proposition, various options are possible for structuring a (compliant) bid. These can have material implications for costs and revenues. For example, there is an array of options regarding host cities and venues, including whether to develop new facilities or upgrade existing arenas. Essentially, a bid could be prepared to be relatively cheaper or more expensive and these options will each have different community welfare outcomes. Importantly, they may also affect the probability of a successful bid.

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Cost benefit analysis of the 2022 FIFA World Cup

Box 1: Costs and benefits of hosting the World Cup


Benefits Quantitative impacts Tourism Around 700,000 tourists expected to travel to Australia for the tournament LOC spending Funding used to organise the event which provides a welfare gain for Australia Other World Cup related expenditure Broadcasting and communications for the tournament funded by FIFA partners Bidding $45.6 million committed by the Commonwealth Government Stadia Construction and overlay cost of new and redeveloped stadia Transport and security Additional transport facilities and security measures to meet increased demand from international tourists and domestic spectators Government guarantees Costs to ensure efficient administration of the tournament borne by Government Impact on professional sports Other sporting codes which currently use World Cup stadia will be required to use alternative venues Costs

Infrastructure legacy Improved stadium and training facilities Tourism legacy A successful tournament and positive image of Australia is expected to increase tourism in the years following the event Qualitative impacts National pride An increase in community spirit and national pride Reputation enhancing A successful tournament would enhance Australias reputation for hosting major events and may lead to other events big awarded to Australia in the future

PricewaterhouseCoopers World Cup Business Case


To assist its bid, the FFA appointed PricewaterhouseCoopers (PwC) to undertake an economic assessment of staging the World Cup and to develop a preliminary business case analysis to assist governments consider their involvement in the bid. This analysis was based on various specialist assessments also commissioned by the FFA to examine the major infrastructure and operational requirements for the event. The PwC analysis, together with its related specialist assessments, represents the most up-todate information on many of the core aspects of staging the World Cup. Accordingly, it has been a large source of information for this study.

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Cost benefit analysis of the 2022 FIFA World Cup

Structure of the report


Chapter 2 provides a brief description of the FIFA World Cup bidding process and operational characteristics. The framework of analysis, including the principles adopted for the study and methodology, are set out in Chapter 3. Chapters 4 and 5 detail the costs and benefits involved in staging the World Cup. Chapter 6 contains the overall outcomes of the study, including an analysis of key uncertainties. Chapter 7 includes a discussion on key risks faced in hosting the World Cup and a sensitivity analysis of key assumptions. Some general conclusions are drawn in Chapter 8.

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Cost benefit analysis of the 2022 FIFA World Cup

The FIFA World Cup

Outline of the World Cup event


The first World Cup was held in Uruguay in 1930, and has been held every four years since, with the exceptions of 1942 and 1946, due to World War II. The tournament is now considered to be the largest sporting event in the world, attracting a larger audience than the Olympics. The 2010 World Cup was recently hosted by South Africa. A total of 200 nations entered qualifying events for the tournament, with 31 qualification places available (the host nation for each tournament is guaranteed a place in the finals). Australia qualified for the tournament and was one of 19 countries that also qualified to compete in the 2006 World Cup. The broad structure of the tournament is shown in Box 2.

Box 2: World Cup tournament The tournament involves 64 matches over 4 weeks.

There are 32 national teams that contest the tournament, split into 8 groups of 4 teams in the early stage Group Matches. This stage comprises 48 matches, with the final matches in each group played simultaneously. Following the group stage, 16 teams (the two top teams in each group) proceed to the knock-out stage of the tournament. This stage is an elimination tournament where teams play each other in one-off matches. The subsequent rounds of the tournament include: Round of 16 winners of each group play the runner-up of another group Quarter-finals Semi-finals Third-place match (contested by the losing semi-finalists) World Cup final Host countries will also stage the FIFA Confederations Cup a year before the respective World Cup. A principal aim of staging this much smaller event is to test the required infrastructure before the World Cup. The tournament is contested between the host country, the winner of the previous World Cup and winners of the six FIFA confederation championships. The tournament involves 16 matches over 2 weeks.

Confederations Cup tournament

The 8 competing nations are split into 2 groups of 4 teams for the Group Matches. This stage comprises 12 matches, with the final matches in the group played simultaneously. Following the group stage, the two top teams in each group proceed to the semi-finals of the tournament. The winners proceed to the Confederations Cup final and a third-place playoff is contested between the losing semi-finalists.

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Cost benefit analysis of the 2022 FIFA World Cup

The bidding process


The bidding process is being held simultaneously for both the 2018 and 2022 tournaments. At the deadline for registration in March 2009, Australias bid was one of nine preliminary bids for the 2018 tournament, with an additional two nations entering bids for just the 2022 tournament. Australia initially bid for both tournaments, however, the FFA formally withdrew its bid to host the 2018 World Cup in order to focus its efforts on the bid for 2022. In an attempt to ensure tournaments are shared amongst the continents, the last two host confederations are ineligible to host each tournament. Given South Africa hosted the event in 2010 and Brazil will be the host nation in 2014, this makes African nations ineligible for 2018, and South American nations ineligible for both. Of the bidders, four are from the Asian confederation, one from North America, and four from Europe (two of the European bids are joint bids by two nations). The North American and European countries have submitted bids for both tournaments, with the Asian confederation countries bidding to host the 2022 tournament. Only one bidder from any confederation may host either tournament for example, if a European bid is selected for 2018 then only the Asian and North American nations are eligible for 2022. All bidders were required to submit full details of their bids to FIFA by 14 May 2010. The broad structure of the tournament and key dates are shown in Box 3.

Staging the event


The host country of the World Cup hosts two football tournaments the FIFA World Cup and the Confederations Cup. The FIFA Confederations Cup takes place the year before the World Cup. For the 2006 World Cup, Germany became the first host nation to host both events in their amalgamated form. This was continued in South Africa and future host nations will follow this structure. The FIFA Confederations Cup is a tournament involving the host nation, the champion team from the previous FIFA World Cup, and the champion team from each of FIFAs six continental membership confederation tournaments. With the tie-in to the host country of the World Cup, the Confederations Cup provides opportunity for a smaller-scale testing of venues, transport and other infrastructure. For the World Cup itself, the Local Organising Committee (LOC) is responsible for delivering all infrastructure required for the event, including stadiums and training venues, hotels, media centres, ticketing and transportation. Sponsorship is not an LOC responsibility, and is arranged by FIFA. Because of the intensive nature of the tournament and a need to hold more than one match per day in the earlier stages of the tournament, host nations are required to use multiple cities for matches. The 2006 World Cup in Germany used 12 stadiums, while the 2010 World Cup in South Africa used 10 stadiums in nine cities.

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Cost benefit analysis of the 2022 FIFA World Cup

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Cost benefit analysis of the 2022 FIFA World Cup

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Cost benefit analysis of the 2022 FIFA World Cup

Framework of the analysis

Cost benefit analysis (CBA) is a tool used to determine whether or not the full economic costs of a policy change are outweighed by its full economic benefits that is, whether the policy has a net benefit for society. Ideally, a CBA examines all the monetary and non-monetary (or intangible) costs and benefits of a policy or project to society. This includes its economic, social and environmental impacts. The broad stages of a cost benefit analysis generally comprise: 1. Defining the scope and objectives The first stage of the CBA requires an investigation of the project and its context including an outline of key objectives and beneficiaries. 2. Defining the baseline scenario and counterfactual cases A CBA only measures the incremental benefits and costs of the policy change scenario which occur over and above the business as usual scenario. Thus, to review the potential benefits and costs of a project, in this case the World Cup, it is necessary to specify the counterfactual case, that is, Australia not hosting the World Cup. This examines what could be expected to occur in the absence of the project and compares this to the potential incremental impacts of the project itself. 3. Specifying the various costs and benefits of different scenarios Understanding of the chain of causation of the project is necessary. The benefits expected to flow from the project, its costs and viable project options should all be examined. As noted, only costs and benefits additional to the business-as-usual case should be included in the analysis. Given the high level of uncertainty surrounding stadium redevelopments over the next 12 years and the allocation of costs to the World Cup or the business as usual scenario, the Department has provided three scenarios with which to analyse costs associated with stadium construction. The three scenarios considered reflect the likelihood of stadium works being developed irrespective of Australia staging the World Cup in 2022. The scenarios are discussed further in Chapter 4. 4. Quantifying the various costs and benefits, where possible This is arguably the most fundamental and challenging part of a CBA. Monetary values need to be assigned to costs and benefits where they exist in the year in which the revenue or cost will be borne. 5. Discounting past and future costs and benefits to net present values The costs and benefits of projects often accrue over a number of years. Thus, the valuation of costs and benefits should take into account the time in which they occur. A net present value approach is utilised to discount future benefits and costs to a present value. Choosing an appropriate discount rate can be challenging and must often account for the specifics of a project.

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Cost benefit analysis of the 2022 FIFA World Cup

6.

Conducting sensitivity tests for uncertainties Future costs and benefits are typically subject to uncertainty. For estimates with a high degree of uncertainty, information relating to the margin for error should be provided and a sensitivity analysis conducted. A sensitivity analysis generally substitutes different estimates for key variables (including the discount rate and major benefit and cost factors) and calculates the impact of these on the overall outcome. Decision-makers are thus provided with information on the impact of key parameters, which can highlight risks and the main areas of uncertainty.

3.1 Some key preliminaries


Access Economics has developed a range of principles for conducting cost benefit assessments of major events. These principles cover various procedural and analytical aspects of major event evaluations. The Access Economics companion report A framework for cost benefit analysis of major events (2009) contains a detailed discussion of the principles adopted in this report. A summary of this approach is provided in Appendix D. A major challenge in undertaking cost benefit analysis involves the quantification of all relevant costs and benefits. Unlike a more narrow financial evaluation, cost benefit studies cover a much wider range of impacts. Quantification of some of those impacts can be difficult, especially where they relate to indirect, non-market, environmental and social impacts such as increases in community wellbeing, where the data required to undertake a comprehensive quantification exercise may not exist or be readily obtainable. The quantified impacts have been limited to those where a reasonable level of confidence in the data and the valuation techniques can be demonstrated. The analysis conducted for this report focuses on the financial costs and benefits associated with the World Cup. Where it was not feasible to robustly quantify costs, including social and intangible aspects, these have been explored in a qualitative sense. Uncertainty regarding the benefits and costs necessarily involves a high degree of judgement in conducting an event analysis. A common analytical flaw is that inherent optimism bias systemically underestimates costs and overstates benefits. Therefore, where tournament related assumptions were required, Access Economics has adopted a more conservative approach to the analysis. A list of key assumptions adopted in the analysis is provided in Appendix A, with further detail provided in Chapters 4 and 5.

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Cost benefit analysis of the 2022 FIFA World Cup

Costs of the World Cup

This chapter focuses on the costs of Australia hosting the World Cup in 2022. The main costs associated with hosting the World Cup relate to the upgrade of current stadia to FIFA standards and the construction of new stadia. Given that the CBA only includes costs over and above the business as usual scenario, ie Australia not hosting the World Cup, the allocation of infrastructure costs between the baseline and the World Cup is a key assumption. Stadia development costs are separated into construction and overlay costs. Overlay costs refer to more temporary costs of preparing stadia to ensure they meet FIFA requirements for example changing seating arrangements for a rectangular pitch and are assumed to occur in the tournament year. All other (non-stadium) costs of staging the tournament are consistent across all three scenarios. Given the high level of uncertainty surrounding stadium redevelopments over the next 12 years, the Department has provided three scenarios with which to analyse costs associated with stadium construction (see Table 4.1). Table 4.1: FIFA World Cup scenarios Scenario
Scenario 1 Full stadia costs Scenario 2 Partial stadia costs

Details
All stadium construction, upgrade and overlay costs associated with the 12 stadia in the bid book allocated to the World Cup. Stadia costs incurred directly as a result of Australia hosting the World Cup, specifically upgrades to stadia in Townsville and Newcastle, and new stadia in Blacktown and Canberra. Includes all overlay and temporary costs for other stadia required to become FIFA compliant. Overlay costs for the 12 stadia nominated in the bid book.

Scenario 3 Overlay costs

The three scenarios considered in the analysis reflect current uncertainty regarding how infrastructure costs can be attributed to the tournament. Under the FFAs bid, a suite of 12 stadia has been proposed: some of these are yet to be built, others will require substantial upgrade and refurbishment and all will require a level of overlay for the tournament. Almost all the major greenfield stadia contained in the bid are under some degree of active development consideration independent to the World Cup process (for example, Perth and Adelaide Oval). The three scenarios considered reflect the likelihood of those stadium works being developed irrespective of Australia staging the World Cup in 2022. Moving from scenarios 1 to 3, a greater level of stadium development is essentially pre-committed and not contingent on the tournament, therefore reducing the cost of the event. A conceptual representation of the analytical baseline for each of the three stadia scenarios is set out in Figure 4.1, with the key cost components of Australia hosting the World Cup summarised in Table 4.2 below.

