economic impact assessment of the rome 2024 ... - CEIS Tor Vergata

ECONOMIC IMPACT ASSESSMENT OF THE ROME 2024 OLYMPIC AND PARALYMPIC GAMES JANUARY 2016

Working Group: OpenEconomics1 Pasquale Lucio Scandizzo3 Raffaele Nardone Cataldo Ferrarese

CEIS2 Beniamino Quintieri4 Mariarita Pierleoni

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OpenEconomics srl, via Tagliamento 9, 00198 Rome – http://www.openeconomics.eu CEIS – Centre for Economic and International Studies – University of Rome Tor Vergata, via Columbia 2, 00133, Rome – http://www.ceistorvergata.it 3 Pasquale L. Scandizzo is presently President of OpenEconomics srl, Professor of Economic Policy and Senior Fellow of Fondazione Economia, and the Center for Economic International Studies (CEIS) at the University of Rome “Tor Vergata”. He has held positions as Senior Economist with the World Bank, President of the Italian Institute for Economic Planning, Member of the National Planning Board, Member of the Board of the National Institute of Statistics and Economic Adviser of the Parliamentary Budget Committee and several public agencies. He has a wide experience in designing, monitoring and evaluating major investment projects funded by national and international organizations. He has developed methodologies to evaluate public investment programs and strategic planning initiatives, including key proposals of urban and rural development and project financing, and is presently advising the World Bank on the applications of these methodologies to policies of sustainable development. 4 Beniamino Quintieri is presently Professor of International Economics at University of Rome “Tor Vergata” and Chairman of the “Masi Foundation – National Observatory for Internationalisation and Trade”. He has held positions as Commissioner General of Italy of the World Exposition of Shanghai 2010, Chairman of the Italian Institute for Foreign Trade (ICE – Istituto nazionale per il Commercio Estero), Director of CEIS Tor Vergata, member of the Advisory Board of SACE and economic expert CNEL. He is author of many books and articles published in scientific journals on topics related to the international economy, public finance, labor economics and macroeconomics. On 2 June 2005 the President of the Republic awarded him the highest Honour of Knight Grand Cross. 2

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TABLE OF CONTENTS

Executive summary ............................................................................................................... 7 Economic value of the Games ........................................................................................................................... 8 Economic Impact of the Games....................................................................................................................... 10

1

Assessment of the Rome 2024 Olympics ........................................................................ 14

1.1

Investment costs...................................................................................................................................... 14

1.1.1

Sports infrastructures ...................................................................................................................... 14

1.1.2

Non-sports infrastructures .............................................................................................................. 16

1.1.3

The infrastructures serving the city ................................................................................................. 16

1.1.4

Investments costs in the scenario without the Project ................................................................... 16

1.2

External costs........................................................................................................................................... 18

1.3

Operating Costs ...................................................................................................................................... 19

1.4

Net macroeconomic benefits to the Lazio Region .................................................................................. 20

1.4.1

Determination of shadow prices - Effects in the construction period ............................................ 22

1.4.2

Impact in the construction period ................................................................................................... 25

1.4.2.1

Determination of expenditure vectors ........................................................................................ 25

1.4.2.2

Net effects of the investments to be made ................................................................................. 27

1.4.3 1.5

Impact in the period of full operation ............................................................................................. 30

Intangible benefits ................................................................................................................................... 34

1.5.1

Olympic and Paralympic aura ....................................................................................................... 34

1.5.2

Non-use Values of the Games ......................................................................................................... 36

1.5.2.1

Value of the Legacy of the Games as a Cultural Event ................................................................ 36

1.5.2.2

Existence Value of the Games as a Local Public Good ................................................................ 37

1.5.3 1.5.3.1

Benefits of the Games for Italy as host country .......................................................................... 38

1.5.3.2

Benefits of the Games from the Media ....................................................................................... 39

1.5.3.3

Benefits of direct participation in the sports events ................................................................... 40

1.5.3.4

Benefits of increase in the practice of sport ............................................................................... 40

1.5.3.5

Benefits of social inclusion .......................................................................................................... 42

1.5.4 1.6

2

Olympic village benefits................................................................................................................... 43

Socio-economic assessment .................................................................................................................... 44

1.6.1 1.7

Use Values of the Games ................................................................................................................. 38

Rome 2024 Games ENPV and EIRR .................................................................................................. 44

Sensitivity and risks analysis .................................................................................................................... 46

Economics of the Olympic Games................................................................................... 49

2.1

Introduction ............................................................................................................................................. 49

2.2

Impact of the Olympic Games: cost-benefit analysis .............................................................................. 50

2.3

Candidature process ................................................................................................................................ 54

2.3.1 2.4

Change in the candidature process and the new vision of the legacy concept .............................. 54

Review of the literature on the assessment of the impact of the Olympic Games ................................ 59 3

2.4.1

Ex-ante and ex-post studies: the main methodological approaches and issues ............................. 59

2.4.2

Ex-ante studies ................................................................................................................................ 59

2.4.3

Ex-post studies................................................................................................................................. 62

2.4.4

The contingent valuation method ................................................................................................... 63

2.5

The quantification of economic effects in the literature ........................................................................ 64

3

Historical data on the Olympic Games ............................................................................ 66

4

Appendix ....................................................................................................................... 72

4.1

Methodology for estimating TV Benefits ................................................................................................ 72

4.1.1

TV coverage of the Games and consumer surplus .......................................................................... 74

4.1.2

Estimation of consumer surplus and benefits from TV coverage ................................................... 75

4.2

Impact of the situation with the Project in the construction period ...................................................... 78

4.3

Impact of the situation without the Project in the construction period ................................................. 79

4.4

Annual impact in the period of full operation ......................................................................................... 80

4.5

Impact on employment in the situation with the Project in the construction period ............................ 81

4.6

Impact on employment in the situation without the Project in the construction period ...................... 82

4.7

Net impact on employment in the construction period ......................................................................... 83

4.8

Annual impact on employment in the period of full operation .............................................................. 84

4.9

Alternative scenarios ............................................................................................................................... 85

4.9.1 4.10

5

Sensitivity and risk analysis ............................................................................................................. 85

Social Accounting Matrix – SAM .............................................................................................................. 89

Bibliography .................................................................................................................. 96

Contents of Tables Table 1. Preliminary Financial Analysis of the Public Component ............................................................................ 9 Table 2. Economic Net Present Value of the Games ............................................................................................... 10 Table 3. Net Value Added generated in Investment period .................................................................................... 11 Table 4. Impact on the Lazio Region and Rome Institutions ................................................................................... 12 Table 5.Impact on Production in the Lazio Region and Rome ................................................................................ 12 Table 6. Annual employment generated in the construction period (labour units) ............................................... 13 Table 7. Economic impact in the period of full operation ....................................................................................... 13 Table 8. Investment Costs ....................................................................................................................................... 14 Table 9. Investment costs for sports facilities ......................................................................................................... 15 Table 10. Investment costs for non-sports facilities................................................................................................ 16 Table 11. External costs in economic values ........................................................................................................... 18 Table 12. Operating costs ....................................................................................................................................... 19 Table 13. Conversion factors ................................................................................................................................... 24 Table 14. Scenarios with and without the Project .................................................................................................. 26 Table 15. Expenditure vector of the scenario with the Project............................................................................... 26 Table 16. Expenditure vector of the scenario without the Project ......................................................................... 27 Table 17. Net Value Added generated in the Lazio Region and Rome .................................................................... 28 Table 18. Impact on the Lazio Region and Rome Institutions ................................................................................. 29 4

Table 19. Impact on Production in the Lazio Region and Rome.............................................................................. 29 Table 20. Annual employment generated in the construction period (labour units) ............................................. 30 Table 21. Annual Value Added in the period of full operation............................................................................... 31 Table 22. Effects on the Institutions in the period of full operation ....................................................................... 32 Table 23. Effects on Production in the period of full operation .............................................................................. 32 Table 24. Jobs created in the period of full operation ............................................................................................ 32 Table 25. Existence Value of the Rome 2024 Games .............................................................................................. 38 Table 26. Benefits from the Media .......................................................................................................................... 40 Table 27. Estimated benefits generated from direct participation in the events ................................................... 40 Table 28. Estimated parameters of the sport practice option values generated by the Games ............................ 41 Table 29. Sport practice option values* .................................................................................................................. 42 Table 30. Estimated parameters of the sport practice option values generated by the Olympics......................... 42 Table 31. Sport practice option values* .................................................................................................................. 43 Table 32. Revenues from the Olympic Village ......................................................................................................... 43 Table 33. Economic cash flow of the base scenario ................................................................................................ 45 Table 34. Risk analysis results.................................................................................................................................. 46 Table 35. Cities Bidding for the Olympic Games - 1984-2016 ................................................................................. 66 Table 36. Participating countries, number of athletes, opening and total costs - 1992-2012 ................................ 66 Table 37. Potential impacts of the Olympic Games ................................................................................................ 67 Table 38. Positive legacies and negative induced effects of staging the Olympic Games ...................................... 68 Table 39. Main valuation methods used to assess the effects of the Olympics ..................................................... 69 Table 40. Parameters for estimating TV use value - Base scenario......................................................................... 76 Table 41. Estimated TV use value - Base scenario................................................................................................... 76 Table 42. Parameters for estimating TV use value – Best scenario ........................................................................ 76 Table 41. Estimated TV use value - Best scenario ................................................................................................... 76 Table 42. Parameters for estimating TV use value – Worst scenario ..................................................................... 77 Table 43. Estimated TV use value - Worst scenario ................................................................................................ 77 Table 46. Economic cash flow of alternative scenarios ........................................................................................... 85 Table 47. Risk analysis results.................................................................................................................................. 86 Contents of Figures Figure 1. Value Added generated in the Lazio Region and Rome ........................................................................... 11 Figure 2. SAM structure ........................................................................................................................................... 21 Figure 3. Social Accounting Matrix Model............................................................................................................... 22 Figure 3. Process for estimation of costs and benefits ........................................................................................... 23 Figure 5. Value Added generated in the Lazio Region and Rome ........................................................................... 28 Figure 6. Net annual employment generated in the construction period ( annual labour units) .......................... 30 Figure 7. Annual Value Added in the period of full operation ................................................................................ 31 Figure 8. Jobs created in the period of full operation ............................................................................................. 33 Figure 9. Risk analysis results - costs ....................................................................................................................... 47 Figure 10. Risk analysis results - benefits ................................................................................................................ 47 Figure 11. Risk analysis results – ENPV and EIRR..................................................................................................... 47 Figure 12. Consumer surplus ................................................................................................................................... 72 Figure 13. Risk analysis results – Worst scenario – benefits ................................................................................... 86 Figure 14. Risk analysis results – Worst scenario – ENPV and EIRR ........................................................................ 87 Figure 15. Risk analysis results – Best scenario – benefits ...................................................................................... 88 Figure 16. Risk analysis results – Best scenario – ENPV and EIRR ........................................................................... 88 5