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Cost benefit analysis of the 2022 FIFA World Cup

Figure 4.1: Stadia development scenarios


Scenario 1
Full stadia costs
Temporary construction costs associated with stadia preparation for the event Permanent construction works including new stadia and stadia upgrades due specifically to the World Cup Permanent stadia construction works completed independently of the World Cup

Scenario 2
Partial stadia costs

Scenario 3
Overlay costs

Overlay

Overlay

Overlay

Contingent stadia

Contingent stadia

Contingent stadia

Pre-committed stadia
Analytical baseline

Pre-committed stadia

Pre-committed stadia

Non tournament related costs

Table 4.2: Costs of the 2022 World Cup Expenditure item


Bidding Infrastructure Transport

Scenario 1 Full stadia


$ million 45.6 2,748.2 82.9

Scenario 2 Partial stadia


$ million 45.6 1,136.6 82.9

Scenario 3 Overlay costs


$ million 45.6 346.2 82.9

Comments

Bidding cost budget allocated to 2010 (sunk cost) Based on FFA Infrastructure Consortium estimates Based on FFA commissioned transport assessment report by Arup Based on Department of Attorney Generals estimate for State and Commonwealth government security costs incurred during the World Cup and Confederations Cup Cost of upgrading and building new training facilities Cost incurred by State and Commonwealth governments in meeting the government guarantees and host city agreements Total operational cost based on PwC scenario estimates

Security

560.0

560.0

560.0

Other Cost to Government

53.5 150.9

53.5 150.9

53.5 150.9

Impact on other sporting codes Total Costs

50.0 3,691.2

50.0 2,079.5

50.0 1,289.1

Note: Costs are in real dollars (2010 prices).

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Cost benefit analysis of the 2022 FIFA World Cup

4.1 Infrastructure
4.1.1 Stadiums

A FIFA requirement for hosting the World Cup is for at least 12 stadiums with a minimum capacity of 40,000 for the group stage and increased capacities as the tournament progresses. Infrastructure costs range from $2.7 billion under the full stadia scenario to $346 million under the overlay cost scenario, based on estimates provided by the FFAs Infrastructure Consortium. The costs of individual stadium upgrades are listed in Table 4.3 below. The costs are based on upgrades to meet FIFAs technical requirements to host a World Cup match, or full construction costs if the stadium is built specifically for the World Cup. Table 4.3: Estimated stadium infrastructure costs Stadium
New Perth Stadium Adelaide Oval Melbourne Cricket Ground Stadium Australia Sydney Football Stadium New Western Sydney Stadium Redeveloped Energy Australia Stadium Suncorp Stadium Redeveloped Gold Coast Stadium Redeveloped Dairy Farmers Stadium New Canberra Stadium (CS4 Option) Redeveloped Geelong Stadium Total of 12 selected stadiums
Source: FFA estimates

Scenario 1 Full stadia


$ million 766.4 412.1 36.9 41.6 44.6 279.3 127.9 35.7 127.6 209.8 279.3 387.0 2,748.2

Scenario 2 Partial stadia


$ million 31.8 36.1 36.0 26.7 17.5 279.3 127.9 33.5 21.7 209.8 279.3 37.0 1,136.6

Scenario 3 Overlay costs


$ million 31.8 36.1 36.0 26.7 17.5 25.3 30.9 33.5 21.7 24.4 25.3 37.0 346.2

Given the significant costs of providing stadium infrastructure, these have been considered in the sensitivity analysis (see Section 7.1.2).

4.1.2

Training facilities and base camps

Each team competing in the World Cup is allocated a training venue, which is located close to their accommodation and match venues. Strict requirements concerning exclusivity of use, clean venues and other FIFA rules apply. Upgrades to venues include, where required, resurfacing of pitches, change rooms, seating capacity, lighting, insurance and media requirements. The FFA and PwC have conducted a review of training venues and Access Economics has adopted the cost estimates made as part of this study. Hosting the World Cup will require an upgrade of approximately 69 training venues. The estimated cost of upgrading training venues is determined by the current quality of each training site: low, medium and high. The cost per site based on this rating is $1.5 million (low), $0.8 million (medium) and $0.1 million (high). The estimated total cost of the new training venues is around $54 million.

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Cost benefit analysis of the 2022 FIFA World Cup

4.2 Bidding costs


There are up-front costs associated with bidding for the World Cup. These are incurred whether or not Australia is successful in its bid to host the tournament. The Australian Government has committed $45.6 million to the FFA, which will be provided over three years. This grant provides financial support for Australias bid for the World Cup only. Any other financial assistance will be subject to future consideration.

4.3 Security
During both the World Cup and Confederations Cup, the provision of security for athletes, officials and spectators will involve substantial costs. Some costs will be incurred in the lead up to these events for example, through risk assessment and training. However, the significant security resource deployment during the event will be the largest cost component. Security costs are aggregated into three tiers:

Tier 1 security within stadiums. Tier 2 security within state borders excluding Tier 1 costs. Tier 3 Commonwealth Government security costs which include airports, sea ports, Australian Federal Police, ASIO and the Attorney Generals Department.

Security costs are allocated by tier to the FFA (Tier 1), state governments (Tier 2) and the Commonwealth Government (Tier 3). Total security costs for the World Cup and Confederations Cup are estimated at $560 million for State and Commonwealth governments with Tier 1 costs considered as part of the LOC budget. The security cost estimate has been provided by the Attorney Generals Department. Various security challenges with the World Cup have been raised, including the large number of international spectators and the city-wide nature of the security footprint. It is difficult to compare security costs between events due to the different structure of each event, and in particular with events held pre and post 11 September 2001. Two major events held in Australia were the Sydney 2000 Olympic Games and the 2006 Melbourne Commonwealth Games, with the security costs for these around $1511 million and $161 million respectively. The difficulty in basing any security costs on these events is that each was concentrated in one major city, whereas the World Cup would be a national event taking in 10 host cities.

Olympic Co-ordination Authority, A report on the financial contribution by the New South Wales Government to the Sydney 2000 Games, 2002

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Cost benefit analysis of the 2022 FIFA World Cup

4.4 Transport
Transport costs are estimated at $82.9 million based on a specialist transport assessment by Arup which was commissioned by the FFA. The report includes costs incurred by each State based on the number of matches held and includes the following factors:

airport parking, rental vehicle and staff costs; road traffic management costs, in respect of key routes to be utilised during both the World Cup and Confederations Cup; public transport; FIFA fan fest transport; information and volunteers; and vehicle fleet costs.

4.5 Costs to Government


Both the Commonwealth and State Governments will be required to assist the LOC in the preparation and running of the World Cup through commitments in the Host City Agreements and other guarantees. In total, additional costs relating to the host city agreement and government guarantees is expected to be around $150.9 million. State Governments are estimated to incur costs of about $67 million, of which around $39 million is allocated for the cost of cleaning stadiums. An additional $28 million is due to other host city obligations including: communication/project management structure, LOC office facilities (rental costs), host city staffing and costs, and the use of products and services of commercial affiliates. A requirement of the World Cup bidding process is for bidding nations to sign various government guarantees that cover a range of commercial, legal and operational arrangements. These guarantees will commit governments to substantial costs, such as providing security and telecommunication requirements. Commonwealth Government guarantees, excluding security costs (discussed in Section 4.3), are estimated at $83.8 million.

4.6 LOC Budget


Costs other than those detailed above will be met under the FIFA and LOC budgets. The FFA has provided an estimate of the LOC budget at $820 million, based on the budget of the 2006 World Cup held in Germany. A specific breakdown of this overall LOC expenditure is not available and Access Economics has adopted the cost structure of the German LOC for the 2006 World Cup as a benchmark. A breakdown of the operating budget for the Germany 2006 World Cup is listed in Table 4.4 below.

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Cost benefit analysis of the 2022 FIFA World Cup

Table 4.4: Budgeted expenditure of the 2006 World Cup Organising Committee2 Expenditure
World Cup cities Field offices Volunteers Miscellaneous Transport and traffic Security Budget reserve Media Personnel Stadiums Organisation costs Total

Share of Costs
3% 3% 5% 6% 6% 6% 11% 13% 14% 14% 19% 100%

As in previous World Cup tournaments, the LOC budget is primarily funded by FIFA through its financial platform. The primary source of funds is generated through ticket sales to the event. World Cup ticket revenues initially flow through to FIFA which then funds the operations of the LOC, which is established as a FIFA subsidiary. A preliminary budget is required by each bidding nation with a final budget and funding arrangement negotiated between the LOC and FIFA once the host nation is selected. Figure 4.2 below shows the flow of funds between the LOC and FIFA. Other sources of supplementary funding for the LOC are also available. The LOC may generate its own revenues from certain commercial activities and it is also possible that some government contribution might be sought although this would appear to represent more of a contingency rather than form a foundation funding. Figure 4.2: FIFA financial platform

Tournament expenses
Ticket revenue

LOC
Primary funding

FIFA

Other revenues (for example, Government, internally-generated)

2006 World Cup Final Report by the Federal Government (www.fifawm2006.deutschland.de)

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Cost benefit analysis of the 2022 FIFA World Cup

4.7 Impacts on other sporting codes


Hosting the World Cup will affect other professional sports in Australia, predominantly the AFL, NRL, ARU and Cricket Australia (CA), due to restricted access to major sporting venues and changes to normal operating schedules. While these impacts are not large relative to other cost components, they are potentially sensitive. To an extent, the nature of discussions between sporting codes and the FFA seen to date has some positive dimensions. Firstly, it is a direct expression of the dynamic and viable state of professional sport in Australia. Secondly, the keen interest shown by codes in securing key stadium access as a result of the tournament suggests future utilisation of stadium infrastructure will be healthy. While these operational impacts were also an issue during the 2000 Sydney Olympics, the World Cup will likely have greater impacts. The Sydney Olympics occurred in two weeks over September, typically the period in which both the NRL and AFL finals series are held. To accommodate this event, both competitions started and concluded earlier than usual. However, the World Cup would fall in the middle of the season for all football codes, go over a longer period and involve almost all key football stadiums. As such different operational alternatives must be considered. The AFL, NRL, ARU and CA have entered into a memorandum of understanding (MOU) with the FFA that will be used as a basis for ongoing commercial discussions, including any compensation, should Australia succeed in winning the right to host the 2022 World Cup. A fundamental principle of the MOU is that the respective codes will not be any worse off as a result of Australia hosting the World Cup and Confederations Cup. A restriction imposed by FIFA on nations hosting the World Cup is that no other major sporting events are able to take place during the tournament window. The FFA has sought and gained agreement from FIFA that each of the sporting codes listed under the MOU does not constitute a major sporting event, and as such, can continue with their respective competitions during the World Cup tournament window. It is important to note that no final decision or compensation has been agreed to between the FFA and any of the four affected sporting codes, and, as such, there is considerable uncertainty surrounding the respective costs. Any final decision may be sensitive given the concessions each code will have to make in order for the World Cup to proceed. The 12-year lead time for the tournament does however provide significant scope to negotiate and resolve issues of stadium access and other potential impacts on sporting codes. Based on limited consultations, Access Economics has assumed an operational cost of $50 million based on PwCs central case estimate of the impacts on other sports. This assessment assumes each professional sport code will, where possible, arrange fixtures to minimise the impact of venue restrictions.

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Cost benefit analysis of the 2022 FIFA World Cup

Training venues In addition to stadium requirements for match days, FIFA also require that teams have access to base camps (chosen individually and separately financed by the competing nations) and training venues in close vicinity to match day venues. It is not expected that training venues currently used by other sporting codes will be required for the exclusive use of the World Cup Access Economics has not quantified any costs relating to training venue availability.

4.8 Broader impacts


In addition to the costs discussed above, local communities are likely to be impacted due to other aspects of the tournament. These impacts are largely intangible and have not been quantified as part of this analysis, principally due to considerable uncertainty about their nature and magnitude.

Local amenity
Hosting the World Cup will involve some costs associated with the loss of local amenity. Key impacts are likely to comprise major and partial road closures, and changes to public transport timetables to ensure there are sufficient train and bus services available to transport patrons to venues. Additionally, school holidays may be moved to ensure schools are closed during key phases of the event, which also increases the transport resources available. Such impacts were seen during the Sydney Olympics. However, because the World Cup is more geographically dispersed than the Olympics, these amenity costs are not likely to be as intensive for relevant cities.

Hosting a successful tournament


There are potentially significant legacy benefits to be gained from hosting a major event. However, these are contingent on the event being run successfully. Hosting a major event also runs the risk that it is perceived as being poorly managed, and may in fact detract from Australias international standing in terms of its ability to host mega events, potentially having a negative effect for future events. However, given Australia has a proven track record in hosting successful and safe mega events, the risk of a negative effect from hosting the World Cup are considered low.

Security issues and tourism legacy


Security and safety is also a substantial element of risk and is a critical role for a host nation. Should Australias bid be successful, considerable resources would be allocated to ensure all precautions and measures were taken to provide a safe and memorable experience for visitors to the tournament. This commitment is underscored by Australias consistent record of hosting successful major events without incident.

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Cost benefit analysis of the 2022 FIFA World Cup

4.9 Summary of the costs of staging the World Cup


The costs of staging the World Cup are large and involve a range of components. Most direct financial costs associated with staging the event have been quantified, although some indirect costs have not been valued. Table 4.5: Quantified costs of the World Cup and Confederations Cup Cost category Scenario 1 Full stadia
$ million Direct Costs Bid to host the World Cup Security costs New stadiums and stadium upgrades Training grounds Transport Costs to Government Indirect Costs Displacement of sporting codes Total quantified costs
Note: Costs are in real dollars (2010 prices).

Scenario 2 Partial stadia


$ million $45.6 $560.0 $1,136.6 $53.5 $82.9 $150.9 $50.0 $2,079.5

Scenario 3 Overlay costs


$ million $45.6 $560.0 $346.2 $53.5 $82.9 $150.9 $50.0 $1,289.1

$45.6 $560.0 $2,748.2 $53.5 $82.9 $150.9 $50.0 $3,691.2

The total quantified costs of hosting the World Cup range from $3.7 billion under the full stadia scenario to $1.3 billion under the overlay cost scenario. This estimate is subject to a high degree of variability due to the assumptions adopted, continuing negotiations between the FFA and other sporting codes and the uncertainty surrounding estimates 12 years out from the World Cup tournament.

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Cost benefit analysis of the 2022 FIFA World Cup

Benefits of the World Cup

This chapter focuses on the benefits of Australia hosting the World Cup in 2022. The key benefit components are summarised in Table 5.1 below. These reflect the welfare impact of expenditure in Australia (discussed further in Section 5.6) and are common to each of the three stadia development scenarios. Table 5.1: Benefits of the 2022 World Cup Benefit item
Tourism spending

$ real 2010
$ million 1,237.9

Comments
Bottom-up approach from ticket allocation number of games per person percentage of international spectators length of stay and the number of additional tourists during tournaments welfare impacts flowing from overseas tourism expenditures modelled in a CGE framework Based on FFA budget estimate welfare impacts flowing from overseas expenditure modelled in a CGE framework FFA estimate on cost of producing television broadcast to a worldwide audience welfare impacts flowing from overseas expenditure modelled in a CGE framework Based on the number of Australians that would have travelled overseas to attend the World Cup but now stay in Australia Based on the expected cost per ticket and the number of tickets that are sold to international spectators Based on 10% of LOC budget Not quantified

LOC expenditure

284.9

Television broadcasting

77.9

Consumer surplus

54.7

GST on ticket sales

56.7

Operating surplus National pride halo effect Total benefits

82.0 1,793.8

Note: Benefits are in real dollars (2010 prices).

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Cost benefit analysis of the 2022 FIFA World Cup

5.1 Tourism
5.1.1 Visitors expected

World Cup tickets


The number of international visitors expected to attend the World Cup is based on the saleable capacity of the 12 selected stadiums, the number of matches to be played in each stadium and the allocation of tickets to international spectators (this was taken to be 60% based on discussions with the FFA). The proposed stadia and the number of games that will be played at each venue gives an overall saleable capacity of around 3.36 million tickets over 64 matches. The saleable capacity excludes all non revenue bearing seats such as a contingency reserve (the removal of seats in order to erect camera positions, seats blocked due to obstructed views, security considerations and various other operational reasons) and complimentary tickets. There remains a high level of uncertainty surrounding match configuration should Australias bid succeed. The number of matches notionally allocated to each stadium for the tournament is shown in Table 5.2 below. Table 5.2: Fixture allocation Stadium
New Perth Stadium Adelaide Oval Melbourne Cricket Ground Stadium Australia Sydney Football Stadium New Western Sydney Stadium Redeveloped Energy Australia Stadium Suncorp Stadium Redeveloped Gold Coast Stadium Redeveloped Dairy Farmers Stadium New Canberra Stadium (CS4 Option) Redeveloped Geelong Stadium

Saleable capacity
60,085 48,240 88,048 82,480 40,402 41,022 42,138 49,150 40,021 40,068 40,150 43,584

Number of matches
6 6 6 6 5 5 5 5 5 5 5 5

On average, it is assumed that tourists will each attend 2.9 matches during the World Cup (during the 2006 World Cup in Germany Visitors on average had 2.9 tickets with no difference existing between German and foreign visitors3). Under the fixture allocation in Table 5.2, the number of international visitors who attend World Cup matches through the ticket allocation ballot is estimated at around 694,000.
3

2006 World Cup Final Report by the Federal Government (www.fifawm2006.deutschland.de)

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Cost benefit analysis of the 2022 FIFA World Cup

In developing a net tourism figure for Australia, the expected movements due to the World Cup of various groups of both international visitors and domestic residents have been included. In total, it is estimated that the net tourism inflow to Australia due to the World Cup is 677,100 international visitors (see Table 5.3). Further details on the tourism flow methodology are set out in Appendix C. Table 5.3: Net tourism effect Category
Event specific visitors (with tickets) plus plus less less plus plus Event specific visitors (without tickets) Visitors who would have come anyway (combine event in their itinerary) Visitors who postpone their visit due to the event Visitors who cancel visit due to the event Residents who would have travelled to a World Cup overseas but remain in Australia for the event Overall impact of residents who leave and those who cancel an overseas trip and remain home due to the event Total net tourism effect

Total
694,300 7,800 17,350
*

0 7,600 10,000
#

0 677,100
#

Note: * Adjustment made for these visitors to extend length of stay by 7 days. staying in Australia for the event captured in consumer surplus.

Residents

The Department of Resources, Energy and Tourism (DRET) provided projections of the airline capacity for 2022. On the basis of these projections and the estimated number of international visitors, it is unlikely that airline capacity will constrain the number of tourists able to travel to Australia for the World Cup. Given no final decision has yet been made on the tournament configuration or FIFA ticket allocations, the tourism estimate has a high degree of variability and its effects are considered in the sensitivity analysis (see Section 7.1.2).

Confederations Cup visitors


The Confederations Cup has eight competing teams and attracts considerably less coverage and interest than the World Cup. The FFA estimates that around 600,000 tickets will be available to the tournament, giving an average of 37,500 tickets per match for 16 matches. The average crowd in South Africa 2009 was 37,0004, with a total attendance of 585,000. The average attendance at other recent Confederations Cup tournaments was: Germany 2005, 38,000; France 2003, 31,000;5 and Japan 2001, 35,000. No estimate of the proportion of international visitors attending matches at these tournaments was available. The level of tourism is very difficult to estimate for the Confederations Cup as there is no specific ticket allocation as with the World Cup. For the South Africa 2009 tournament, tickets were allocated on a first come, first serve basis.6 South Africa only expected 15,000
4 5 6

http://www.fifa.com/mm/document/afdeveloping/technicaldevp/01/09/92/45/ffc09report.pdf http://www.fifa.com/tournaments/archive/tournament=101/edition=8503/index.html http://www.sa2010.gov.za/confederations-cup/tickets/ticket-information

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Cost benefit analysis of the 2022 FIFA World Cup

international visitors for the Confederations Cup, predominantly through media and team delegations.7 Assuming that tourists who attend the Confederations Cup will watch three matches, and that international visitors comprise 10% of spectators, it is estimated that around 20,000 tourists will attend the Confederations Cup in Australia in 2021.

5.1.2

Other tourism related assumptions

In addition to the number of tourists expected to attend the World Cup in 2022, estimates are required for daily expenditure and length of stay for the various tourism categories general tourists, corporate, media, officials and competing teams. The amount of time spent in Australia for World Cup spectators was based on TRA estimates for the average time spent in Australia for holiday travelers for the year ending March 2009. The length of stay in Australia for other categories, including teams and officials, was estimated based on the number of teams and officials that qualify and are required at each stage of the competition, with all competitors arriving 10 days prior to the commencement of the tournament (a FIFA requirement). In 2009, international visitors are estimated to have spent $138 per day8 whilst in Australia. The estimate is based on the number of holiday travelers, excluding backpackers. The figures reported by the TRA reflect the spending patterns for the 12 months to March 2009. The March 2010 TRA report saw an average 10% fall in daily expenditure per international visitor. For the purposes of this study, the 2009 daily expenditure estimates have been adopted. This is based on a judgement that the most recent estimates are more reflective of the global economic downturn rather than a longer term pattern. The real increase in daily spending per person is forecast by the TRA to remain fairly stable to 2022. Access Economics has adopted an increase of 0.2% per annum based on the total inbound economic value and the number of international tourists visiting Australia annually to 2020, as forecast by the TRA. During a major event, visitor spending generally increases above that which is expected during other periods for example, an increase of around 20% in spending was seen during the 2003 Rugby World Cup in Australia when compared to normal periods. In addition, a study of the purchasing behavior of visitors to the 1996 Australian Formula One Grand Prix indicated that corporate visitors spent around 18% more per day than other types of visitor.9 These increases in spending during major events have been adopted in estimating the international visitor expenditure during the World Cup in 2022. A full list of tourism related assumptions is shown in Appendix A.

7 8 9

http://www.bizcommunity.com/Article/196/82/36812.html Tourism Research Australia, International Visitors in Australia, March 2009 Leo Jago and Larry Dwyer, Economic Evaluation of special events: A Practitioners Guide, 2006, p. 9

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Cost benefit analysis of the 2022 FIFA World Cup

5.2 Tourism and sporting infrastructure legacy benefits


Tourism
Each year the Australian Government promotes Australia as an international tourism destination. An event such as the World Cup creates an opportunity to showcase Australia to the rest of the world over a number of weeks. This potentially creates a greater awareness of Australias tourism regions and the possibility of increased flow-on tourism benefits. Tourism legacy benefits arising from the Sydney Olympics were estimated to continue for two years 1.0% in 2001 and 0.6% in 2002.10 During the Olympics, the number of tourists influenced by the Olympics was estimated to be 5%. Legacy benefits for the combined World Cup and Confederations Cup tournaments are assumed to be similar to that from the Sydney Olympics for the years following the event due to the broadly similar scale of international media coverage and cumulative global audience. Visitor numbers to Australia during 2023 are expected to be around 6.9 million.11 The additional visitors that could be attributed to the legacy from Australia hosting the 2022 World Cup total around 69,000 in 2023 and 42,500 in 2024. This is estimated to have an overall welfare benefit in 2023 and 2024 of $86.5 million and $60.1 million respectively.

Sporting infrastructure
Construction of additional seating capacity at existing stadiums or developing entirely new stadiums, independent of the World Cup, would be made if there was sufficient intrinsic demand from the sporting community to warrant the expenditure. Over time it would be expected that new stadium facilities would be required and this lies at the heart of any stadium legacy benefit. However, defining an optimal infrastructure development path is very difficult. There are practical challenges in ascertaining whether sporting infrastructure developed for a special event like the World Cup would essentially bring forward future spending say by two years or by a decade, if at all. An important point is that the actual sporting infrastructure developed for an event may never be required in the future for example, its actual scale, configuration or location might well be suboptimal. The current speculation surrounding development of major greenfields stadiums (for example the new Perth stadium) underlines this uncertainty and is reflected in the three stadia scenarios analysed. Indeed, Stadium Australia which is proposed as a major venue for the World Cup, potentially hosting a semi final and/or final, is a direct legacy of the 2000 Sydney Olympics. However, at the time when that stadium development was being evaluated, it would have been impossible to gauge its potential future usage as a World Cup venue (which could be some 22 years after the Sydney Olympics). In many respects, such benefits should be considered intangible and qualitatively examined alongside other similar impacts.

10

URS Finance and Economics, Economic Impact of the Rugby World Cup 2003 on the Australian Economy Post Analysis, June 2004, Section 4-15. Figures sourced from Bureau of Tourism Research.
11

Tourism Forecasting Committee Forecast Executive Summary 2010 Issue 1 Tourism Research Australia

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Cost benefit analysis of the 2022 FIFA World Cup

A legacy benefit would be generated where sporting teams, who currently use stadiums that are proposed to have additional spectator capacity, could attract crowds to fill those extra seats. These legacy benefits are difficult to estimate as they are based on how often the new seating is actually used (for example, the number of matches played at relevant venues and the additional attendance per match). The additional seating would also incur costs through an increase in stadium maintenance expenses. For many sporting matches, the additional seating would not be required on a regular basis, but would be utilised more for major sporting events such as the State of Origin series at Stadium Australia and Suncorp Stadium. Given the lack of publicly announced stadium developments, with the recent exception of the Adelaide Oval redevelopment, any legacy benefit of additional seating in current stadiums is likely to be minimal or highly speculative at best. Even with a reduced seating capacity post World Cup, many stadiums will likely have excess capacity for the majority of sporting events and redeveloped stadiums are unlikely to significantly increase crowd numbers to fill additional seating. As such, any legacy impacts from stadium developments have not been quantified in the analysis. Stadiums including Gold Coast, Dairy Farmers and Canberra Stadium will be built to a capacity of around 40,000 and subsequently reduced to around 25,000, depending on the needs of each individual stadium. This additional temporary seating could provide further benefits to local community sporting facilities as it is slated be used for spectator seating where required. That said, the requirements for such facilities are not clear cut and far better investments in community sport may well exist. In addition to the capacity upgrades, corporate facilities also require refurbishments to meet the high standards that FIFA has set for the World Cup. While these improved facilities may be able to generate additional income during future matches, there is insufficient data on the utilisation of corporate facilities, and it is unclear how much demand for these facilities would change post refurbishment. As such, the additional benefit that could be gained from corporate facilities has not been estimated.