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Executive summary Three elements have to be distinguished in assessing the value of the Olympics. They are related to each other but very different in conception, interpretation and measurement: financial sustainability analysis, analysis of economic advantage and impact analysis. From the financial point of view, we see a responsible entity, the Organising Committee, a number of coordinated entities, the most important of which are the many institutions involved at national, regional and local level, and all the private entities concerned, such as TV broadcasters, construction companies, various sponsors, etc.. Each of these entities has its own financial plan, based on the pursuit of its economic objectives, the constraints on the availability of its resources and its operating plan. Although the problems faced by the Coordinating Committee are often stressed, it is equally important to assess the financial sustainability of the other entities’ plans. This assessment should not be confused with the analysis of the economic convenience of the event, which consists in weighing its benefits and costs from the point of view of the entire population of the country. While refraining from entering into the maze of the interests of the many entities concerned and of the reasons for the financial analysis, our study seeks to conduct a preliminary analysis of the economic convenience of the event on the assumption that the Games take place in Rome, and an economic impact analysis. The purpose of the latter is to complete the cost-benefit analysis using an economic model based on the most up-to-date statistics in order to simulate the effects which the investment projects implemented, , the preparatory works and the celebration of the Games would have on the local and national economy. In fact, investments in the Olympics consist of a large number of public projects of different kinds and of various degrees of inter-dependence, which include new buildings, improvements to already existing infrastructures, the supply of residential accommodation and residential services and the rescheduling of routine projects to adapt them to the special opportunities provided by the celebration of the Games. All these capital investments are opportunities that the Olympics offer in addition to the opportunity to host the Games for the city selected . The economic assessment, therefore, must first confront the problem of distinguishing the value of hosting the Games from the value of the works necessary to do so. The separation of these two elements determines an important complementary relationship in the economic assessment. On one hand the effects of the infrastructural works and of the other investments made because the Games are held have to be examined, and the expectations raised analysed. On the other hand, consideration is to be given to the fact that the Games themselves have an economic impact on the city and the country, which transcends the effects of the individual facilities and is due to the synergy and success of the Games as a cultural event with a planetary scope. In some ways the infrastructures and the Games are reflections of a more profound dualism which tends to be attached to big events, namely the reconciliation between local and global assets which culture is able to make. In this study we conducted an analysis of the economic consequences that the celebration of the 2024 Olympics in Rome would have on the host country with the following objectives: 1. To develop a reliable economic model capable to simulate the effects of specific events and the infrastructures related to them; 2. To develop specific methodologies for the assessment of the net benefits of the Olympics as a spectacle; 3. To identify and measure the net benefits of the intangible goods produced by the event, such as the pride taken in the Games by the inhabitants of the host country and the opportunity for viewing and practising sport provided by the Olympics and the related infrastructures in the short and long term; 4. To identify and measure the net benefits and economic effects of the preparatory works, the celebration of the Olympics and the completion of the related infrastructures using appropriate quantitative methods in compliance with the highest international standards in terms of state of the art and scientific rigour. We have conducted the analysis on the basis of prudent assumptions, applying the principle that the economic effects are to be assessed, by always comparing them with a realistic counterfactual situation (what would likely materialize in the case of the award of the Olympics to another city), and therefore not attributing benefits or costs to the celebration of the Games in Rome, which would presumably be obtained in their absence as well. Additionally, in order to make prudent estimates we did not consider some benefits, such as citizens’ willingness 7

to pay to host the Olympics, in order to assess which we will only be able to use the results of a survey in progress in a few months’ time. The results of the analysis conducted in this manner suggest that holding the Olympic Games in Rome in 2024 would, in all probability, be a positive economic event, both in terms of cost benefit balance and, more generally, owing to the favourable effects it would have on the local and the national economy in the short and long term. These positive effects extend to increases in aggregate gross domestic product (GDP) business’ and households’ incomes public finances and employment.

Economic value of the Games This analysis considers the Olympic and Paralympic Games as a cultural product in the form of competition in a host city, among athletes of international level, conducted in accordance with established and formal traditions and rules. Cultural events, including buildings and infrastructures with historical, symbolical and identity connotations, belong to the category of goods for which the market is unable to provide an efficient delivery. While individuals attribute them a positive value, these goods, which fall under the category of public goods are not adequately supplied by the market because, unlike private goods, they can be shared and individuals cannot be easily excluded from their consumption. In general the economic assessment of a project, producing public goods, such as the Olympic Games, can be broken down into two separate parts: analysis of impact (or analysis of its economic effects) and cost-benefit analysis, that is to say the attribution of monetary values to these effects and the construction of an economic balance sheet, with the indicators of the viability and profitability of the project seen as a collective initiative. The purpose of an economic evaluation of the Olympics and Paralympics is to assess the significant effects of the event and the benefits and costs that present or future consumers derive from them. The assessment seeks not only to estimate a direct economic benefit (the expectation of receiving a benefit, present or deferred over time) but also the social and cultural values generated by the project being considered. In other words, the entire range of values attributable to the Games falls within the scope of an economic assessment if it is translated into individual benefits (or costs). A large part of these values, furthermore, are not related to the use of the Games, i.e. to participating in or enjoying the Games event as a consumer spectacle, but to the effects, which are often intangible, which they have on the population’s well-being and on the individual, social and economic conditions. Hence the economic assessment of the Rome 2024 Olympic and Paralympic Games that is developed in this study seeks to determine the impact of the Games on the quality of life of the citizens involved, assessing their direct, indirect and induced effects, compared with the so-called counterfactual alternative and, at the same time, drawing up an economic balance of the individual costs and benefits which correspond to these effects. The counterfactual alternative considered is what would happen in the Lazio Region area if the Games were not hosted in Rome. Most assessments of the Olympics conducted up to now are based on an impact analysis, which tries to recognise and measure the effects of the preparation and celebration of the Games in the host country both before and after the event. These effects have rarely been translated into an economic cost-benefit analysis, which has often given rise to confusion between the economic and the purely financial evaluation of the event. This study, on the other hand, has chosen to develop an economic evaluation which uses the latest methods of quantitative analysis and operational research. This evaluation allows the integration of cost-benefit analyses into economic impact assessments, considering effects, benefits and costs of Olympics in Rome, Lazio Region and Italy, while drawing up an economic balance in terms of profitability and economic advantage. Table 1 below shows the initial data (input) of the expected expenditure and financial coverage for the preparatory works and for the celebration of the Games.

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Table 1. Preliminary Financial Analysis of the Public Component

Costs Investment costs Unexpected events (35% of investment costs) Operating Costs Returns National sponsorship Merchandising Tickets for Italian spectators Tickets for foreign tourists IOC contribution Benefits from the Olympic Village Public investments already planned Estimated tax revenues as a result of the Games Public contribution for unexpexted events Public contribution

3,897.44 1,364.1 2,184.22 615.25 73.78 345.86 94.76 1,046.02 78.02 2,211.58 1,150.57 1,364.1 465.82

Note: millions of euro: values discounted at 2017 values at a discount rate of 5%

The results of our cost-benefit analysis are summarised in Table 2, which presents the details of the estimates of the individual components according to three scenarios:  base scenario (more probable);  pessimistic scenario (worst);  optimistic scenario(best). The economic values directly and/or indirectly generated by the Games are taken into account in this costbenefit analysis, including investment costs, operating costs, external costs, the symbolic values associated with the so-called “Olympic aura” and the direct values and options created by the sports and civil facilities and infrastructures. All the values are measured at economic prices (shadow prices) in the analysis, which take account of both market prices when they exist and the actual opportunity costs of the goods and services (marketable and non-marketable), net of distortions caused by taxation, grants and market imperfections. Our economic assessment of the Games as an investment project finds that the indicators are positive in all cases: in the base scenario of 2017 they amount to an Economic Net Present Value, as calculated at a discount rate of 5%, equal to 2.9 billion Euro, with an Economic Internal Rate of Return of 31.09%. Both our consideration of the other scenarios and our risk analysis show that these estimates, based on very prudent assumptions, are robust and that the economic net present value is still positive even in most of the unfavourable scenarios.

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Table 2. Economic Net Present Value of the Games Economic indicators

Investment costs Overrun costs Congestion costs Security costs Operating costs of the event Total Costs Existence value Macroeconomic benefits Benefits from the Media National Sponsorship Merchandising Ticket surplus Tickets for italian spectators Tickets for foreign tourists IOC contribution Sport practice option Social inclusion option Olympic Village benefits Total Benefits ENPV EIRR

Base scenario

Worst scenario

Best scenario

1,050.79 367.78 203.05 676.84 1,937.64 4,236.1 107.96 2,676.08 482.45 615.25 73.78 763.47 345.86 94.76 1,046.02 532.34 245.02 139.09 7,122.08 2,885.98 31.1%

1,050.79 367.78 203.05 676.84 1,937.64 4,236.1 107.96 1,637.57 192.99 615.25 -67.68 381.74 345.86 94.76 1,046.02 159.7 73.5 69.54 4,657.21 421.11 10.4%

1,050.79 367.78 203.05 676.84 1,937.64 4,236.1 107.96 2,676.08 1033.2 615.25 147.55 763.47 345.86 94.76 1,046.02 1,064.68 490.03 139.09 8,523.95 4,287.85 41.4%

Note: Differential values with respect to the situation without the Games; millions of euro discounted at 2017 values at a rate of 5%

Economic Impact of the Games The economic impact of the investment in the Olympics consists of bringing additional resources into action which would not be used in the most probable alternative scenario. In monetary terms, we estimate these resources as the difference between 5.58 billion euro expected to be invested and the expenditure planned for the part of the same infrastructures already included in the public programmes for the same years (2017-2023) for Rome and the Lazio Region, amounting to 4.03 billion euro. Using these figures, we have conducted an impact analysis using an economic model based on the estimate of a Social Accounting Matrix (SAM). Using this method, the net effects on Lazio Region Value Added are about 4 billion euro, 3.3 billion euro of which in the Rome metropolitan area. Given these values, the total incremental contribution to the increase of GDP in the Lazio Region, including Rome, is over 2.4% during the construction period (2017-2023), with an annual average of around 0.4% and a substantial acceleration of growth, compared with the most probable scenario without the Olympics (Table 3 and Figure 1).