5.3 FFA friendly matches


As part of hosting a World Cup, the host nation automatically qualifies for both the World Cup and Confederations Cup tournaments. Therefore, the host nation is no longer required to compete in the qualification rounds. For South Africa 2010, Australia qualified through the Asian confederation which involved playing around 14 matches, seven of which were played in Australia. Should Australia host the 2022 World Cup, the FFA would incur a loss from not playing qualifying matches in Australia and would gain from not incurring the expenditure of travelling to other Asian countries for qualifiers. However, the loss from any matches not played in qualifiers could be offset through hosting friendly matches. In the lead up to the World Cup, the FFA will have the opportunity to organise friendly matches with countries that would attract a larger crowd, for example Brazil or Italy. Given that Australia would not be required to play qualifiers on weeks that are allocated within the overall football calendar to internationals, this gives the FFA a chance to more readily choose which opponents to play. It is also expected that several nations which expect to compete in the World Cup would travel to Australia in order to test playing conditions and better prepare squads for the event.

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Cost benefit analysis of the 2022 FIFA World Cup

It is difficult to determine the number of matches that the FFA would be able to organise in the lead up to the World Cup, or the revenue that would be generated from such matches. Any revenue would be dependent on the nation which Australia would play, the stadium and the timing of the match. Access Economics has assumed that the revenue lost from not competing in the qualifying rounds of the World Cup would be broadly offset by the friendly matches Australia would play over the same period and in the lead up to the World Cup.

5.4 Other benefits


In addition to the benefits discussed above, there will also be economic benefits from LOC expenditure within Australia and additional television broadcasting expenditures made by FIFA. The LOC is expected to have a budget in the region of $820 million to host the World Cup. The benefit to the Australian economy is that the LOC is not an expense covered by the government but rather, as discussed previously, is funded through ticket revenue effectively recycled under FIFAs financial platform. The LOC expenditure therefore represents additional economic activity which provides a welfare gain to the economy. Televising the World Cup across the globe comes at a significant cost. As with the LOC expenditure, the costs of televising the event will be met by FIFA and its broadcast partners. In order to achieve the high quality pictures required by FIFA, the total expenditure within Australia of providing the broadcast feeds is expected to be around $200 million.12

5.5 Ticket revenue


World Cup
Ticketing revenue for the 2022 tournament has been estimated using the ticket prices in South Africa 201013 and the percentage share of tickets in four price categories (1 being the most expensive). The South Africa 2010 ticket allocation is detailed in Table 5.4. Table 5.4: World Cup ticket allocation Category
Category 1 Category 2 Category 3 Category 4
Source: South Africa 2010 ticket allocation

% share of saleable tickets


49% 20% 20% 11%

In South Africa 2010, Category 4 tickets were set aside exclusively for local residents and are around one third the price of Category 3 tickets. It has been assumed that this category of ticket was allocated due to local economic considerations and that it was a one-off occurrence. Therefore, the 11% of Category 4 tickets have been allocated to Category 3 to estimate ticket revenue for the World Cup in Australia.
12 13

Estimate provided by FFA http://www.sa2010.gov.za/en/ticket-information/24-ticket-prices

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Cost benefit analysis of the 2022 FIFA World Cup

From Germany 2006 to South Africa 2010, the average ticket price has increased from around US$134 to US$154, a real increase of around 4.4%. Based on this price change, an increase of around 13% on 2010 ticket prices has been assumed to 2022. On the above assumptions, the estimated ticket revenue for the 2022 World Cup in Australia (based on sale of 3.3 million tickets) is $844 million.

Confederations Cup
Total ticket revenue from the Confederations Cup in Australia in 2021 is estimated at $82.6 million. The FFA has indicated that 600,000 tickets will be available for the 16 matches, giving an average attendance of 37,500 per match. Revenue estimates for the Confederations Cup are made using a similar method to the World Cup. The price of tickets is based on the Confederations Cup in South Africa 200914, increased by around 13% to 2021.

GST revenue on ticket sales


Based on Australian Government advice, the sale of all World Cup and Confederations Cup tickets will incur GST, irrespective of whether these are purchased overseas or within Australia. For international visitors purchasing World Cup tickets, the GST represents extra income generated for the Government. GST revenue estimates have been based on the share of visitors that are expected to purchase tickets. In total, it is estimated around $56.4 million of GST revenue will be collected for both the World Cup and Confederations Cup tournaments.

Consumer surplus
Consumer surplus is estimated at around $54.7 million for Australian supporters. The surplus is based on the number of Australians who would have travelled overseas to attend the World Cup but can now remain in Australia for the event. Access Economics estimated that around 10,000 Australians attended the World Cup in Germany 2006 and has used this as the expected figure in 2022. The consumer surplus is based on the expenditure assumptions used for international visitors (spending and length of stay) and includes the purchase of overseas travel totaling $2000.

5.6 Economic welfare impacts of staging the World Cup


This study has an economy-wide focus. As such, it is important to carefully consider how the benefits of additional activity brought about by the World Cup are quantified. In other words, the additional activity generated by: tourism, team and media spending;

LOC spending; and the sale of communication services to FIFA.

14

http://www.capetownmagazine.com/articles/Sport-a-Fifa-2010~c9/Prices-and-Tickets-for-the-FIFAConfederations-Cup-2009~1027

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Cost benefit analysis of the 2022 FIFA World Cup

When assessing the economy-wide impacts, an estimate of the economic welfare effects of these different spending items is required. To make this assessment Access Economics has used a computable general equilibrium (CGE) modelling approach (see Box 4). A key advantage of the CGE framework is the ability to determine the direct and indirect impacts of additional demand generated by the World Cup. These represent both positive and negative influences on the economy. On the positive side, additional spending on, say, tourism services increases economic activity in this sector. The model also accounts for linkages between the tourism sector and other sectors of the economy it uses as intermediate inputs. As such, any increase in demand for tourism also increases economic activity in those sectors that supply relevant impacts to the tourism sector. Increased economic activity raises the demand for factors of production (labour and capital) which, depending on their availability, increases their use and price which, in turn, increases national income and welfare. On the negative side, the model accounts for indirect linkages across the economy though mechanisms such as the collective competition for available resources, for example, labour, that operates in an economy-wide or global context. As such, the model accounts for what is known as crowding out. In other words, as the tourism sector expands as a result of the World Cup, other sectors find it difficult to attract or retain key factor inputs such as workers. As a result, tourism expands at the expense of other activities, thereby crowding them out.

Box 4:

The modelling framework

AE-RGEM is a large scale, dynamic, multi-region, multi-commodity computable general equilibrium model of the world economy. The model allows policy analysis in a single, robust, integrated economic framework. This model projects changes in macroeconomic aggregates such as GDP, employment, export volumes, investment and private consumption. At the sectoral level, detailed results such as output, exports, imports and employment are also produced. The base data of AE-RGEM is derived from the Global Trade Analysis Project (GTAP). GTAP produces a global database for GE modelling used by over 700 researchers worldwide. AE-RGEM is based on Version 6.0 of the GTAP database. This version has a 2001 base year with 87 countries and 57 industry sectors. AE-RGEM solves year-on-year over a specified timeframe. The model is then used to project the relationship between variables under different scenarios over a predefined period. A typical scenario is comprised of a reference case projection that forms the basis of the analysis, in this case an estimate of economic activity in the absence of the World Cup. This is then compared with a scenario that assesses the economic impacts of increased spending associated with the World Cup. The impacts of the World Cup spending are measured by differences between the reference case and scenario levels at given points in time.

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Cost benefit analysis of the 2022 FIFA World Cup

Of course, any economic model is highly dependent on its assumptions, parameters and data. Some of the key assumptions are described in Appendix E. Two key assumptions underpinning the analysis are that:

full employment conditions apply, meaning the World Cup does not increase employment; and the government budget position remains unchanged and government expenditures for the World Cup do not require additional taxes to be levied.

5.7 Broader impacts


Hosting the World Cup in 2022 would generate additional social benefits. However, the intangible aspect of these benefits, which manifest in enhanced social cohesion, social inclusion and legacy benefits means their nature and scope is highly uncertain. Further, the flow-on benefits often extends to future generations. As such, these benefits are very difficult to quantify and, indeed, can be challenging to adequately define. Consequently, Access Economics has not attempted to place a dollar value on these impacts.

National pride and other intangible effects


Major events are generally seen to confer a positive halo effect on the residents of the city or nation in which the event is held. These effects are generally attributed to several factors, such as general public enthusiasm, and can be usefully categorised as feelings of wellbeing. Additionally, representation on a global stage in a premier sports event is commonly considered to improve a sense of national pride. Importantly, such an effect can be experienced broadly across the community and does not necessarily depend on individuals attending the event. Such effects will, however, depend highly on the type and nature of the event, with some events naturally being more popular. A useful proxy might perhaps be the number of volunteers able to be marshalled for the event, such as the large numbers used to stage the Sydney Olympics. The halo effect is an example of a public good: citizens cannot be excluded from its enjoyment (non-excludable) and the feeling of wellbeing generated in one person does not impact the amount of wellbeing felt by another (non-rivalrous). The public good nature of this halo effect cannot be effectively captured by markets and, where significant, it provides some justification for public support for such events. While these effects are no less important than the other quantifiable benefits discussed above, they are certainly less tangible. Including them in a CBA would require explicit quantification of the community wellbeing generated. As there is no market price and revealed preference for wellbeing, estimation is notoriously difficult.

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Cost benefit analysis of the 2022 FIFA World Cup

Business and trade benefits


Additional business and trade can potentially be generated with international companies via tournament-specific functions. During the Rugby World Cup in 2003, the Business Club Australia (BCA) held events where international business executives could be introduced to local exporting companies during their visit. The BCA estimated that $496 million of additional trade was generated for Australian companies through the Rugby World Cup initiatives. However, countries like Australia are certainly not new and unknown to most international business people. As such, the potential developmental business opportunities from hosting a major event would appear somewhat limited (the opposite would appear to apply for emerging economies). It is also difficult to establish whether such benefits would have occurred regardless (possibly at some time in the near future). A fundamental issue for the success of this demonstration strategy is to attract additional investment and trade without assistance. For these reasons, such trade benefits have not been incorporated into the analysis.

Legacy effects
Proponents often advocate the potential for a major event to make winning other events more likely. While this can represent a legitimate positive spillover effect, the magnitude of any impact can be overstated and the effects are extremely difficult to verify after the event. There is also considerable uncertainty regarding the precise nature and timing of any potentially benefiting future event. This makes the inclusion of such impacts into the evaluation highly speculative and, as such, they have not been adopted into the analytical framework.

5.8 Economic welfare and labour market assumptions


Economic welfare is measured in the CGE model by real Gross National Product (GNP). This is a common welfare measure used in economic modelling. It equates to gross domestic product (GDP) plus foreign income transfers, and therefore provides a complete measure of national income. In the context of the CBA, this measure recognises that a dollar of additional demand brought about by the World Cup does not equate to a dollar of economic welfare. Rather, it is the contribution of the additional spending to national income, or the net impact on earnings by labour, capital and tax revenue that contributes to the welfare of Australians. The economic benefits of additional spending associated with the World Cup are shown in Table 5.5. The table shows additional World Cup spending totalling around $4.3 billion for the 2022 event, as well as the estimated economic welfare effect of around $1.6 billion. In other words, for every dollar of additional expenditure estimated for the World Cup, around 37 cents accrues to the country in terms of economic welfare.

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Cost benefit analysis of the 2022 FIFA World Cup

Table 5.5: Economic welfare benefits of staging the 2022 World Cup Benefit
Tourist expenditure LOC expenditure in Australia Television broadcasting Total Benefits

Revenue ($million)
3,250.0 819.6 200.0 4,269.6

Economic welfare ($million)


1,237.9 284.9 77.9 1,600.6

Note: Revenue represents the value of expenditure (2010 dollars) before adjusting for welfare effects.

One of the key determinants of this spending-to-welfare ratio is the assumption of full employment. This assumption means that, in response to an increase in aggregate demand brought about by the World Cup, the Australian economy is not able to increase its productive base in order to increase economic activity and, ultimately, welfare. This is particularly relevant for the World Cup as it is primarily a tourism related activity, the provision of which is labour intensive. A representation of the effects of an increase in aggregate demand under different supply conditions is shown in Figure 5.1, with the demand movement from AD1 to AD1 being broadly representative of the core labour supply assumptions used in the analysis. Figure 5.1: Macroeconomic expansionary effects
Aggregate supply

Price
Aggregate demand

Towards fullemployment

AD1
Excess capacity

AD1

AD0

AD0

Expansionary effects

Output

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Cost benefit analysis of the 2022 FIFA World Cup

Sensitivity of results to the labour market assumptions


To test the sensitivity of the welfare benefits of World Cup spending to the labour market assumptions, the full employment assumption was relaxed. This was replaced by a specification of the labour market that assumed a long run supply elasticity of 0.1 and a short run supply elasticity of 1.0. This means that for every one per cent rise in wages, labour supply increases by 0.1 per cent in the long run, and 1.0 per cent in the short run. From an economy-wide point of view, a more elastic labour supply curve allows the economy to respond more favourably to increased demand generated by the World Cup compared with the full employment assumption. This is demonstrated in Table 5.6, which shows the projected economic welfare benefits under the long run supply elasticity assumption are significantly higher than the full employment assumption. This is because some labour can be employed by, for example, the tourism sector from a pool of unused labour rather than competing workers away from other sectors of the economy which occurs under full employment conditions (i.e. the crowding out effects are greatly reduced). Table 5.6 shows the value of additional spending, which totals around $4.3 billion for the 2022 event, as well as the estimated economic welfare impact of around $2.7 billion. This implies a 0.64 ratio of economic welfare to spending. Table 5.6: Sensitivity of economic welfare benefits to labour market assumptions Benefit
Tourist expenditure LOC expenditure in Australia Television broadcasting Total Benefits

Revenue ($ million)
3,250.0 819.6 200.0 4,269.6

Full employment ($ million)


1,237.9 284.9 77.9 1,600.6

Higher labour supply elasticity ($ million)


2,145.9 426.6 140.8 2,713.3

Note: Revenue represents the value of expenditure (2010 dollars) before adjusting for welfare effects.

The ability of the Australian economy to expand production in the World Cup year by employing more labour is a key uncertainty. The full employment assumption is conservative, and is consistent with the principles established for this analysis and Department of Finance and Deregulation guidelines. On the other hand, the assumption can be questioned given the standard practice for long term analysis such as this is to assume an elastic supply response. These labour market sensitivities are considered alongside other key parameter assumptions in Section 7.1.2.

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Cost benefit analysis of the 2022 FIFA World Cup

5.9 Summary of the benefits of staging the World Cup


The benefits of staging the World Cup are predominantly due to international tourists attending the event and LOC expenditure. Indirect benefits such national pride other intangible benefits have not been valued. The total quantified benefits of hosting the World Cup in 2022 total $1.8 billion. This reflects the welfare impact of expenditure in Australia and is common to each of the three stadia development scenarios. Table 5.7: Quantified benefits of the World Cup and Confederations Cup Benefit category
Tourism spending LOC Expenditure Television broadcasting Consumer surplus GST on ticket sales Operating surplus Total quantified costs
Note: Benefits are in real dollars (2010 prices).

Scenarios 1 to 3
$ million $1,237.9 $284.9 $77.9 $54.7 $56.7 $82.0 $1,793.8

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Cost benefit analysis of the 2022 FIFA World Cup

Weighing up the impacts of the World Cup

6.1 Quantification of costs


The major costs involved in hosting the 2022 World Cup are shown below in Table 6.1. The three development scenarios are discussed in Chapter 4. The construction of new stadia and upgrades to existing stadia account for the major share of costs under Scenario 1 and Scenario 2, followed by security and the cost to government of providing FIFA guarantees for the tournament. Under Scenario 3, security is the major cost category followed by stadium infrastructure which only allocates overlay costs specifically to the World Cup. Excluding stadium infrastructure costs, other cost components are consistent between scenarios. Table 6.1: World Cup costs
Expenditure / Benefit item Bidding Infrastructure Transport Security Other Cost to Government Total Costs

Scenario 1 Full stadia


($m, 2010) 45.6 2,748.2 82.9 560.0 103.5 150.9 3,691.2 ($m, NPV) 45.6 1,947.8 49.8 333.2 62.5 97.1 2,535.9

Scenario 2 Partial stadia


($m, 2010) 45.6 1,136.6 82.9 560.0 103.5 150.9 2,079.5 ($m, NPV) 45.6 775.8 49.8 333.2 62.5 97.1 1,364.0

Scenario 3 Overlay costs


($m, 2010) 45.6 346.2 82.9 560.0 103.5 150.9 1,289.1 ($m, NPV) 45.6 204.1 49.8 333.2 62.5 97.1 792.3

Note: Costs are in real dollars (2010 prices).

Given the significant share of costs represented by stadium infrastructure, transport and security, these are examined further in the sensitivity analysis in Section 7.1.2.

Scenario 1 Full stadia


The time profile of costs and benefits for Scenario 1 is set out in Chart 6.1 below. Chart 6.2 details a breakdown of major tournament expenditures. The major cost associated with hosting the 2022 World Cup under Scenario 1 is stadium infrastructure. FIFA requires that a minimum of 12 stadiums be used during the tournament and, given Australias current stadium infrastructure, all would require some refurbishment and/or reconstruction works to meet FIFA requirements. In total, it is estimated that around $2.7 billion is required for stadium infrastructure and training grounds.

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Cost benefit analysis of the 2022 FIFA World Cup

Chart 6.1: Costs and benefits of hosting the World Cup Scenario 1: All stadia
2,000 1,500 1,000
$ Millions (Real)

500
-500 -1,000 -1,500

2010

2014

2015

2016

2017

2018

2019

2020

2021

2025

Total annual revenue

Total annual expenditure

Net revenue

Chart 6.2: Costs of hosting the World Cup Scenario 1: Full stadia
Transport 2% Security 15%

Other 3% Cost to Government 4%

Stadium infrastructure 75%

Bidding 1%

Infrastructure accounts for around 75% of total costs under Scenario 1, with the majority of construction works expected to take place from 2016 to 2021. Security and transport are the two other major expenditure components. Security is estimated at $560 million, or 15% of total expenditure, for both the World Cup and Confederations Cup tournaments, with transport costs contributing a further $82.9 million.

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2011

2012

2013

2022

2023

2024

Cost benefit analysis of the 2022 FIFA World Cup

Scenario 2 Partial stadia


Infrastructure costs under Scenario 2 are significantly lower than for Scenario 1, totalling $1.1 billion, or 55% of total costs. The time profile of construction works is consistent with the relevant stadia under Scenario 1 (see Chart 6.3). Again security costs are the next largest cost component totalling $560 million, or 27% of total costs, with transport at around 4% of total costs. Chart 6.3: Costs and benefits of hosting the World Cup Scenario 1: All stadia
2,000

1,500

1,000
$ Millions (Real)

500

-500

-1,000

-1,500
2010 2011 2016 2017 2018 2019 2023 2024 2025 2026
2012 2013 2014 2015 2020 2021 2022
Other 5%

Total annual revenue

Total annual expenditure

Net revenue

Chart 6.4 shows a breakdown of tournament expenditure under Scenario 2. Chart 6.4: Costs of hosting the World Cup Scenario 2: Partial stadia
Security 27% Transport 4%

Cost to Government 7%

Bidding 2% Stadium infrastructure 55%

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Cost benefit analysis of the 2022 FIFA World Cup

Scenario 3 Overlay costs


Under Scenario 3, all new stadia construction and upgrades to existing stadia have been allocated to the baseline (i.e. they are treated as non-tournament developments), with overlay construction costs specifically attributed to the World Cup. Overlay costs total $346.2 million, or 27% of total costs under Scenario 3, and are expected to be undertaken in 2022, consistent with Scenario 1 and Scenario 2 (see Chart 6.5). Security is the major cost category accounting for 43% of total event costs. Chart 6.5: Costs and benefits of hosting the World Cup Scenario 3: Overlay costs
2,000

1,500

1,000
$ Millions (Real)

500

-500

-1,000

-1,500

2010

2011

2016

2017

2018

2019

2023

2024

2025

Total annual revenue

Total annual expenditure

Net revenue

Chart 6.6 below shows a breakdown of event expenditures under Scenario 3. Chart 6.6: Costs of hosting the World Cup Scenario 3: Overlay costs
Other 8%

Security 43%

Cost to Government 12%

Bidding 4%

Transport 6%

Stadium infrastructure 27%

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2012

2013

2014

2015

2020

2021

2022

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Cost benefit analysis of the 2022 FIFA World Cup

6.2 Quantification of benefits


The major benefits generated from the 2022 World Cup are shown below in Table 6.2. Tourism is the major benefit and generates a welfare gain of around $1.2 billion, followed by LOC expenditure totalling $284.9 million. Table 6.2: World Cup benefits
Expenditure / Benefit item Tourism (including legacy) LOC Expenditure Television Broadcasting Other World Cup related Total Benefits
Note: Benefits are in real dollars (2010 prices).

Scenario 1 to 3 inclusive
($m, 2010) 1,237.9 284.9 77.9 193.1 1,793.8 ($m, NPV) 726.1 172.7 45.9 113.9 1,058.7

Based on the expected number of tourists, teams and officials that would travel to Australia for the event, tourism welfare gains are estimated at 69% of total benefits. The LOC is expected to spend around $820 million in organising the event which contributes to significant welfare gains for Australia, and accounts for 16% of total benefits. The benefit generated assumes that the LOC budget will be negotiated with FIFA and funded through the FIFA financial platform model (see Chapter 3). Chart 6.7 below shows a breakdown of benefits accrued from hosting the 2022 World Cup in Australia. Benefits from hosting the tournament are consistent across all scenarios. Chart 6.7: Benefits of hosting the World Cup
LOC expenditure 16%

Other World Cup related 8%

Television broadcasting 4% Consumer surplus 3%

Tourism 69%

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Cost benefit analysis of the 2022 FIFA World Cup

The benefits accrue almost entirely during the year of the World Cup with welfare gains of approximately $1.0 billion in 2022 (see benefit profile in Chart 6.1, Chart 6.3 and Chart 6.5). Following the event, the benefits taper off considerably, with the post-event tourism impact in the two years following the tournament the major driver of benefits.

6.3 Results summary


Chart 6.8 and Table 6.3 below detail the costs and benefits of hosting the 2022 World Cup. The tournament generates a net financial cost under Scenario 1 and Scenario 2 of $1.5 billion and $305 million respectively. Under Scenario 3, however, the World Cup generates a net financial gain of $266 million. On a per capita basis, hosting the 2022 World Cup would involve a financial cost of $66 per person for Scenario 1 and $14 per person for Scenario 2, whilst providing a financial gain of $12 per person for Scenario 3. The fundamental conclusion drawn from this analysis is that the allocation of stadium infrastructure costs to the World Cup is a major driver of the overall outcomes (see Chart 6.8). Chart 6.8: Costs and benefits of hosting the 2022 World Cup
2,250 2,000 1,750
$ Millions (NPV)

Scenario 1

1,500 1,250 1,000 750 500 250 0

Scenario 2

Scenario 3

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Cost benefit analysis of the 2022 FIFA World Cup

Table 6.3: Net benefits of hosting the 2022 World Cup


Expenditure / Benefit item Benefits Tourism (incl legacy) LOC Expenditure Television Broadcasting Other World Cup related Total Benefits Costs Bidding Infrastructure Transport Security Other Cost to Government Total Costs Net benefits Net benefit per person

Scenario 1 Full stadia


($m, 2010) 1,237.9 284.9 77.9 193.1 1,793.8 45.6 2,748.2 82.9 560.0 103.5 150.9 3,691.2 -1,897.4 ($m, NPV) 726.1 172.7 45.9 113.9 1,058.7 45.6 1,947.8 49.8 333.2 62.5 97.1 2,535.9 -1,477.2 -66.0

Scenario 2 Partial stadia


($m, 2010) 1,237.9 284.9 77.9 193.1 1,793.8 45.6 1,136.6 82.9 560.0 103.5 150.9 2,079.5 -285.7 ($m, NPV) 726.1 172.7 45.9 113.9 1,058.7 45.6 775.8 49.8 333.2 62.5 97.1 1,364.0 -305.3 -13.9

Scenario 3 Overlay costs


($m, 2010) 1,237.9 284.9 77.9 193.1 1,793.8 45.6 346.2 82.9 560.0 103.5 150.9 1,289.1 504.6 ($m, NPV) 726.1 172.7 45.9 113.9 1,058.7 45.6 204.1 49.8 333.2 62.5 97.1 792.3 266.4 11.9

Note: Impacts are in real dollars (2010 prices). Per capita estimates based on a population of 22.38 million as at July 2010, Australian Bureau of Statistics.

6.4 Key uncertainties


Data limitations
The estimated costs and benefits of the tournament are highly dependant on the availability of reliable and robust information. Specialist transport and infrastructure firms were commissioned by the FFA to cost various aspects of the tournament and this analysis has relied on these reports. The estimates have been completed based on the most up to date information, and have relied on the tournament specifications as set out in the bid book. Given the World Cup is 12 years away and the Australian economy will change markedly over this period, there is considerable uncertainty on the final costs for the tournament. Where possible, the cost information should be improved over time to reflect the current economic and international environment. In particular, security and stadium infrastructure costs are expected to have the greatest uncertainty. While security costs were developed based on the current environment, how security is viewed and enforced over the next decade is likely to change, and costs should be updated to account for new factors. Stadium infrastructure is another area where considerable uncertainty exists and where cost estimates should be updated to reflect the cost of labour and materials used in construction. Stadium construction costs should also be updated if stadium configurations change or different stadiums are proposed for use during the tournament. This may in turn affect forecasts of international tourists attending the event.