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Table 3. Net Value Added generated in Investment period

Scenario with Scenario without Difference the Project the Project Value Added Household Income Tax Revenues GDP increase/year Total employment - construction period Annual employment - construction period

14,561 10,708 3,199 1.4% 177,408 29,568

10,599 7,804 2,331 1.0% 129,408 21,568

3,961 2,904 867 0.4% 48,000 8,000

million euro million euro million euro % jobs jobs

Source: data processed by OpenEconomics

Figure 1. Value Added generated in the Lazio Region and Rome Unskilled labour - Lazio Region (excluding Rome) 1%

Value Added

Capital – Rome 45%

Capital - Lazio Skilled Region labour (excluding Lazio Region Rome) (excluding 9% Rome) Unskilled 7% labour – Rome 4%

Skilled labour – Rome 34%


If the effect on Income and consequently on Household consumption is considered, net impact turns out to amount to 2.9 billion euro, while businesses benefit for about 1.7 billion. If the effects on tax revenues are also considered at central and local level, the net impact is estimated to be 868 million euro (table 4).

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Table 4. Impact on the Lazio Region and Rome Institutions Scenario Scenario with Net without the the Project impact Project 381.1 277.7 103.4

Institutions Households 1 Households 2

858.4

625.6

232.8

Households 3

899.3

655.6

243.7

Households 4

1,424.5

1,038.3

386.3

Households 5

1,770.8

1,290.8

480.0

Households 6

1,877.6

1,368.5

509.1

Households 7

3,496.5

2,547.4

949.1

Businesses

6,186.9

4,495.1 1,691.8

Central Government

1,868.0

1,361.6

506.5

Local Government

1,330.6

969.6

361.0

Total

20,093.8

14,630.2 5,463.7

Source: data processed by OpenEconomics. Data in millions of euro

Finally, the net effect on production is about 9 billion euro, with a strong preponderance (5.68 billion) of the impact on services activities, which are also the fundamental element in the local economy of Rome metropolitan area. Table 5 summarises the economic effects estimated by the SAM model, while the Appendix shows the sectoral details of the impacts. Table 5.Impact on Production in the Lazio Region and Rome Production Agriculture

Scenario with the Project 256.6

Scenario without the Net impact Project 187.5 69.0

Industry

4,048.0

3,169.9

878.1

Construction

2,882.0

1,903.3

978.8

Trade

4,233.8

3,113.3

1,120.5

Accommodation

894.3

650.4

243.9

Other services

20,473.6

14,785.4

5,688.2

Total

32,788.4

23,809.8

8,978.6


Another major impact generated by investments in the construction period is that on direct, indirect and induced employment. The estimated effect on employment considering a 6-year construction period is about 48,000 new jobs in the whole period, about 40,000 of which in the Rome area, with an annual average of about 8,000 jobs, more than 7,000 of which in the Rome area (Table 6). The increase in employment would be added to a forecast average increase of about 27,000 jobs per year which would also be created if the Games were not to be held in Rome, provided that the public infrastructures plan for Rome already in the pipeline is implemented. Although we have not quantified the corresponding benefit, this plan is presumably more likely to be carried out if the Games are awarded to Rome. Furthermore, in the post-Olympic period, the economic model that we used projects more than 9,000 additional permanent jobs (Table 7). This rise would appear to be the consequence of an increase in the efficiency of infrastructures (especially sports infrastructures) and the expansion of the services and economic activities connected with them. Table 6 and 7 shows some details of the results, while the Appendix shows additional details of results broken down by sector.

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Table 6. Annual employment generated in the construction period (labour units) Employment in the construction period

Scenario with the Project annual

Unskilled labour - Lazio Region (excluding Rome) Skilled labour - Lazio Region (excluding Rome) Unskilled labour – Rome

total

Scenario without the Project annual

total

Net employment annual

total

693

4.159

506

3.039

187

1.121

4.196

25.174

3.065

18.392

1.131

6.781

4.149

24.896

3.015

18.087

1.134

6.809

Skilled labour – Rome

20.530

123.180

14.982

89.890

5.548

33.291

Total

29.568

177.409

21.568

129.408

8.000

48.001


Table 7. Economic impact in the period of full operation

Value Added Household Income Tax Revenues GDP increase/year Annual employment – period of full operation

726 million euro 835 million euro 331 million euro 0.4% 9,117 jobs

Source: data processed by OpenEconomics – annual data

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1 1.1

Assessment of the Rome 2024 Olympics Investment costs

The works that are to be carried out in order to host the 2024 Olympic and Paralympic Games in Rome cover a wide range: on one hand projects exclusively dedicated to the sports event and on the other hand investments necessary both for the Olympics and Paralympics themselves and the city, residents and visitors. The infrastructural projects have been analysed and their cost components determined considering three types of investments: sports infrastructures, non-sports infrastructures directly devoted to the Games and non-sports infrastructures serving the city. The construction period is expected to cover a period of time from 2018 to 2023. The total cost of the works thought to be necessary for the delivery of the Games is 5,6 billion euro. Table 8 summarises the expected expenses for the two scenarios. Table 8. Investment Costs Sports facilities Homes

1,704,181,818 801,000,000

Green spaces

85,090,909

Media centre

254,545,455

Roads

30,818,182

Logistics centres

5,454,545

Hotels

1,363,636

Roads

1,400,000,000

Railways

1,400,000,000

Total

5,682,454,545

Source: Commissione di Compatibilità Roma 2020 - preliminary analysis Roma 2024 Committee. Values in euro

1.1.1 Sports infrastructures The facilities to build new or to upgrade are: - Athletics in Olympic Stadium; - Acquatics in Foro Italico Park; - Tennis in Tor Vergata (temporale structure); - BMX in Tor Vergata; - Volleyball and Gymnastics between Palazzo Sport EUR and Tor Vergata (Temporary) ; - Basketball in Tor Vergata Complex; - Handball in Tor Vergata Complex; - Rowing/Canoe/Kayak in the Natural Water Sport Park (Fiera di Roma); - Fencing, Judo, Weightlifting, Wrestling, Table Tennis, Boxing, and Badminton in Fiera di Roma; - Sailing in Cagliari; - Beach Volley at Circo Massimo; - Archery at Fori Imperiali and Caracalla Stadium; - Equestrian disciplines at Pratoni del Vivaro and Villa Borghese; - Rugby Seven and Pentathlon at Flaminio Stadium; - Golf at Marco Simone Golf Club; - Hockey at Tre Fontane Stadium: - Football in Rome and other 10 Italian cities. The total cost of all the above works is 1.70 billion euro, about 1.18 billion euro of which for permanent facilities (Capex) and 0.54 billion euro for temporary or removable facilities (Opex). Table 9 summarises the costs.

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Table 9. Investment costs for sports facilities SPORT VENUES

OLYMPIC/PARALYMPIC SPORT DISCIPLINE

Cost of permanent works (CAPEX)

Cost of temporary works (OPEX)

COST

Aqua ti cs Swi mmi ng Aqua ti cs Synchro Foro Ita l i co Cl us ter

Modern Penta thl on Swi mmi ng Aqua ti cs , Wa ter Pol o

159.545.455

112.363.636

271.909.091

762.954.545

70.772.727

833.727.272

180.000.000

81.945.455

261.945.455

22.727.273

42.045.454

64.772.727

93.318.182

93.318.182

57.272.728

145.727.271

203.000.000

1.182.500.001

546.172.726

1.728.672.727

Aqua ti cs Di vi ng Athl eti cs Ba s ketba l l , Wheel cha i r Ba s ketba l l Ha ndba l l , Goa l ba l l Cycl i ng, BMX, Cycl i ng Tra k Tor Verga ta Cl us ter

Tenni s , Wheel Cha i r Tenni s Vol l eyba l l Fi na l Gymna s ti c Arti s ti c Prel i mi na ry, Gymna s ti c Tra mpol i ne Wheel cha i r Rugby Ba dmi nton, Ta ekwondo, Bocci a Boxi ng Fenci ng, Wheel cha i r fenci ng Judo, Wres tl i ng

Fi era di Roma Cl us ter

Ta bl e Tenni s Wei ghtl i fti ng, Power Li fti ng Aqua ti cs Swi mmi ng open Wa ter Ca noe/Ka ya k fl a t wa ter, Rowi ng Ca noe/Ka ya k/s l a l om Vol l eyba l l Prel i mi na ry 2 Gymna s ti c Rhythmi c

EUR Cl us ter

Vol l eyba l l s i tti ng Hockey Footba l l 5 a nd 7 a s i de Tri a thl on Eques tri a n jumpi ng Eques tri a n dres s a ge Archery Fi na l

Ci ty Centre Cl us ter

Cycl i ng Roa d/Ti me Tri a l Ma ra thon/ra ce Wa l k Arri va l Archery Prel i ms Bea ch Vol l eyba l l Cycl i ng Mounta i n bi ke Eques tri a n Cros s Country, Eques tri a n Footba l l Prel i mi na ry Footba l l Fi na l

Other s porti ng venues

Vol l eyba l l Prel i mi na ry 1 Gol f Modern Penta thl on, Fenci ng, Shooti ng, Ra i d run Rugby s evens Sa i l i ng Shooti ng

Total Investment Costs

Source: Rome 2024 Organising Committee. Values in euro

15

1.1.2 Non-sports infrastructures The main item of cost and construction work for creating non-sports facilities is without any doubt the Olympic Village. The area chosen is that around the Tor Vergata University campus. It is planned to sleep 17,000 people in 4,250 flats which will be used after the Games to accommodate students, families of patients at the nearby University Polyclinic and residents. The only other expected permanent investment among the non-sport infrastructures is for the media centre, which will become a broadcasting centre for RAI (Italian public broadcaster) productions. The cost of these two projects is over 1 billion dollars, accounting for more than 80% of costs for non-sport works. The other permanent investment planned is the Olympic Village for sailing athletes, to be built in Cagliari. It is to sleep 800 in 200 flats. Also budgeted for is over 50 million dollars in indemnities for the use of common areas, airports and depots. Another cost item is that of logistics centres, stands round the hotels where the football teams stay and stands for the IOC Committee and for the press and at the airport and railway station. Other items are the expense of the hospitality village and the sponsors’ village, which will be built by the event sponsors and the organisation of the test events in the years before the Games, the estimated costs of which are 30 million dollars. The costs of the look of the Games, fitting out the sites and presenting the commercial spaces will also be paid by the sponsors. The Organising Committee is left with the cost of laying out the ceremonial spaces, while the last mile for connections with the utilities will be paid for by the Rome City Council. The Organising Committee will have to pay a total cost of about 1.17 billion euro for non -sports facilities (Capex), 226 million euro of which for temporary works (Opex) and the remainder for permanent facilities. Table 10 summarises the works to be executed and related costs. Table 10. Investment costs for non-sports facilities Cost of permanent works

Cost of temporary works

951,909,091

226,363,636

Source: Rome 2024 Organising Committee. Values in euro

1.1.3 The infrastructures serving the city The third category of investment costs is that of structural projects to optimise Rome’s public services and road infrastructures. These may be considered as works that would probably be completed within the period of time under consideration, regardless of whether Rome is awarded the Olympic Games. The projects include creating new security gates and controls and other works necessary for the security of the venues. The improvements to roads, railways and transport facilities in general consist above all of new dedicated bus platforms, bus connections and additional bus stops, temporary bridges and extraordinary road maintenance. All these works include projects already contained in Roma Capitale’s Strategic Development Plan for the 2025 Jubilee and/or under completion, for a total of about 2.8 billion euro for transport and mobility infrastructures and other urban plans. This cost is estimated to be equally divided beween the cost of road improvements and the cost of improvements to the railway and underground system.