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Cost benefit analysis of the 2022 FIFA World Cup

Risk analysis

A general framework for considering risks that may influence the magnitude, timing and distribution of costs and benefits of hosting the World Cup is provided in Figure 7.1. Figure 7.1: Risk analysis framework

High

Medium

High

Critical

Impact

Medium

Low

Medium

High

Low

Low

Low

Medium

Low

Medium

High

Likelihood
Most of the cost and revenue components of the World Cup occur well into the future and are thus uncertain. The following assessment aims to systematically examine the attendant risks, identify the main risk factors and subsequently inform the most appropriate way of addressing risk in the cost benefit analysis. The risks that typically require the most attention are those that have a large effect on the dominant benefit and cost elements and thus the potential for significant economic gains or losses. In addition to an evaluation of specific risks and uncertainties, sensitivity analysis on more general modelling parameters is also undertaken. A key aspect is to highlight the extent to which outcomes are sensitive to changes in the assumptions and to address any inherent biases in developing the analysis. A summary of the main risks and consequences is provided in Table 7.1. A more detailed sensitivity assessment is provided in Section 7.1.2.

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Table 7.1: Key risks of hosting a World Cup Risk


Planning Stage Other sporting codes Costs incurred by other sporting codes for disruption of season. Impact is expected to be low but potentially sensitive. Macroeconomic conditions (such as skills shortages or weak Australian dollar), cost blow outs or industrial action that causes an increase in costs of stadium developments. The services required to be delivered by the LOC could be changed or the scope increased. Other professional sporting codes, Commonwealth and State Governments Commonwealth and State Governments Likelihood: High Impact: Low Rating: Medium Likelihood: High Impact: High Rating: Critical Likelihood: Low Impact: Low Rating: Low Likelihood: High Impact: Medium Rating: High Likelihood: Low Impact: High Rating: Medium Likelihood: Medium Impact: Low Rating: High

Key issues

Bearer

Scale

Construction

Scope creep

Commonwealth and State Governments

Transport and security

Need for further infrastructure to accommodate the movement in tourists or an increase in security concerns. This may have an implication on the design of transport links and security. Stadiums, training venues or transport links not completed in time for the tournament.

Commonwealth and State Governments

Availability / Delay risk

Commonwealth and State Governments

Tournament Stage Team participation Tournament qualification uncertainty. A country with residents that have a higher propensity to travel to Australia, such as England or the USA, does not qualify, or that a country like China does qualify. The qualification, or failure to qualify, of a team from a larger country is likely to affect the number of tourists. Commonwealth and State Governments

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Cost benefit analysis of the 2022 FIFA World Cup

Risk
Catastrophes Global travel risks

Key issues
Events that affect World Cup tourists willingness to travel such as terrorist activity, SARS or economic conditions (global financial crisis). Disruption to the itinerary of travellers to the World Cup, from an extreme weather event. This would primarily be a localised event affecting one or two venues.

Bearer
Commonwealth and State Governments

Scale
Likelihood: Low Impact: High Rating: Medium Likelihood: Low Impact: Low Rating: Low

Natural hazards

Commonwealth and State Governments

Other risk and third party risk Airline capacity The tourist arrival window is critical for measuring the benefits of the tourism activity. Tourism activity may be significantly affected where the normal airline operation capacity was disrupted during this time. For instance, one of the major airports could remain inoperable during this time or an airline may cease operations during the event window. Commonwealth Government risk State governments unable to meet host city agreement requirements post bidding. Commonwealth Government Commonwealth and State Governments Likelihood: Low Impact: High Rating: Medium

Likelihood: Medium Impact: High Rating: High

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Main forms of risk


In examining risks relevant to the World Cup and their consequences, it is important to distinguish between different forms of risk. There is considerable evidence pointing to a systematic tendency for optimism bias when assessing project risk. The tendency is to overestimate demand and revenues and to understate costs. The difference between projected (biased) values and true expectations can be termed downside risk. This is principally addressed through thorough reporting of assumptions and sensitivity testing of key parameters. Other forms of risk can be termed pure risk and have two key forms: idiosyncratic risk and systematic risk. Idiosyncratic or unsystematic risk is project-specific. In the context of the World Cup, it essentially reflects risks associated with the unique circumstances of the tournament, as opposed to the economy overall. Conversely, systematic or market risk concerns risk that is correlated with other projects or with movements in the economy as a whole. An important aspect to distinguishing these forms of risk is that idiosyncratic risks can be largely eliminated by diversification across a variety of projects and investments, whereas systematic risks cannot be diversified away.

7.1.2

Sensitivity analysis

Sensitivity analysis was conducted on key inputs to determine the variability of net costs and benefits. This includes an analysis of the discount rate, construction costs (including stadium and training venues), tourism revenue, transport, security costs and labour market constraint assumptions. As seen in Figure 7.2 below, stadium construction costs and tourism revenue are the key cost and benefit categories that drive the overall results. Figure 7.2: NPV of costs and benefits of the World Cup
2,250 2,000 1,750
$ Millions (NPV)

1,500 1,250 1,000 750 500 250 0 Scenario 3 Scenario 2 Scenario 1

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Table 7.2 below details the sensitivity analysis for major cost and benefit categories. Under Scenario 1, a 10% increase in the costs of stadium construction would lead to a $198 million increase in overall net costs. Stadium cost increases for Scenarios 2 and 3 are significantly less than under Scenario 1 due to a higher proportion of costs allocated to the baseline. A 10% increase in stadium infrastructure costs under Scenarios 2 and 3 would result in a lower net benefit of around $81 million and $24 million respectively. In respect of benefits generated from the World Cup, the sensitivity results are consistent across all scenarios. Should tourism revenue be 10% less than projected, this would have a material impact on the outcomes, reducing the overall net result by $72.6 million. Table 7.2: Sensitivity analysis of key inputs
Expenditure / Benefit item

Scenario 1 Full stadia


NPV $million -1,477.2 -1,605.6 -1,359.6 -1,095.8 -1,675.3 -1,873.4 -1,279.2 -1,081.1 -1,404.6 -1,332.0 -1,549.9 -1,622.5 -1,514.5 -1,551.8 -1,440.0 -1,402.7 -797.2 Variance $million -128.4 117.7 384.4 -198.1 -396.1 198.1 396.1 72.6 145.2 -72.6 -145.2 -37.3 -74.5 37.3 74.5 680.0

Scenario 2 Partial stadia


NPV $million -305.3 -305.0 -301.6 -280.2 -386.2 -467.1 -224.4 -143.5 -232.7 -160.1 -377.9 -450.5 -342.6 -379.8 -268.0 -230.8 374.7 Variance $million 0.3 3.7 25.1 -80.9 -161.8 80.9 161.8 72.6 145.2 -72.6 -145.2 -37.3 -74.5 37.3 74.5 680.0

Scenario 3 Overlay costs


NPV $million 266.4 330.5 213.7 114.1 242.7 219.0 290.1 313.8 339.0 411.6 193.8 121.2 229.1 191.9 303.7 340.9 946.4 Variance $million 64.1 -52.7 -152.3 -23.7 -47.4 23.7 47.4 72.6 145.2 -72.6 -145.2 -37.3 -74.5 37.3 74.5 680.0

Base Case 3% real discount rate 6% real discount rate 10% real discount rate +10% construction costs +20% construction costs -10% construction costs -20% construction costs +10% tourism revenue +20% tourism revenue -10% tourism revenue -20% tourism revenue +10% transport & security +20% transport & security -10% transport & security -20% transport & security Long run labour supply

Note: NPV estimates use a real discount rate of 4.5%. The long run labour supply sensitivity test relaxes the full employment assumption and shows the economic impact in which spare capacity in the labour market can respond to increased demand generated by the tournament.

Labour market conditions


The 2022 World Cup is 12 years away and the Australian economy will look quite different at this time than it does today. This extended timeframe has important implications for the analysis. Above all, projections of macroeconomic and labour market conditions, as well as stadia and infrastructure cost estimates, become much more uncertain. In particular, the full employment assumption adopted in the GE modelling has a significant effect on results. The labour supply condition has a considerable effect on the economys ability to respond to increased demand from the World Cup through increased employment, and therefore the extent to which economic welfare can increase. Department of Finance and Deregulation guidelines state a full employment condition is to be taken when examining the general equilibrium impacts of policy proposals. Such a condition, which is consistent with the

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conservative approach adopted in the analysis, ensures that any expansionary impacts are more constrained than if there was excess capacity in labour and other factor markets. Relaxing the long run labour supply assumption (see Table 7.3) improves the net result by around $680 million across all three scenarios. It results in a net tournament cost of $797 million under Scenario 1, and a net positive result of $374.7 million and $946.4 million for Scenarios 2 and 3 respectively. Table 7.3: Impact of additional labour market capacity
Expenditure / Benefit item

Scenario 1 Full stadia


($m, NPV)

Scenario 2 Partial stadia


($m, NPV) 1,260.5 281.3 83.0 113.9 1,738.7 45.6 775.8 49.8 333.2 62.5 97.1 1,364.0 374.7

Scenario 3 Overlay costs


($m, NPV) 1,260.5 281.3 83.0 113.9 1,738.7 45.6 204.1 49.8 333.2 62.5 97.1 792.3 946.4

Benefits Tourism (incl legacy) LOC Expenditure Television Broadcasting Other World Cup related Total Benefits Costs Bidding Infrastructure Transport Security Other Cost to Government Total Costs Net Benefit
Note: Impacts are in real dollars (2010 prices).

1,260.5 281.3 83.0 113.9 1,738.7 45.6 1,947.8 49.8 333.2 62.5 97.1 2,535.9 -797.2

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Concluding comments

Hosting a tournament the scale of the FIFA World Cup requires a significant commitment from the Government to meet the requirements set out by the governing body. Given the World Cup will not be held for 12 years, there is considerable uncertainty surrounding not only the overall costs of the tournament but which costs will be borne by State or Commonwealth governments. Once a host nation for the World Cup is selected, government (and thus taxpayers) would bear significant risk of either tournament cost overruns or that benefits are lower than expectations. It should be noted that upside potential also exists from more international tourists attending the tournament than expected. But this is less likely and indeed has not been the general experience with staging mega sporting events. The fundamental conclusion drawn from this analysis is that, except under the most favourable cost conditions, the expected financial benefits from tourism, team and media spending are not sufficient to outweigh the significant financial cost of stadium construction and operational services required to host the event. These financial estimates would need to be considered in conjunction with the broader social and cultural benefits which the tournament is likely to yield. An important procedural aspect given high levels of uncertainty is to clearly establish responsibility for all costs of staging the event. This would include costs to be borne by the LOC and especially between States and the Commonwealth. Host city agreements are entered into by the States involved, but may present considerable risks for the Commonwealth for instance, to meet any funding shortfall from the States or LOC. Should Australias bid succeed, it is understood that a more inclusive process between FIFA and the host country will emerge in which there is likely to be some scope to modify or refine aspects of tournament commitments given the long lead time and changing circumstances. Where this occurs, there may well be material cost and risk implications for government and any such proposals should be carefully scrutinised. Further, cost benefit analysis of an event should ideally be commenced early in the process to allow careful analysis and consideration of methodological issues and data requirements. Preferably, this should occur before a decision to bid for the World Cup is made.