1.1.4 Investments costs in the scenario without the Project A prudent assessment must also take into account the most probable alternative to the Olympics plan, i.e. the foreseeable investment scenario if the Olympics and Paralympics were not to be held in Rome. In the without the project scenario, which reflects this possibility, it was decided to consider the costs of all the works that are already in the pipeline, independently of the Games, i.e. 2.8 billion euro intended to finance the infrastructures serving the city. All the project are include in "Piano Strategico di Sviluppo di Roma Capitale Millennium Project" made by Roma Capitale Municipality in 2010. 16

Apart from these projects, in the scenario without the project, another 1.23 billion euro has been considered which would be spent according with the historical investment typology of the Lazio Region. This means that without the Games a part of the investments (net of the IOC contribution) would be made in any case but in works that are others than those necessary in order to hold the Olympics and Paralympics.

17

1.2

External costs

All the external costs are those of the negative spillovers of the Games and the activities associated with them. These costs may be classified under three broad categories: (i) congestion costs; (ii) security costs; and (iii) costs arising from unexpected events that occur while preparing or carrying out the activities involving the Games. As regards congestion costs, although the Olympics and Paralympics are concentrated in only one month, the events would probably have an unfavourable effect on traffic both in the city and on traffic entering and leaving the city. According to a comparative study5 of traffic in Italy, in 2008 the cost of congestion was 27 billion euro a year for about 8.5 million people living in the ten most populous cities. This is about 2% of GDP even without taking into account aggravating factors such as the cost of pollution other than CO2, public services or the depreciation of cars and other means of transport. Rome accounts for about 40% of total costs, with more than 10 billion euro and 2,500 euro per capita a year (more than 10% of per capita GDP), equivalent to about 6.8 euro per capita a day. Assuming that during the Olympic and Paralympic Games (considering six weeks of operations) congestion rises by an average of 18% (similar to the rise in traffic reported for the London 2012 Games), the individual cost would increase by about 1.22 euro per capita per day (51.4 euro for the whole period affected by the Games) and to about 150 million euro for the whole population gravitating around the Games (about 3 million). This estimate is not excessive if one considers the aggravating circumstances arising from pollution and also the heightened probability of mortal accidents, which is already greater in Rome than anywhere else in Italy. In order to estimate the loss of well-being that corresponds to this cost, the consumer surplus lost by passengers blocked in the traffic (or otherwise affected) has to be added. Assuming an elasticity of 1.56 of demand for time, the surplus may be estimated as about double the value of the cost of the time. The total negative benefit from the increase in traffic congestion which the Olympics and Paralympics would probably cause in Rome may therefore be quantified as about 300 million euro. There is no doubt that security costs may be substantial and that it is easy to underestimate them if the uncertainty and unfavourable trend of the general conditions of vulnerability in which mega-events take place are not borne in mind. For Boston, which recently withdrew its candidature, the costs of the security system were estimated as more than 1 billion euro7. Costs of this magnitude certainly appear to be plausible and should be considered, even if they will be covered by the State and will not be chargeable to the organisers either in whole or in part. Finally, the costs of unexpected events ( cost overruns), which are typically associated with public works in Italy but which have also been features of many Olympics and Paralympics, may be calculated indirectly, to a certain extent, through risk analysis. The experience of Games in the more recent past, especially Beijing and Athens, indicates that cost overruns should be taken into account even in an analysis based on the most probable estimates. For this reason, the cost estimated for the construction of the Olympic and Paralympic facilities and of any other supporting infrastructure that may be directly or indirectly involved in the Games, was increased by about 35% in the economic analysis, while considering, in this case as well, the difference between the scenario with the Project and the scenario without the Project. Table 11. External costs in economic values

Congestion costs Security costs Overrun costs Total

300 1,000 465 1,765

Source: data processed by OpenEconomics 5

Grillo F. & Laperrouze J. (2013) “Measuring the Cost of Congestion on Urban Area and the Flexible Congestion Rights”, Journal of Management and Sustainability; Vol. 3, No. 2; 2013. 6 This figure implies that passengers are willing to pay more than would be proportionate for a reduction in journey time, i.e. 15% more for a 10% time saving. 7 Assessing the Olympics, Preliminary Economic Analysis of a Boston 2024 Games: Impacts, Opportunities and Risks, https://www.tbf.org/~/media/TBFOrg/Files/Reports/Boston%20Olympics%20Report.pdf

18

1.3

Operating Costs

A preliminary analysis of operating costs have been estimated by the Rome 2024 Organising Committee and amount to 3.2 billion euro divided between Venue Infrastructure Operating Costs (temporary venues and renovating costs on already existing venues), Sport, Games Services & Operations, Technology, People Management, Ceremonies & Culture, Communications, Marketing and Look, Corporate Administration and Legacy, Contingency. Table 12. Operating costs Total Expenditures

3,227.08

Source: preliminary analysis Roma 2024 - to be further confirmed - Rome 2024 Committee. Values in Million euro

19

1.4

Net macroeconomic benefits to the Lazio Region

In order to calculate the macroeconomic benefits, the construction phase (2017 - 2023) must be distinguished from the period of full operation of the projects, which may last more or less time according to the utility and economic life of the investments concerned. In the case of the macroeconomic benefits in the construction period, the use of conversion factors and hence of shadow prices allows to include in the estimate of the economic costs the net effect, or at least part of it, deriving from the economic value of the factors used to implement the projects . For this reason, the economic costs of the construction period can be considered a prudent estimate including the macroeconomic benefits deriving from the impact multiplier effects of the projects considered. The tool used to estimate socio-economic impact is an Equilibrium Model based on Social Accounting Matrices (SAM), which provides the possibility of estimating the impact of a project both during the construction period and during the period of full operation as a result of the multiplier effects determined by expansion in the demand for goods and services triggered by project expenditure. A SAM records the flows between the different operators in the various phases of the economic process, such as production, distribution, consumption and accumulation of capital, showing their circularity. It is a matrix with a double entry system; the columns of the matrix by convention present the outflows (purchases), showing the structure of the payments of the aggregate considered with respect to all the other aggregates. The lines of the matrix represent instead the inflows (sales), thus showing the formation of the income of each aggregate against the payments received from all the others. Overall a SAM includes and presents the distributive and redistributive process of income as reciprocal and bilateral flows, presenting the accounts in the names of the institutional sectors on the basis of seven basic economic aggregates:



Primary production factors (Labour, Capital)



Households

    

Businesses Production sectors (Agriculture, Industry, Services) Government (Public Administration) Capital formation (Gross fixed public and private investments) Rest of the world (in this case Italy as an account for the rest of the country is also added)

Inflows and outflows are calculated for each production and institutional aggregate. Each of these blocks may also be further disaggregated along dimensions which depend on the objectives of the analysis. A SAM, therefore, is a tool which can provide a detailed description of the economy over a determinate period of time; it can also analyse how income is generated and distributed among households and how they use it. The Italian national SAM is constructed integrating the information shown in the input output tables with the data shown in the national accounts . The input-output matrix, which is the heart of SAM, is estimated by ISTAT (Italian Statistical Institute) periodically and is entered into the SAM directly. The institutional accounts (households, businesses, government, capital formation, rest of the world), in their turn, are entered into the SAM by means of a series of adjustment operations, such as the aggregation of the homogeneous accounts of the matrix in such a way as to identify the items entering and leaving the corresponding account and the balancing of each account in order to ensure the equilibrium of the system. Figure 2 shows a simplified representation of SAM.

20

Figure 2. SAM structure

CAPITAL REST OF HOUSEH BUSINES GOVERN SECTORS FACTORS FORMATI THE OLDS SES MENT ON WORLD SECTORS X X X X X FACTORS X X HOUSEHOLDS X X X X X X BUSINESSES X X X X X GOVERNMENT X X X X X X X CAPITAL FORMATION X X X X REST OF THE WORLD X X X X X X Source: OpenEconomics elaboration

A SAM allows the analysis of the effect of a project on the entire economic system by taking into account the relationships between all the activities in the system and the indirect effects of the increase in incomes available for consumption. The SAM used in the assessment of this study was estimated by adopting an innovative methodology that combines the RAS method with other estimation techniques based on the maximisation of entropy, in a framework which makes full use of the statistical information available and valorises the stochastic character of the information in the historical series utilised8. In addition to assessing direct and indirect impacts, this study used the SAM estimated to obtain estimates of the economic prices (shadow prices) of the various products, by evaluating the opportunity costs of the externalities and purging the market prices of the direct and indirect effects of the market distortions caused by imperfections in competition or public interventions (e.g. induced by taxes or tariffs). The estimation methodology to obtain the shadow prices is based on the so-called dual SAM form, and combines price estimates based on the structure of production costs and income distribution with the possibility of attributing the prices to goods for which there is no market, on the basis of replaceability criteria in production or consumption (Norton and Scandizzo, 1981)9. By using the SAM estimated as the core of a Computable General Equilibrium (CGE) Model and including elasticity estimates in the calculation algorithm, equilibrium scenarios may be constructed which respond to the stimulus to the economy deriving from the expenditure and investments necessary to stage the Games. The figure below reports the economic circuit shown by the CGE.

8

Scandizzo, P.L. and Ferrarese , C. (2015), “Social Accounting Matrix, a New Estimation Methodology”, Journal of Policy Modeling Norton R. and Scandizzo P.L. (1981), “Market Equilibrium Computations in Activity Analysis Models”, in Operations Research, vol.29, no.2. 9

21

Figure 3. Social Accounting Matrix Model

Along the above lines, in order to assess the socio-economic impact of the Rome 2024 Olympic and Paralympic Games, a regional model with 64 economic production sectors has been developed and estimated. These sectors include : 3 agricultural, 24 industrial and 37 services sectors, in addition to production factors , such as Labour (divided into skilled and unskilled) and Capital, institutions, distinguished into Households (divided into seven classes of income and consumption), Government (distinguishing central and local government), Businesses, Capital Formation, and Rest of the World, also including the sectors of trade with Southern Italy and the remainder of Central-Northern Italy. In order to represent the effects of organising the Games on Rome as accurately as possible, the regional model has been further extended by adding thesectors, factors and institutions of Rome metropolitan area (Roma Capitale) These include: Local Labour (skilled and unskilled) and Capital, Household income and consumption and the production of the sectors of construction, hotel and restaurant, transport services, information and communication services, real estate activities, professional activities, activities supporting businesses and public administration and art, leisure and entertainment activities.

1.4.1 Determination of shadow prices - Effects in the construction period In order to estimate the cost benefit analysis economic indicators, the financial data, expressed in constant market prices, have to be transformed into internal economic benefits and costs by multiplying (investment and operating) financial returns and costs by appropriate conversion coefficients. These coefficients, estimated by the SAM, allow market prices to be converted into economic prices (shadow prices), purging them of distortions, and to attribute social prices to public goods and to the other externalities for which no markets exist. Figure 4 summarises the process for estimation of internal costs and benefits.

22

Financial Returns

X

Conversion factors

Figure 4. Process for estimation of costs and benefits

=

Economic benefits

Financial Costs

X

Conversion factors

Internal costs and benefits

=

Economic costs

In this study shadow prices have been estimated by means of Social Accounting Matrices (SAMs), using the properties of the columns which present production cost structure by production sector and thus show the endogenous formation of the prices of the products, given the prices of the international goods and of the production factors. The sectors/factors whose prices have been assumed to be exogenous in the estimate are: Labour, Capital, Rest of the World, Rest of Southern Italy and Central-Northern Italy, Capital Formation and the sectors of internationally tradable goods. Table 13 shows the results of the simulation carried out by applying the SAM – Shadow Prices model. The table shows the conversion factor for each sector. This factor, which is the ratio between the shadow price and the market price, is the figure which, multiplied by the market unit value of the good, gives the good’s “economic” price. The figure also suggests the increase or decrease in price which should be made for each good or service in order to achieve an efficient allocation of resources.

23

Table 13. Conversion factors Sectors Mining of metal ores

Conversion factors 0.8280

Manufacture of fabricated metal products (except machinery and equipment)

0.8864

Manufacture of machinery and equipment NEC

0.8456

Manufacture of electronic components, boards, computers and peripheral equipment

0.8232

Manufacture of electrical equipment and non-electrical domestic appliances

0.8930

Manufacture of telecommunications equipment

0.8728

Manufacture of electro-medical instruments and equipment, measuring equipment, watches 0.8527 and clocks Manufacture of motor vehicles, trailers and semi-trailers

0.7953

Manufacture of other transport equipment

0.8227

Manufacture of furniture and other manufacturing, repair and maintenance

0.7779

Waste collection, treatment and disposal activities, materials recovery, etc.

0.8774

Electricity, gas, steam and air conditioning supply

0.8503

Water collection, treatment and supply

0.9475

Construction

0.8226

Wholesale and retail trade and repair of motor vehicles and motorcycles

0.8855

Wholesale trade, except of motor vehicles and motorcycles

0.8891

Retail trade, except of motor vehicles and motorcycles

0.8930

Accommodation and food service activities

0.8535

Land transport and transport via pipelines

0.8855

Sea and water transport

0.8823

Air transport

0.8596

Warehousing and support activities for transportation

0.8770

Postal and courier activities, telecommunications, publishing activities

0.9134

Financial service activities (except insurance and pension funding)

0.8971

Insurance, reinsurance and pension funding (except compulsory social security)

0.9143

Activities auxiliary to financial service and insurance activities

0.9088

Real estate activities

0.9860

Rental and leasing activities, travel agency, business support activities

0.9086

Production of software, consultancy and related activities, information and other information 0.8771 service activities Scientific research and development

0.8626

Professional activities

0.8975

Public administration and defence, compulsory social security

0.8575

Education

0.8794

Human health and social work activities

0.8689

Sewerage

0.8815

Activities of membership organisations

0.9120

Arts, sports, entertainment and amusement and recreation activities

0.9158

Other service activities

0.8811

Activities of households as employers of domestic personnel

0.8612


24

1.4.2 Impact in the construction period Rome’s candidature, for which investments costs of 2.88 billion euro are expected, is based on a strategy of the maximum utilisation of existing and temporary facilities (in all 85% of the facilities for the event). In fact, with reference to sports facilities, the Project only provides for the construction of two new permanent facilities, the Natural Water Sport Park and the cycling arena at Tor Vergata, in addition to the completion of works that have already started such as the multi-purpose Calatrava facility at Tor Vergata. Investments also cover: 

The construction of some temporary facilities that can be removed and/or reused in the same local area (e.g. Volleyball, Tennis, Beach Volleyball);  Temporary installations in existing facilities (e.g. New Rome Fair district) and in some historic sites;  Improvements to big city facilities (Parco del Foro Italico park and the EUR Palazzo dello Sport building, Flaminio Stadium);  The refurbishment of many basic and school facilities as training grounds for all sports disciplines;  Maintenance work on the football stadiums of the 10 cities in which matches will be played in an amount of 45 million euro. This plan also provides for the construction of non-sports works, the most important of which is the Olympic Village with as many as 17,000 beds, which will be left for use to the citizens of Rome and the Tor Vergata campus; a major cost item among the other non-sports works is the RAI (Italian public broadcaster) media centre while other works are temporary and strictly associated with the Olympics. Other consist on smartening up the appearance of the city, accessibility for people with disabilities, cycle tracks and contributions towards improvements to hotels. It also has to be considered that a number of urban infrastructure and mobility works included in the Roma Capitale’s Strategic Plan – in an amount of about 2.8 billion euro - and also necessary in view of the Jubilee in 2025, will serve for the organisation of the Games.

1.4.2.1 Determination of expenditure vectors An expenditure vector is a disaggregation of the cost of the investment being assessed into the producing sectors, i.e. the sectors whose revenues during the construction phase arise from the direct and indirect costs of carrying out the investments planned. Various types of expenditure vectors for complex projects have been reconstructed from the OpenCoesione project database10 in order to estimate the expected cost components for the Rome 2024 Games according with the ATECO (Italian classification of economic activities) codes. These costs include:   

Railways for the construction of railway and tramway lines; Intermodal port/logistics for the construction of commercial districts; Tangible investments for the construction of facilities and the creation of spaces for sports activities, leisure and cultural centres, information and reception centres, accommodation facilities and green areas;  Rehabilitation of urban areas (1) for street furniture plans;  Rehabilitation of urban areas (2) for reclamation and regeneration of public parks and gardens;  Regional and local roads, for the construction of road transport infrastructures;  Enhancement of cultural assets for the restoration and extraordinary maintenance of buildings of historical and cultural value. The details of the two scenarios, with and without the Project, are reported in Table 14 below. An amount of 41 million euro for improvements to football stadiums in cities other than Rome and an amount of 61.5 million euro for the construction of the Olympic Village for the sailing athletes to be built in Cagliari have been subtracted from total investment costs.

10

http://www.opencoesione.gov.it

25

Table 14. Scenarios with and without the Project Scenario with the Project Sports facilities Homes

Scenario without the Project

1,663.27 Historical investment 739.55

Green spaces

85.09

Media centre

254.55

Roads

1,234.64

30.82

Logistics centres

5.45

Hotels

1.36

Roads

1,400.00 Roads

1,400.00

Railways

1,400.00 Railways

1,400.00

Total

5,580.09 Total

4,034.64

Source: Roma 2024 Committee Piano Strategico di Sviluppo di Roma Capitale - Millennium Project - data processed by OpenEconomics. Data in millions of euro

Tables 15 and 16, respectively, show details of the costs according to the ATECO sector classification of the scenario with the Project (i.e. if the Games are held in Rome) and without the Project. Table 15. Expenditure vector of the scenario with the Project

ATECO sector

Expenditure

Manufacture of other non-metallic mineral products

161.0


619.3

Construction Manufacture of telecommunications equipment

2,691.6 70.0


120.9


305.0


89.4


19.2


812.8


690.8

Manufacture of telecommunications equipment Total

0.3 5,580.1


The forecast of expenditure in the scenario without the Project consists of a mix of investments: those already planned for transport and services for the benefit of the city and the remainder in accordance with the historical profile of investments made in the Lazio Region.

26

Table 16. Expenditure vector of the scenario without the Project ATECO sector Other mining and quarrying Arts, sports, entertainment and amusement and recreation activities Real estate activities Professional activities Crop and animal production, hunting and related services activities Wholesale and retail trade and repair of motor vehicles and motorcycles Manufacture of wearing apparel and of articles in leather and of fur Construction Extraction of crude petroleum and natural gas, mining support service activities Manufacture of other transport equipment

Expenditure 0.2 24.0 77.0 328.1 0.5 44.5 0.7 1,769.6 0.5 9.1


166.8


132.4

Manufacture of telecommunications equipment Manufacture of rubber and plastics products Manufacture of leather and related products Manufacture of motor vehicles, trailers and semi-trailers Manufacture of paper and paper products Manufacture of electronic components, boards, computers and peripheral equipment Manufacture of machinery and equipment NEC

85.6 1.6 0.4 25.8 0.0 76.2 402.4


24.4


311.9

Manufacture of electro-medical instruments and equipment, measuring equipment, watches and clocks

9.6

Manufacture of wood and of products of wood, manufacture of articles of straw and plaiting materials (except furniture)

3.9

Manufacture of tobacco products

0.0

Manufacture of food products and beverages

0.7

Manufacture of textiles

3.3

Mining of metal ores Rental and leasing activities, travel agency, business support activities Fishing and aquaculture Production of software, consultancy and related activities, information and other information service activities Printing and reproduction of recorded media Total

4.6 436.7 0.0 92.0 1.9 4,034.6


1.4.2.2 Net effects of the investments to be made In order to make a rigorous assessment of the impact generated by the investment to host the 2024 Games during the construction period, it also has to be considered what would happen in an alternative scenario, namely if the Games were not to take place in Rome. Assuming an expenditure of 5.58 billion euro for the Olympic Project and a counterfactual expenditure of 4.34 billion euro, the net effects on Lazio Region Value Added11 are estimated at about 3.9 billion euro, 3.3 billion euro of which in the Rome metropolitan area. The following tables and figures show Net Value Added broken down into its individual components. The total incremental contribution to the increase of GDP in the Lazio Region, including Rome, is over 2.6% during the construction period, with an annual average of around 0.4%. This figure suggests a substantial acceleration of growth compared with the scenario without the Olympics. The table and the figure below show the details of the creation of the Net Value Added.

11 Gross Value Added, at current basic prices contributes to Gross Domestic Product (GDP) according to the following realtion: GVA (at

current basic prices; available by industry only) plus taxes on products (available at whole economy level only) less subsidies on products (available at whole economy level only) equals GDP (at current market prices; available at whole economy level only).