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Appendix A: Key analytical assumptions


Table A.1: World Cup CBA key assumptions Parameter
Real discount rate Number of host cities Number of stadiums Stadium infrastructure costs Scenario 1 All stadia Scenario 1 Partial stadia Scenario 1 Overlay costs Security costs LOC ticket revenue (World Cup and Confederations Cup) $2,748.2 million $1,136.6 million $346.2 million $560 million $926.9 million FFA Infrastructure Consortium FFA Infrastructure Consortium FFA Infrastructure Consortium Attorney Generals Department Germany 2006 ticket sales, South Africa 2010 ticket prices and Australian stadium capacities 60% of tickets allocated to international visitors (based on discussions with FFA) Availability of tickets, assumption that 10% of ticket holders are international visitors

Assumption
4.5% p.a. 10 12

Basis
Commonly used discount rate Advice from DRET/FFA Advice from DRET/FFA

Expected net tourist numbers during World Cup Expected net tourist numbers during Confederations Cup

677,100

20,000

Visitor time spent in Australia Tourists Corporate Media Officials 20 days 10 days 42 days 31 days TRA International Visitors Survey, holiday travellers excluding backpackers Access Economics assumption Tournament window plus one week either side Based on number of officials required at each stage of the tournament, arriving 10 days prior to the tournament and leaving two days post competition Based on number of teams qualifying at each stage of the tournament, arriving 10 days prior to the tournament and leaving two days post competition or elimination

Teams

32 days

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Parameter
Average daily spend (real $ 2010) World Cup Tourists World Cup Corporate Confederations Cup tourist Confederations Cup corporate Team spend during tournament

Assumption
$172 $203 $172 $203 $7.6 million

Basis
TRA International Visitors Survey minimal forecast real increase in daily expenditure per tourist to 2022

Based on FFA estimates which include: flights, accommodation, incidentals, security, consultants, medical, sponsor tour and VIP functions Based on Germany 2006 Based on Sydney Olympics legacy benefit visitor rates

Attendance by media and officials Legacy extra tourists

32,549 111,000

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Appendix B: Key results


Scenario 1: Full stadia
Hosting the World Cup in 2022 ($ million)
CAPEX TOTAL CAPEX Bidding Stadium Infrastructure Transport Secuirty Other Cost to Government REVENUE TOTAL REVENUE Tourism LOC Expenditure Trade gain Television Broadcasting Other World Cup related NET REVENUES COST $46 $2,748 $83 $560 $104 $151 NPV $2,427 $46 $1,948 $50 $333 $62 $97 NPV $1,013 $726 $173 $0 $46 $114 -$1,477 2010 $46 $46 $0 $0 $0 $0 $0 2010 $0 $0 $0 $0 $0 $0 -$46 2011 $2 $0 $0 $0 $0 $0 $2 2011 $0 $0 $0 $0 $0 $0 -$2 2012 $2 $0 $0 $0 $0 $0 $2 2012 $0 $0 $0 $0 $0 $0 -$2 2013 $2 $0 $0 $0 $0 $0 $2 2013 $0 $0 $0 $0 $0 $0 -$2 2014 $78 $0 $75 $0 $0 $0 $3 2014 $0 $0 $0 $0 $0 $0 -$78 2015 $36 $0 $32 $0 $0 $0 $4 2015 $1 $0 $1 $0 $0 $0 -$35 2016 $732 $0 $729 $0 $0 $0 $4 2016 $1 $0 $1 $0 $0 $0 -$731 2017 $634 $0 $627 $0 $0 $0 $8 2017 $1 $0 $1 $0 $0 $0 -$633 2018 $364 $0 $356 $0 $0 $0 $8 2018 $5 $0 $5 $0 $0 $0 -$359 2019 $344 $0 $337 $0 $0 $0 $8 2019 $9 $0 $9 $0 $0 $0 -$335 2020 $235 $0 $216 $3 $0 $0 $15 2020 $29 $3 $26 $0 $0 $0 -$206 2021 $261 $0 $31 $27 $112 $54 $38 2021 $101 $48 $52 $0 $0 $1 -$160 2022 $958 $0 $346 $53 $448 $50 $60 2022 $1,501 $1,041 $190 $0 $78 $192 $543 2023 $0 $0 $0 $0 $0 $0 $0 2023 $87 $87 $0 $0 $0 $0 $87 2024 $0 $0 $0 $0 $0 $0 $0 2024 $60 $60 $0 $0 $0 $0 $60

$1,238 $285 $0 $78 $193

Note: Impacts are in real dollars (2010 prices).

Scenario 2: Partial stadia


Hosting the World Cup in 2022 ($ million)
CAPEX TOTAL CAPEX Bidding Stadium Infrastructure Transport Secuirty Other Cost to Government REVENUE TOTAL REVENUE Tourism LOC Expenditure Trade gain Television Broadcasting Other World Cup related NET REVENUES COST $46 $1,137 $83 $560 $104 $151 NPV $1,305 $46 $776 $50 $333 $62 $97 NPV $1,013 $726 $173 $0 $46 $114 -$305 2010 $46 $46 $0 $0 $0 $0 $0 2010 $0 $0 $0 $0 $0 $0 -$46 2011 $2 $0 $0 $0 $0 $0 $2 2011 $0 $0 $0 $0 $0 $0 -$2 2012 $2 $0 $0 $0 $0 $0 $2 2012 $0 $0 $0 $0 $0 $0 -$2 2013 $2 $0 $0 $0 $0 $0 $2 2013 $0 $0 $0 $0 $0 $0 -$2 2014 $3 $0 $0 $0 $0 $0 $3 2014 $0 $0 $0 $0 $0 $0 -$3 2015 $4 $0 $0 $0 $0 $0 $4 2015 $1 $0 $1 $0 $0 $0 -$3 2016 $317 $0 $314 $0 $0 $0 $4 2016 $1 $0 $1 $0 $0 $0 -$316 2017 $251 $0 $243 $0 $0 $0 $8 2017 $1 $0 $1 $0 $0 $0 -$249 2018 $8 $0 $0 $0 $0 $0 $8 2018 $5 $0 $5 $0 $0 $0 -$3 2019 $99 $0 $91 $0 $0 $0 $8 2019 $9 $0 $9 $0 $0 $0 -$90 2020 $132 $0 $113 $3 $0 $0 $15 2020 $29 $3 $26 $0 $0 $0 -$103 2021 $259 $0 $30 $27 $112 $54 $38 2021 $101 $48 $52 $0 $0 $1 -$159 2022 $958 $0 $346 $53 $448 $50 $60 2022 $1,501 $1,041 $190 $0 $78 $192 $543 2023 $0 $0 $0 $0 $0 $0 $0 2023 $87 $87 $0 $0 $0 $0 $87 2024 $0 $0 $0 $0 $0 $0 $0 2024 $60 $60 $0 $0 $0 $0 $60

$1,238 $285 $0 $78 $193

Note: Impacts are in real dollars (2010 prices).

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Scenario 3: Overlay costs


Hosting the World Cup in 2022 ($ million)
CAPEX TOTAL CAPEX Bidding Stadium Infrastructure Transport Secuirty Other Cost to Government REVENUE TOTAL REVENUE Tourism LOC Expenditure Trade gain Television Broadcasting Other World Cup related NET REVENUES COST $46 $346 $83 $560 $104 $151 NPV $758 $46 $204 $50 $333 $62 $97 NPV $1,013 $726 $173 $0 $46 $114 $266 2010 $46 $46 $0 $0 $0 $0 $0 2010 $0 $0 $0 $0 $0 $0 -$46 2011 $2 $0 $0 $0 $0 $0 $2 2011 $0 $0 $0 $0 $0 $0 -$2 2012 $2 $0 $0 $0 $0 $0 $2 2012 $0 $0 $0 $0 $0 $0 -$2 2013 $2 $0 $0 $0 $0 $0 $2 2013 $0 $0 $0 $0 $0 $0 -$2 2014 $3 $0 $0 $0 $0 $0 $3 2014 $0 $0 $0 $0 $0 $0 -$3 2015 $4 $0 $0 $0 $0 $0 $4 2015 $1 $0 $1 $0 $0 $0 -$3 2016 $4 $0 $0 $0 $0 $0 $4 2016 $1 $0 $1 $0 $0 $0 -$3 2017 $8 $0 $0 $0 $0 $0 $8 2017 $1 $0 $1 $0 $0 $0 -$6 2018 $8 $0 $0 $0 $0 $0 $8 2018 $5 $0 $5 $0 $0 $0 -$3 2019 $8 $0 $0 $0 $0 $0 $8 2019 $9 $0 $9 $0 $0 $0 $1 2020 $18 $0 $0 $3 $0 $0 $15 2020 $29 $3 $26 $0 $0 $0 $10 2021 $230 $0 $0 $27 $112 $54 $38 2021 $101 $48 $52 $0 $0 $1 -$129 2022 $958 $0 $346 $53 $448 $50 $60 2022 $1,501 $1,041 $190 $0 $78 $192 $543 2023 $0 $0 $0 $0 $0 $0 $0 2023 $87 $87 $0 $0 $0 $0 $87 2024 $0 $0 $0 $0 $0 $0 $0 2024 $60 $60 $0 $0 $0 $0 $60

$1,238 $285 $0 $78 $193

Note: Impacts are in real dollars (2010 prices).

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Appendix C: Net tourism impact of the World Cup


In developing a net tourism estimate for the World Cup, the expected movements of various groups of both international visitors and domestic residents during the tournament window has been considered. These various movement effects are shown in Figure C.1 below. Australian Bureau of Statistics tourism data has been used to identify trends in short term arrivals and departures during previous major events in Australia (ABS Cat. No. 3401.0). Figure C.1: Host nation net tourism effect

Non resident movements


Event specific visitors, without a ticket Visitors who postpone their visit due to the event Visitors who would have come anyway, combine event in their itinerary

Event specific visitors, with a ticket

Host Nation net tourism effect

Visitors who cancel their visit due to the event

Resident movements

Residents who cancel an overseas trip to stay in Australia due to the event

Residents who would have travelled to a world cup but remain in Australia for the event

Residents who leave due to the event

Non-resident movements The event specific visitors with a ticket were estimated based on assumptions of stadia usage, matches per spectator and tickets allocated to international visitors. In total, international visitors are estimated at 694,300. Event specific visitors without a ticket are those who travel to the host nation to be part of the tournament, for example attend fan zones or travel with family members. Access Economics has assumed a total of around 7800 visitors fit this category, or 1.0% of those travelling with a ticket. There may be some visitors who would have travelled to Australia around the time of the World Cup, but who postpone or bring forward their visit due to the event (possibly to avoid crowds, high prices and accommodation shortages). These include business travellers who come regularly to Australia who may rearrange a pre-existing trip to avoid the tournament (i.e. to arrive either before or after the tournament window). The effect of this visitor category has been estimated by examining visitor arrivals before and after the event. An opposite effect may also occur in which individuals with pre-existing plans alter their itineraries to actually coincide with the event. If such an effect is present, lower than trend

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visitation would be recorded in the periods immediately before or after the event. When data from the Sydney Olympics period is considered, however, no such pattern is observed. Even when the data is disaggregated to consider visitors by main purpose of trip, there is no quantitative evidence to suggest business travellers or other visitor categories altered travel plans to coincide with the Olympics. Examining those visitors who would have come anyway is difficult, primarily because these individuals will tend to be embedded in other tourist data. These are visitors who were already planning to visit Australia, and simply add the World Cup to their activities. One way these visitors may be identified in the tourism data is by staying for a longer period of time. However, the length of stay data in Australia is broken into large chunks, such as 10 to 39 nights and 40 to 99 nights, and so an additional week stay for a major event may not be sufficient for any change in reported data. Indeed, no such pattern is seen for the Sydney Olympics and the period before and after the event. In Germany 2006, survey responses indicated that around 10% of World Cup tourists fell into this category. Based on the German experience and given Australias relative geographic isolation, Access Economics has assumed 2.5% of ticketholders belong to this category. When major events take place, many visitors are attracted to the region. However, the anticipated large influx of additional tourists is often associated with a temporary increase in prices for goods utilised by tourists, including accommodation, transport, food and beverages. Increased demand for some services, particularly accommodation, may mean hotels are fully booked. These price increases and capacity constraints, along with potential loss of amenity because of special event arrangements (i.e. large crowds), mean that some visitors cancel their visit due to the event. These visitors partially offset the benefits of those who come to Australia for the event. When visitors to Australia for the Sydney Olympics are considered by region of residence, there are considerable differences. Some regions, particularly the Americas, recorded large increases in visitors for September 2000, before these returned to trend levels in the following months and the following September. However three regions Oceania, South-East Asia and North-East Asia recorded noticeable drops in visitor numbers for September 2000. In total, an estimated 15,260 visitors below the September 1999-2001 average growth rate visited from these regions in September 2000. These may be considered individuals who were dissuaded from coming to Australia because of the Olympics. However, it would be overly simplistic to suggest that this number represents dissuaded visitors due to the Olympics. Visitor numbers from these regions rebounded to trend levels in October 2000, while for the Oceania and North-East Asian regions, a considerably above trend number of visitors arrived in Australia for November 2000. This suggests that some of these visitors did not cancel their trip, but rather deferred visiting Australia until after the Olympics. The November spike suggests that only around half of the September shortfall represents actual lost visitors rather than merely a delay, or around 7600 visitors.

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Resident movements Should Australia be successful in its bid to host a World Cup, residents who would have travelled to a World Cup now remain in Australia. In June 2006, Australian visitors to Germany totalled 17,300. This compares to 7,100 and 7,900 in that month in 2005 and 2007 the years before and after the World Cup. Based on seasonally adjusted numbers, Access Economics has assumed that additional Australians visiting Germany during the World Cup were around 10,000. Given the event would be held in Australia, these residents are now assumed to remain in Australia for the tournament. The additional expenditure from these residents is captured in the consumer surplus estimates. Although many residents will embrace a major event there are some residents who leave due to the event. This effect is supported by the fact that flights running counter to the flow of inbound World Cup traffic (i.e. backhaul flights) may be offered at unusually low prices, as was seen during the Sydney Olympics. The departure of these residents is tempered by those residents who cancel an overseas trip to remain in Australia for the event. It is difficult to disentangle these two factors, and so they are best considered jointly, for a net resident impact. When data on Australian residents departing the country during the Sydney Olympics is considered, there is a slight drop in Australian resident departures in the month of September 2000, however, it is not large enough to be considered any form of deviation from the trend. This suggests that the impacts of residents who departed the country because of the event and those who stayed because of the event are roughly offset. A summary of the net tourism impact for Australia is detailed in Table C.2. Table C.2: Net tourism effect Category
Event specific visitors (with tickets) plus plus less less plus plus Event specific visitors (without ticket) Visitors who would have come anyway, combine event in their itinerary Visitors who postpone their visit due to the event Visitors who cancel visit due to the event Residents who would have travelled to a World Cup overseas but remain in Australia for the event Overall impact of residents who leave and those who cancel an overseas trip and remain home due to the event Total net tourism effect
#

Total
694,300 7,800 17,350
*

0 7,600 10,000
#

0 677,100
#

Note: * Adjustment made for these visitors to extend length of stay by 7 days. Residents staying in Australia for the event captured in consumer surplus.