27

Table 17. Net Value Added generated in the Lazio Region and Rome With the Project

Value Added Unskilled labour - Lazio Region (excluding Rome)

Without the Project

Net value

104.0

76.0

28.0

Skilled labour - Lazio Region (excluding Rome)

1,006.9

735.7

271.3

Capital - Lazio Region (excluding Rome)

1,348.8

989.4

359.3

622.4

452.2

170.2


4,927.2

3,595.6

1,331.6

Capital – Rome

6,551.3

4,750.3

1,801.0

14,560.5

10,599.1

3,961.4

Unskilled labour – Rome

Total


Figure 5. Value Added generated in the Lazio Region and Rome Unskilled labour - Lazio Region (excluding Rome) 1%

Value Added

Capital – Rome 45%

Capital - Lazio Skilled Region labour (excluding Lazio Region Rome) (excluding 9% Rome) Unskilled 7% labour – Rome 4%



If the effect on Income and consequently on Household consumption is considered, net impact turns out to amount to 2.9 billion euro, while businesses benefit for about 1.7 billions. If the effects on tax revenues are also considered at central and local level, the net impact is estimated to be 868 million euro (table 18).

28

Table 18. Impact on the Lazio Region and Rome Institutions Scenario Scenario with Net without the the Project impact Project 381.1 277.7 103.4

Institutions Households 1 Households 2

858.4

625.6

232.8

Households 3

899.3

655.6

243.7

Households 4

1,424.5

1,038.3

386.3

Households 5

1,770.8

1,290.8

480.0

Households 6

1,877.6

1,368.5

509.1

Households 7

3,496.5

2,547.4

949.1

Businesses

6,186.9

4,495.1 1,691.8

Central Government

1,868.0

1,361.6

506.5

Local Government

1,330.6

969.6

361.0

Total

20,093.8

14,630.2 5,463.7


Finally, the net effect on production is about 9 billion euro, with a strong preponderance (5.68 billion) of the impact on services activities, which are also the fundamental element in the local economy of Rome metropolitan area. Table 19 summarises the economic effects estimated by the SAM model, while the Appendix shows the sectoral details of the impacts. Table 19. Impact on Production in the Lazio Region and Rome Production

Scenario with the Project

Agriculture

256.6

Scenario without the Net impact Project 187.5 69.0

Industry

4,048.0

3,169.9

878.1

Construction

2,882.0

1,903.3

978.8

Trade

4,233.8

3,113.3

1,120.5

894.3

650.4

243.9

Other services

20,473.6

14,785.4

5,688.2

Total

32,788.4

23,809.8

8,978.6

Accommodation


Another major impact generated by investments in the construction period is that on direct, indirect and induced employment. The estimated effect on employment considering a 6-year construction period is about 48,000 new jobs in the whole period, about 40,000 of which in the Rome area, with an annual average of about 8,000 jobs, more than 7,000 of which in the Rome area (Table 6). The increase in employment would be added to a forecast average increase of about 27,000 jobs per year which would also be created if the Games were not to be held in Rome, provided that the public infrastructures plan for Rome already in the pipeline is implemented. Although we have not quantified the corresponding benefit, presumably this plan is more likely to be carried out if the Games are awarded to Rome. Table 20 and figure 6 show some details of the results, while the Appendix shows additional details of results broken down by sector.

29

Table 20. Annual employment generated in the construction period (labour units) Scenario with the Project

Employment in the construction period

annual Unskilled labour - Lazio Region (excluding Rome) Skilled labour - Lazio Region (excluding Rome) Unskilled labour – Rome

total

Scenario without the Project annual

total

Net employment annual

total

693

4,159

506

3,039

187

1,121

4,196

25,174

3,065

18,392

1,131

6,781

4,149

24,896

3,015

18,087

1,134

6,809


20,530

123,180

14,982

89,890

5,548

33,291

Total

29,568

177,409

21,568

129,408

8,000

48,001


Figure 6. Net annual employment generated in the construction period ( annual labour units) Unskilled labour - Lazio Region (excluding Rome) 2%

Employment

Skilled labour Lazio Region (excluding Rome) 14% Unskilled labour

– Rome 14% Skilled labour – Rome 70%


1.4.3 Impact in the period of full operation The SAM model has also been used to simulate the long-term effects of staging the 2024 Olympic and Paralympic Games in Rome. Events of this kind cannot be merely studied as the effect of an increase in the income of the persons directly involved because, as they have the potential to change the stakeholders’ production structure and behaviour, they could generate a significant effect on the structure of the SAM in terms of coefficients and multipliers. For this reason this analysis uses a method for the simulation of the effects which takes into account not only the multipliers of the greater expenditure flows from the investments during the period of full operation, but also those resulting from changes in the coefficients of the matrix. To be more precise, the traditional economic equilibrium model based on SAM is a derivation of the so-called Leontief open model according to the equation:

X  ( I  A)1 Y where Y è is an exogenous shock vector for the sectors, institutions and production factors represented in the matrix (investment costs in the construction period), X is the vector of the change induced in the levels of activity of these sectors, and A is the SAM matrix of the coefficients. These coefficients, down the columns of the matrix, express both the purchases of inputs on the part of the production sectors (final and intermediate products, products and production factors) and the purchases of final goods on the part of the various income categories of households and of the other institutions. Along the lines, on the other hand, the coefficients measure the incomes gained by each sector and institution from the other sectors and institutions. Owing to 30

this structure, a simulation of the effects which alter the structure of the economy is possible if a variation in the coefficient matrix is considered, according to the equation:

X  ( I  A*)1[(A) X  Y ] where A and A* are the SAM matrices, with and without the change respectively, and Y is the vector of the exogenous, long run changes in expenditure induced by the investment related to the Games. The greatest effects on the economy of the Lazio Region in the period of investment full operation will lie in a generalised improvement (which has been prudentially estimated as around 3%) in the productivity of the sport and leisure related sectors, which leads to an increase in Value Added as a consequence of the construction of a new generation of sports facilities. Additional effects are (1) changes in the behaviour of Households, which will spend more time and more money on cultural activities; and (2) an increase in tourism as a result of the marketing of the Games. In view of these assumptions, the long-term effects may be summarised in a synthetic indicator: an annual incremental average contribution to economic growth of 0.4% of GDP for the Lazio Region and the Rome metropolitan area during the 10 years following the Olympic event. The annual average Added Value generated in the period of full operation (table 21 and figure 7) has been estimated at more than 700 million euro in the Lazio Region, more than 65% of which in Rome metropolitan area (the details of the results are reported in the Appendix). Table 21. Annual Value Added in the period of full operation Value Added Unskilled labour – Lazio Region (excluding Rome)

2

Skilled labour - Lazio Region (excluding Rome)

22

Capital - Lazio Region (excluding Rome)

29


37


281

Capital – Rome

356

Total

726


Figure 7. Annual Value Added in the period of full operation Skilled labour Lazio Region (excluding Rome) 3% Unskilled labour – Lazio Region Capital – Rome (excluding 49% Rome) 0%

Value Added

Capital - Lazio Region (excluding Rome) 4%

Unskilled labour – Rome 5%



31

As a whole, households will benefit from about 800 million euro, while the net annual tax effect is estimated at more than 330 million euro. Table 22. Effects on the Institutions in the period of full operation Institutions Households 1

20

Households 2

58

Households 3

75

Households 4

118

Households 5

155

Households 6

166

Households 7

243

Businesses

-11

Central Government

221

Local Government

110

Total

1,154


In terms of effects on overall production, the accommodation sector will be the one which derives most benefit in the long term, while in spite of a slightly negative figure for the other sectors, a significant increase is estimated to occur in the sport and leisure related sectors (see the Appendix). Table 23. Effects on Production in the period of full operation Production Industry

7.9

Construction

-1.6

Trade

-8.0

Accommodation Other services Total

504.7 -8.6 494.4


Finally, the effect on total employment will be favourable, with over 9,000 permanent jobs per year being created during the years following the Games. Table 24. Jobs created in the period of full operation Employment in operational period Unskilled labour - Lazio Region (excluding Rome) Skilled labour - Lazio Region (excluding Rome)

90 538


1,471


7,018

Total

9,117


32

Figure 8. Jobs created in the period of full operation Unskilled labour - Lazio Region (excluding Rome) 1%

Employment

Skilled labour Lazio Region (excluding Rome) 6% Unskilled labour – Rome 16%



33

1.5 Intangible benefits 1.5.1 Olympic and Paralympic aura The celebration of the Olympics and Paralympics inside a metropolis is based on two concepts: endogenous growth and sustainable development. These concepts are related to a number of mechanisms which are autonomous, once they are triggered, in the sense that they are self-fuelling (endogenous growth) and at the same time they do not endanger their equilibrium (sustainability) over time by undermining their basis of natural, human or social resources. This makes it possible to ensure that development “does not devour itself”, harming the environment irreversibly or causing destructive economic and social crises. In addition to the strictly economic elements, the cities which seek the Olympic aura bring to the celebration of this global cultural event a range of natural factors (climate, landscape, the topography of the venues, the accessibility of the area) and cultural factors (pre-existing historical and archaeological sites, local traditions in art and culture, social behaviour).The quality of social life, but also the combination, which is harder to define, of the human resources necessary to spark off a sustained, self-standing and lasting process of growth, depend on this set of factors, on which in practice, the cities which compete to host the Olympics, base the fundamental aspects of their candidature as a cultural proposal. These local factors, on the other hand, are not merely a matter of city areas, however they appear to be well defined, like Rome or Paris. In fact as a location hosting the Olympics, a specific area is affected which we can describe as the Olympic area. This term designates a geographic, anthropological and cultural area which puts itself forward not only because it can host the Olympics materially but also as an area which has its own capacity for growth. Such an area implicitly claims to possess the resources and potential to make the Olympics give rise to a virtuous process of economic and sustainable development, not only from the material point of view but also from that of social inclusion, care for the environment and the participation of civil society. In the case of Rome, this area does not correspond to one or more administrative districts, such as municipalities or provinces but tends to fall within the boundaries of the Lazio Region, with its centre of gravity in the metropolitan area. Although the Olympics stand as a quintessential global public good, the candidature of the host cities depends on a further, not less important local aspect . This aspect concerns the organisation of the Games as a cultural event by the local institutions and private individuals , and should be seen as a projection of the sense of belonging, the need for social identity on the part of a community, fragmented in the functional and spatial divisions of a complex society It does not present itself as an artifice, nor as a construction, but as a natural expression of life. The local aspect is the primordial form of enjoyment of the Olympics, in which the athletes represented localities of Greece and the cosmopolitanism and the universalistic attitude were not alternatives to local culture, but a higher form of religiosity which enfolded and glorified it. In our days too, culturally speaking the Games are firstly consumed from the point of view of people’s own culture, their cognitive roots and only secondarily as participation in the myths of sport as a global form of popular religion12. Furthermore, the local context today is the place in which there are the greatest opportunities of rebuilding the Olympics as an instrument of cultural policy to associate with the integral development of the community. Seen from this viewpoint, it is the territorial dimension which prevails, which becomes the best possible one, since it gives rise to a type of bond across people , which is competitive and cooperative at the same time, with its common heritage of values, know-how and organisational capacity. The cultural assets which are produced and consumed under the umbrella of the Olympic Games, whether they belong to the tangible sphere (like sports facilities or infrastructures) or the intangible sphere (like the ceremonies and performances) thus have an important status in terms of civilised living, cooperation and social inclusion. This anthropological observation, however, is often obscured by the shadow of the ephemeral, the useless and even of the manipulatable which a certain positivist tradition has diffused widely in the second half of the last century and which continues to generate sceptical comments on the usefulness of the Olympics, as that of other cultural assets. These comments may serve to suggest caution regarding excessive enthusiasm and may improve the efficiency of these events, but must not let it be forgotten that culture, contrary to what this

12

Rizzotti, M. “The Olympic Games: Consecrating Globalization”, (2015), The Net Age, http://netage.org/2012/07/04/the-olympicgames-consecrating-globalization/.

34

tradition indicates, is one of the critical instruments of economic development, with which the practice of culture coincides and whose rapidity and social value it contributes to bring about. In the broader framework of culture, the Olympics constitute an exceptional opportunity for the area which hosts them, the opportunity of providing local roots for a global event whose origins and whose ideals, however many transformations they have undergone, go back to the beginning of Western civilisation. But what does the value of the Olympics as a cultural activity consist in? The apparent diffusion and incorporeality of cultural production contributes to the confusion on this subject. The value of the existence of the Games, that is to say the benefit that the community (not only the local community of the venues that host the Games, but also and especially that community), gains from the event, apart from the spectacle and the other features that consumers can enjoy, essentially depends on the fact that the Olympics are a historical reality which reproduces itself in the form of myths and narratives13, regarding sport like a secular form of popular religion. These stories do not necessarily breed knowledge, at least not in the sense of the rational accumulation of voluntary information, even if they can stimulate the practice of the arts (for example sculpture at the time of the Greeks, literature and the films created by Olympic events in more recent times), the reproduction or reiteration of art messages, the contemplation of the beautiful or the presentation of works by present or past artists. Without claiming to state a definition of their artistic value, perhaps some of their essential characteristics may be captured by looking at their economic qualities. From this point of view, it could be said that the Olympics, like other cultural assets, are an asset which can be enjoyed and accumulated in a particular manner, but also that they are at the same time a public good and a local and global good. To enjoy a cultural asset is a form of consumption that is very different from all other forms. Even more than the satisfaction experienced from the other forms of consumption, in fact, cultural products satisfy a need for something novel and surprising. They challenge the imagination and open the doors to a reality that is different from day-to-day reality. In this extraordinary reality, which one enters also, but not only, with art, the so-called principle of the “suspension of disbelief” holds sway. Within certain limits everything is possible, because for a moment we give up our control over rationality and relish the surprise of something gratuitous and ineffable. In order to enjoy cultural products, then, it is necessary to cultivate the capacity to surprise and be surprised, but this capacity inevitably wanes with the practice of culture. Sport, however, is sustained by a series of events which cultivate the unexpected. The enjoyment of sport, more than other cultural events, unlike consumer goods, the consumption of which, again by definition, destroys the good that is consumed, produces culture in its turn, both in the sense that it enables the person who enjoys a sport to do so in an increasingly conscious and refined manner and in the sense that it makes the production of further culture more likely and more efficient. So there is a virtuous circle in the production of culture which nature rarely presents us within other economic fields: after going over a certain critical level, culture comes onto a self-sustaining path to growth. And it is the attempt to spark off this virtuous circle which is at the root of the attraction of the Olympics as an event which can provide the momentum necessary for the development of a modern city and its surroundings. But why should the Olympics, which, after all, would appear to be an autonomous activity, destined to turn in on itself, have a part to play in the economic growth of a territory? The implicit idea is that even if this activity does not create tangible products directly, except ephemerally and, all in all, unproductively (i.e., as financial experts say, even if it has no fundamentals), it generates external effects which influence the productivity of tangible goods. These effects, which artists, men and women of letters and intellectuals produce indirectly and unintentionally and often disinterestedly, are also inspired by sport as one of the great collective myths. These effects consist in some key qualities which are essential for civilised living and for the production of civilisation itself: trust, freedom, justice, fair play, the sense of an individual and collective identity and, in the last analysis, the capacity to progress and be happy without letting oneself be swept away by egoism and anomie.

13

One Olympic historian tells us that “in literature--as in newspapers, folklore, proverbs, and gossip--Olympic performances are retold in a way that typically... accrues mythic, historical, literary, and religious motifs.” Another writes, “In the sports pages, particularly in sports columns, Americans read about a world far removed from the grubby, daily grind. Not only did athletic heroes perform amazing feats; they did it with a superhuman grace and courage.” In: Slater, J. (2013) “Changing Partners: The Relationship Between the Mass Media and the Olympic Games” Western Carolina University, USA

35

Perhaps in reality, but certainly in the collective imagination, the Games are a unique opportunity for economic growth for areas with the capacity to put themselves on the map as landmarks for the culture of sport and great global events. The benefit expected from their celebration in a particular place is a challenge to their qualities as a cultural asset and, especially, to their public nature. But the Games are also a relational asset, in the sense that they cannot be enjoyed outside a social context, which is the only vantage point from which their capacity to surprise and gratify can be perceived. At the same time they are not a voluntary asset; they can only flourish in favourable conditions, namely if they involve those who are engaged in producing or consuming them, either separately or simultaneously. The Olympics, however, are also eminently a local public good. They satisfy a need felt by the entire population and are staged thanks to the entire population’s production capacity, emerge from a specific framework of relationships and institutions and they cannot be celebrated in the absence of specific historical ingredients: these factors bind them to the local scene. The process that leads the local communities of various cities in the world to compete to be the venue of the Olympics, therefore, has an anthropological reason and also tends to transcend their practical capacity to prompt economic growth except in the sense that, as a planetary cultural event adopted by the genius loci, the Games are a source of identity. As such, they distinguish one community from the others and are consequently a mark of the success of its territorial base in economic competition, attracting residents and visitors to enjoy its friendly welcome and admire its qualities.

1.5.2 Non-use Values of the Games 1.5.2.1 Value of the Legacy of the Games as a Cultural Event The quality of the Olympics and Paralympics as a glocal public good has far-reaching consequences. First of all, as a public good they call for public responsibility. This, however, does not mean that the public sector can take them into its own hands without consultation: rather, the public sector’s role is to find the way to support the initiatives which the community takes through individuals and in total freedom. More than national institutions, it is up to the local institutions to take the responsibility for finding the most suitable instruments for this support technique, which must foster, stimulate, but not take the place of what civil society can produce independently. The he role of non-profit institutions like the organising committees, the IOC and the other sports and cultural institutions involved is also essential in all this. These institutions, in fact, are a private expression of public aspirations and, as such, entail elements of autonomy and public and private responsibilities. They do not interfere with the markets, as public institutions would, because they operate in compliance with private interests and are obliged to fall in with market rules both for their funding and their activities. As a local cultural growth project, then, the Olympics do not involve the execution of a centralised planning project, but are rather an experiment in the pursuit of social goals. What is referred to as the legacy of the Olympics is bound up with the Olympic aura of myth and representation, but in order to be a successful project it requires something more than a mere proliferation of local microinitiatives. More rigour is needed in order to prevent these from degenerating into ephemeral, foolish or bogus events, an attempt is needed to go beyond representation and complacency. In other words the Games must imbue the institutions with their qualities and must also form some institutions themselves if necessary. The Turin Winter Olympics in 2006 are an international point of reference which illustrates the function of the Olympics as a social promotion project centred on sustainability and the participation of the local communities. According to the conclusions of the retrospective assessment study of the event14, four characteristics make the Turin experience a case study of success as a case of social development: 1. A long-term strategy: in order for the Olympic Games to become an example of sustainability, they must be integrated in long-term local planning policies as soon as possible on the basis of sustainable development principles;

14

Frey, M. , Iraldo e Melis, M. (2008) “The Impact of Wide-Scale Sport Events on Local Development: an Assessment of the XXth Torino Olympics through the Sustainability Report”, Bocconi University, Working Paper no. 10.

36

2.

3.

4.

Partnerships for sustainability: sustainability is a collective effort and consequently strong public-private partnerships are essential. The Olympics can be a great opportunity to develop new forms of public-private partnerships, improve cooperation among public authorities and the support network of the various socioeconomic players involved in the event; A Sustainability Report: this can be a precious instrument for Games organisers committed to staging sustainable Olympics since it may make a contribution to analysing and making the most of the potential social benefits just as it may identify the risks and potential negative effects arising from the events. Using a sustainability report could also encourage and help the parties involved to make a structured commitment which would lead to an effective process of consultation among the players involved. In this, the Turin Olympic Committee’s experience may assist future Olympic Committees to understand what a sustainability report is, at the same time acting as a useful point of reference among experiences of largescale events; Giving a good example: large-scale events like the Olympics are global events which have the advantage of attracting great media attention, so they should be exploited as an opportunity for encouraging innovation and the actual implementation in the field of sustainable development. At the same time, the Olympics are the biggest opportunity for the members of the sport system to enhance and promote the social function of sport through a work of education, cultural initiatives and voluntary work programmes.

1.5.2.2 Existence Value of the Games as a Local Public Good Although the Olympic and Paralympic aura includes functional characteristics, the capacity to arouse emotions (the host nation or city’s Olympic pride) and the construction of social capital (e.g. in the form of shared sustainability practices), there appears to be substantial agreement in literature that its value may only be quantified through its Existence Value (EV), measured by a contingent valuation based on willingness to pay (WTP) declared in person-to-person interviews (see, for example, Boardman et al. 15). A study of the matter (Atkinson, 2008) suggests Existence Value estimates for the London 2012 Olympics of 20 euro per capita for the residents directly involved16. A recent IPSOS polling company survey showed that over 66% of Romans and 76% of the residents in the province of Rome appreciate Rome’s candidature for the 2024 Olympics. More generally, according to this survey, one can conclude that three-quarters of Italians are favourable to hosting the Games. Considering about 2 million adult residents between Rome and its province, assuming as a prudent estimate that 66% of them are willing to pay an average of 10 euro, the Existence Value would be about 13 million euro. This WTP only applies, however, to the core group of residents whose Olympic pride is directly aroused by the fact that the Games would take place in Rome. The residents of the other neighbouring localities not included in the province of Rome and all Italians in general, will also, to a certain extent, be willing to pay for the Existence Value of the Games in their country, Italy, even if their WTP will probably be lower. Assuming that such a WTP is only about 5 euro per capita on average for the whole remaining Italian adult population (about 38 million people), the result is a further Existence Value of about 146 million euro. These figures are low and prudent estimates, and indicate a likely minimum economic “existence value” of the Olympics if held in Rome. The amount deriving from Olympic pride and the other intangible characteristics associated with it (social capital, sustainability, etc.) should then be a once and for all value for the WTP of around 159 million euro (Table 25).