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Appendix D: Principles for assessing major events


Access Economics has developed a range of general principles for assessing the costs and benefits of major events (A framework for cost benefit analysis of major events 2009). These principles, which cover various procedural and analytical aspects of major event evaluations, are summarised below.

Cost benefit analysis should be developed with the Australian Government guidelines in mind Cost benefit assessments of major events should closely adhere to the Australian Governments guidelines. In many areas, however, these are not definitive, making sound judgements and analytical transparency paramount. Looking at the event from a society-wide point of view An important part of structuring a cost benefit study is to establish an appropriate analytical envelope. The CBA framework subsequently aims to measure welfare impacts within this envelope. In the case of a major sporting event which spans different states, has a national element, and can involve large transfers overseas and Australian Government support, a wholeof-economy analytical envelope should be adopted. Careful consideration of displacement effects Major events, indeed any activity, use economic resources that could be employed for alternative purposes, with only small scope to use unemployed resources or idle capital. In this regard, event-related activities have a range of displacement effects and come at an opportunity cost. Where government support for an event is intrinsic, the displacement of other economic activities should be factored into the cost benefit analysis. This should include the impacts of the event on other sports where possible. Where an event is large, such displacement and crowding out can be material from a macroeconomic perspective. These dynamic effects should be captured using appropriate analytical techniques.

Recognise the opportunity cost of government expenditures (including in-kind contributions) All government spending uses real resources which have competing uses and which must be funded by taxation. Where government facilitates a major event, whether through direct financial support or some other form of backing, there are explicit costs involved. Such costs should be recognised in undertaking a cost benefit analysis of an event. Cost benefit analysis of major events should be undertaken with an assumption of no additional government expenditure, unless there is clear policy advice to the contrary. Rather, any spending comes at the opportunity cost of other existing government activity. This avoids unnecessary complications such as speculation over government funding or alternative economic impacts of government spending.

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Be careful about claims that costs can generate benefits Many large events involve considerable capital expenditures such as for stadia and other facilities. There are good reasons to be highly sceptical of claims that such spending will provide incremental economy-wide benefits through supporting aggregate demand and employment. Such claims typically ignore the counterfactual effect that multiplier impacts could also be achieved by alternative uses of the project resources. Failing to recognise the forgone stimulus effect from other potential spending priorities can lead to overstating any expansionary benefit from any particular event or project. It may be the case that little or no additional impact is generated.

Careful consideration and treatment of guarantees Where major events, such as the Olympic Games or FIFA World Cup, involve a competitive bidding process, countries are often required to provide a range of guarantees to the relevant governing organisation. These guarantees are typically broad, covering various financial and operational matters such as the costs of staging the event and the rights to relevant event revenues. They can effectively lock sponsoring governments into expensive commitments and involve substantial risk. Accordingly, the potential impacts of guarantees should be carefully considered and accounted for within the analysis. Explicit treatment of risks and bidding costs Many of the costs and benefits of major events are uncertain and therefore involve an element of risk. Importantly, this should be explicitly accounted for in a cost benefit analysis, primarily through undertaking a sensitivity analysis of key risk elements. Where events require participation in a competitive bidding process, the certainty of incurring budgeted bidding costs needs to be recognised in the context of the event, including the expected value of future benefits and costs. In this regard, the amount willing to be spent on a bid would be expected to be commensurate with the likelihood of success (that is, broadly, the number of realistic competitors), as well as the scale of the event and the economic benefits likely to be generated.

Conservatism Uncertainty regarding the benefits and costs of a major event (as discussed above) necessarily involves a high degree of judgement in conducting an event analysis. A common analytical flaw is that inherent optimism bias systemically underestimates costs and overstates benefits. Taking a conservative approach to the analysis, and the myriad of judgements required along the way, is a good way to build a credible and dispassionate analysis. On the benefit side, potential overestimation of non-financial benefits is particularly problematic. Quantifying the social, environmental and cultural impacts from events is to be encouraged, but only where they can be done in a well-designed, transparent and credible fashion. The analysis may well be better served by addressing most, if not all, non-financial social impacts in a qualitative fashion and making policymakers aware of the attendant value judgements involved in pursuing a particular event given other quantifiable impacts.

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Cost benefit analysis of the 2022 FIFA World Cup

Transparency Cost benefit analyses of events, and indeed most projects, are heavily reliant on judgement. Because of this, it is crucial that the basis for analytical inputs, decisions and conclusions are properly explained and documented. A key benefit is it allows for more robust scrutiny of the analysis by other (independent) parties, thereby facilitating more informed debate and continual improvements over time. Post-event assessments Agencies should conduct post-event assessments of the benefits and costs from hosting major events in the context of government support. Crucially, this will also help build a better data and evidence base to support future event analyses. In particular, it can assist in more fully understanding the nature and magnitude of non-financial impacts from events. Ongoing review These principles, and other relevant analytical considerations, should be reviewed periodically. No two events are the same and other issues are sure to arise which will require variations to any general approach. Indeed, the ongoing review of how event analyses are conducted should be a core procedural feature which aims to ensure the assessment of major events is continuously strengthened.

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Appendix E: The Access Economics CGE model


AE-RGEM is a large scale, dynamic, multi-region, multi-commodity computable general equilibrium model of the world economy. The model allows policy analysis in a single, robust, integrated economic framework. This model projects changes in macroeconomic aggregates such as GDP, employment, export volumes, investment and private consumption. At the sectoral level, detailed results such as output, exports, imports and employment are also produced. The model is based upon a set of key underlying relationships between the various components of the model, each which represent a different group of agents in the economy. These relationships are solved simultaneously, and so there is no logical start or end point for describing how the model actually works. Figure E.1 shows the key components of the model for an individual region. The components include a representative household, producers, investors and international (or linkages with the other regions in the model, including other Australian States and foreign regions). Below is a description of each component of the model and key linkages between components. Some additional, somewhat technical, detail is also provided. Figure E.1: Key components of AE-RGEM

Representative household

Producers

International

Investors

AE-RGEM is based on a substantial body of accepted microeconomic theory. Key assumptions underpinning the model are:

The model contains a regional consumer that receives all income from factor payments (labour, capital, land and natural resources), taxes and net foreign income from borrowing (lending). Income is allocated across household consumption, government consumption and savings so as to maximise a Cobb-Douglas (C-D) utility function.

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Household consumption for composite goods is determined by minimising expenditure via a CDE (Constant Differences of Elasticities) expenditure function. For most regions, households can source consumption goods only from domestic and imported sources. In the Australian regions, households can also source goods from interstate. In all cases, the choice of commodities by source is determined by a CRESH (Constant Ratios of Elasticities Substitution, Homothetic) utility function. Government consumption for composite goods, and goods from different sources (domestic, imported and interstate), is determined by maximising utility via a C-D utility function. All savings generated in each region are used to purchase bonds whose price movements reflect movements in the price of creating capital. Producers supply goods by combining aggregate intermediate inputs and primary factors in fixed proportions (the Leontief assumption). Composite intermediate inputs are also combined in fixed proportions, whereas individual primary factors are combined using a CES production function. Producers are cost minimisers, and in doing so choose between domestic, imported and interstate intermediate inputs via a CRESH production function.

The model contains a more detailed treatment of the electricity sector that is based on the technology bundle approach for general equilibrium modelling developed by ABARE (1996).15

The supply of labour is positively influenced by movements in the real wage rate governed by an elasticity of supply. Investment takes place in a global market and allows for different regions to have different rates of return that reflect different risk profiles and policy impediments to investment. A global investor ranks countries as investment destinations based on two factors: global investment and rates of return in a given region compared with global rates of return. Once the aggregate investment has been determined for Australia, aggregate investment in each Australian sub-region is determined by an Australian investor based on: Australian investment and rates of return in a given sub-region compared with the national rate of return. Once aggregate investment is determined in each region, the regional investor constructs capital goods by combining composite investment goods in fixed proportions, and minimises costs by choosing between domestic, imported and interstate sources for these goods via a CRESH production function. Prices are determined via market-clearing conditions that require sectoral output (supply) to equal the amount sold (demand) to final users (households and government), intermediate users (firms and investors), foreigners (international exports), and other Australian regions (interstate exports). For internationally-traded goods (imports and exports), the Armington assumption is applied whereby the same goods produced in different countries are treated as imperfect substitutes. But in relative terms imported goods from different regions are treated as closer substitutes than domestically-produced goods and imported

15

Australian Bureau of Agricultural and Resource Economics (ABARE), 1996, MEGABARE: Interim Documentation, Canberra.

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composites. Goods traded interstate within the Australian regions are assumed to be closer substitutes again.

The model accounts for greenhouse gas emissions from fossil fuel combustion. Taxes can be applied to emissions, which are converted to good-specific sales taxes that impact on demand. Emission quotas can be set by region and these can be traded, at a value equal to the carbon tax avoided, where a regions emissions fall below or exceed their quota.

The representative household


Each region in the model has a so-called representative household that receives and spends all income. The representative household allocates income across three different expenditure areas: private household consumption; government consumption; and savings. Going clockwise around Figure B, the representative household interacts with producers in two ways. First, in allocating expenditure across household and government consumption, this sustains demand for production. Second, the representative household owns and receives all income from factor payments (labour, capital, land and natural resources) as well as net taxes. Factors of production are used by producers as inputs into production along with intermediate inputs. The level of production, as well as supply of factors, determines the amount of income generated in each region. The representative households relationship with investors is through the supply of investable funds savings. The relationship between the representative household and the international sector is twofold. First, importers compete with domestic producers in consumption markets. Second, other regions in the model can lend (borrow) money from each other. Some detail

The representative household allocates income across three different expenditure areas private household consumption; government consumption; and savings to maximise a Cobb-Douglas utility function. Private household consumption on composite goods is determined by minimising a CDE (Constant Differences of Elasticities) expenditure function. Private household consumption on composite goods from different sources is determined is determined by a CRESH (Constant Ratios of Elasticities Substitution, Homothetic) utility function. Government consumption on composite goods, and composite goods from different sources, is determined by maximising a Cobb-Douglas utility function. All savings generated in each region is used to purchase bonds whose price movements reflect movements in the price of generating capital.

Producers
Apart from selling goods and services to households and government, producers sell products to each other (intermediate usage) and to investors. Intermediate usage is where one producer supplies inputs to anothers production. For example, coal producers supply inputs to the electricity sector.

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Capital is an input into production. Investors react to the conditions facing producers in a region to determine the amount of investment. Generally, increases in production are accompanied by increased investment. In addition, the production of machinery, construction of buildings and the like that forms the basis of a regions capital stock, is undertaken by producers. In other words, investment demand adds to household and government expenditure from the representative household, to determine the demand for goods and services in a region. Producers interact with international markets in two main ways. First they compete with producers in overseas regions for export markets, as well as in their own region. Second, they use inputs from overseas in their production. Some detail

Sectoral output equals the amount demanded by consumers (households and government) and intermediate users (firms and investors) as well as exports. Intermediate inputs are assumed to be combined in fixed proportions at the composite level. As mentioned above, the exception to this is the electricity sector that is able to substitute different technologies (brown coal, black coal, oil, gas, hydropower and other renewables) using the technology bundle approach developed by ABARE (1996). To minimise costs, producers substitute between domestic and imported intermediate inputs is governed by the Armington assumption as well as between primary factors of production (through a CES aggregator). Substitution between skilled and unskilled labour is also allowed (again via a CES function). The supply of labour is positively influenced by movements in the wage rate governed by an elasticity of supply (assumed to be 0.2). This implies that changes influencing the demand for labour, positively or negatively, will impact both the level of employment and the wage rate. This is a typical labour market specification for a dynamic model such as AE-RGEM. There are other labour market settings that can be used. First, the labour market could take on long-run characteristics with aggregate employment being fixed and any changes to labour demand changes being absorbed through movements in the wage rate. Second, the labour market could take on short-run characteristics with fixed wages and flexible employment levels.

Investors
Investment takes place in a global market and allows for different regions to have different rates of return that reflect different risk profiles and policy impediments to investment. The global investor ranks countries as investment destination based on two factors: current economic growth and rates of return in a given region compared with global rates of return. Some detail

Once aggregate investment is determined in each region, the regional investor constructs capital goods by combining composite investment goods in fixed proportions, and minimises costs by choosing between domestic, imported and interstate sources for these goods via a CRESH production function.

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International
Each of the components outlined above operate simultaneously, in each region of the model. That is, for any simulation the model forecasts changes to trade and investment flows within, and between, regions subject to optimising behaviour by producers, consumers and investors. Of course, this implies some global conditions must be met, such as global exports and global imports are the same and that global debt repayments equals global debt receipts each year.

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