15

Boardman, Greening. Vining, Weimer (2001), Cost-Benefit Analysis: Concepts and Practice, Prentice-Hall, New Jersey. According to the results, the residents of London would have been willing to pay an average of 22 pounds, those of Manchester 12 and, finally, those of Glasgow 11. 16

37

Table 25. Existence Value of the Rome 2024 Games Residents

Satisfaction %

2,000,000

66%

1,320,000

10

13,200,000

Italy

38,000,000

77%

29,260,000

5

146,300,000

Total

40,000,000

Lazio Region

Residents WTP pro interested capita (euo)

30,580,000

Total WTP (euro)

159,500,000


1.5.3 Use Values of the Games 1.5.3.1 Benefits of the Games for Italy as host country The main problem in analysing the impact of the Olympics and Paralympics and their economic assessment lies in finding out whether and to what extent the host country receives a net benefit in terms of an improvement in the quality of life. This subject has already been partly dealt with as a component of the non-use value of the Olympics. Largely, however, the Olympics also generate use values in terms of facilities, spectacle and long-term benefits, which, however, are more properly considered as values that emerge from the consumption and other forms of direct and indirect enjoyment of the Games. Since the Olympics are an excellent example of a public good, non-rivalrous and non-excludable, but also of a cultural asset, they lead to an improvement in the quality of life not only in the country in which the Games take place but in all the participating countries. Nevertheless, both the possibility of gathering solid empirical evidence with regard to this point and the importance of the question puts the host country in front stage. Before attempting to assess the separate components of the impact of the Olympic Games on the economic system, it is interesting to have a quick glance at some recent findings of econometric studies which use the abundant historical material available today in order to estimate the macroeconomic effects of the Games. This brief review completes the review of the impact studies given in Chapter 2 and is directly relevant to an estimate of the various benefits of the Olympic Games on Italy as host country. In general, these studies appear to affirm an important truth, which risks to be overlooked by the examination of the separate effects of the Games: although the economic dimensions of the Olympics are relatively small compared with host countries’ economies, the aggregate effects, especially the macroeconomic effects and the effects on the big production sectors, may be substantial. Since Italy is at the same time an exporting country and a major international tourist destination, it is not irrelevant to observe that the positive effect on tourism is controversial, but various econometric studies suggest that the Olympics have a considerable impact on exports. Using the log-linear gravity model, for example, Rose and Spiegel17 obtain statistically robust and stable results of mega-events (such as, in particular, the Olympics and the World Cup) on exports. Surprisingly, the authors discover that even the non selected candidate countries experience a similar impact on their exports. This suggests that the international community interprets candidature for the Olympics as an opening signal which a country launches when it announces its participation in the bidding process rather than merely as an expression of its wish to host the Games. A recent study18 analyses if, and to what extent, a host country’s economy has seen improvements in the preand post-Olympic periods. Using econometric estimation methods on a dynamic panel, the study concludes that host countries benefit from a substantial additional GDP per capita growth effect (from 1% to 3%), which already begins when the success of the bid is announced, remains considerable up to the eighth year, and may last up to sixteen years after the event.

17 18

Rose, A. K. and Spiegel, M. M. (2011) “The Olympic effect”. The Economic Journal, 121 (553),652-677. Chong, T.L. and Hui, P.H. (2012) “The Olympic Games and the Improvement of Economic Well Being” Applied Research Quality Life.

38

Another just published econometric study19, also conducted on a panel of host countries, presents evidence of the fact that in spite of a nil or even negative effect on tourism, the Olympics have positive structural effects on GDP which helped to strengthen the countries’ economic growth and enhance the well-being of their inhabitants. Finally, a meta-analysis of 40 retrospective studies20 of the impact of the Olympics concludes that, regardless of whether the individual studies report, uncertain or negative findings, when considered as a whole the positive economic results tend to emerge to a good degree of statistical significance. Also worth mentioning is the research carried out by Kavetsos and Szymanski21. These authors use the results of a direct survey obtaining econometric estimates which show that there is a positive effect on the residents’ happiness as a consequence of the condition of a country that hosts mega sports events, rather than as a consequence of the victory of the nation’s athletes. To conclude, the more rigorous econometric literature available seems to suggest that the host country can count on a number of benefits thanks to the positive impact on the economy and that these benefits last for several years after an Olympic event has been held. Some of these, like a rise in exports, are direct parts of the macroeconomic impact. Others such as tourism, social well-being and happiness are more problematic because they are difficult to measure and because they emerge as differential effects, i.e. as benefits which are seen in comparing the relative performances of countries which have played the part of Olympic hosts and have seized the opportunities offered by the Games at the time in different ways. These opportunities appear to be, in many cases, the main legacy of the Olympics, especially in terms of the benefits, which strongly depend on the particular circumstances of the time and on the place where the Games take place. As opportunities, therefore, they should be assessed not only in terms of expected values, which may even be nil or negative (see, for example, tourism), but also in terms of “real option” values, i.e. benefits which may be seized if the circumstances are favourable enough. In the cost benefit analysis a prudent estimate of an increase in 0.1% per year of the country’s GDP has been considered; this is about one-tenth of the average value estimated in the studies that have been looked at and is consistent with the results of our impact analysis.

1.5.3.2 Benefits of the Games from the Media The first part of the cost-benefit analysis study assesses the benefits for the direct users of the project (spectators and businesses). For the Rome 2024 Games, all the individuals and businesses which are to make use of the Olympics and Paralympics as a live show or through the Media, and which will use the services of the sports and civil infrastructures that are created, may be considered as direct users. Direct users are distinguished from indirect users, i.e. those whose benefits (or costs) derive from particular circumstances, which see them as having a part in the consequences of the Olympics, even if, in principle, they are not among the entities directly involved. Direct users’ benefits have been estimated by means of the “consumer surplus” method, namely by assessing willingness to pay (in terms of actual sums paid or the opportunity costs of the time devoted to the media) net of the costs of time and money sustained by the users. For direct consumers, i.e. those who participate in the events as Media users, the benefits obtained with this method are a multiple of the direct costs (purchase and use of multimedia devices) and of the opportunity costs of the time spent watching the events on TV or through other multimedia devices (Appendix in point 4.1).

19

Demir, A. Z, Eliöz M., Çebi, M. and Yamak B. (2015) “The Economic Development and Tourism Effects of the Olympics”, Anthropologist, 19(3): 811-817 (2015). 20 Van EwijK, A. K. (2015) “The economic impact of hosting the Olympic games”, UVA , Amsterdam. 21 Kavetsos G. and Szymanski S. (2008) “The Impact of Mega Sporting Events on Happiness”, 8th Hamburg Symposium on Sports.

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Table 26. Benefits from the Media

Benefits of Olympics in Rome consumer surplus per capita - use

13.14

consumer surplus per capita – expenditure

1.00

total consumer surplus per capita

14.14

TV viewers – Italy

50,413,889

Total consumer surplus

712,852,390


Even though the estimates of consumer surplus are based on absolutely prudent assumptions and only consider the additional enjoyment of Italian viewers resulting from holding the Games in Rome, they show a large total value of the benefits from participating in the events through the media amounting to about 712 million euro. This is a substantial benefit, which could partly represent additional real income flows in subsequent years as well as an increase in the value of the enjoyment of sports events resulting from the experience of the Games. Prudently , only the effect generated in 2024 has been considered in this analysis.

1.5.3.3 Benefits of direct participation in the sports events Total receipts from the sale of tickets for the Olympic and Paralympic Games in 2024 may be prudently estimated as 650 million euro, about 511 million euro of which for Italian spectators and 140 million for spectators from other countries. Tickets have been classified in four categories according to price and the consumer surplus has been calculated for each category. For tickets sold to foreign visitors, the cost-benefit analysis (conducted from the point of view of Italy) only records the amount of revenues. Table 27 shows the results of the processing of these figures. Table 27. Estimated benefits generated from direct participation in the events Elasticity of demand

Consumer surplus

60

Millions of Euro 300

1.9

Millions of Euro 333

Consumer surplus + Revenues Millions of Euro 633

75

225

1.5

450

675

1.0

90

90

1.4

225

315

Parallel Market

0.3

120

36

1.3

120

156

Total Italian spectators

7.3

1,128

1,779

Tickets

Number

Price

Millions

Euro

1st Tier

5.0

2nd Tier

3.0

3rd Tier

Type

Total Foreign spectators

2

Revenues

511 70

140

140


The table shows that the total economic benefits from the sale of tickets are estimated as about 1.779 billion euro, about 3 times the nominal value of the tickets sold.

1.5.3.4 Benefits of increase in the practice of sport According to the most recent joint statistics published by the ISTAT and CONI (2014), in 2013 about 4.5 million athletes were registered with recognised sport federations, with an increase of about 1 million compared to 2003. Furthermore, according to the same source, 17.7 million Italians stated that they practiced sport and 16.6 40

million that they did a physical activity even if they did not practice a sport, while as many as 24.7 million stated that they are completely sedentary. Between 1999 and 2013 the percentage of the population who stated that they practised a sport regularly rose by about 3%, while the number of those who only did so irregularly fell. However, the percentage of sedentary people recorded a slight increase, passing from 41% to 42% in the period from 2003 to 2013. In Italy, however, 33% of adults do not reach the recommended levels of daily physical activity (World Health Organisation). The fact that the practice of a sport depends on example and role models is borne out by the difference between the percentages of young people who practise a sport and have at least one sporting parent (42%) and of those both of whose parents are non-sporting (32%). Also, as in the rest of the world, sport and physical activity are related to higher income, a higher standard of education and the most developed areas in the countries. The legacy of the Games, as far as sport practice is concerned, is to be considered above all as the creation of an opportunity to foster healthier lifestyles , and to spread sport among the categories of people who, for various reasons, tend to be excluded from this experience by economic and social constraints and to raise the state of health and longevity of the population. These opportunities are created by investment in sports facilities, new forms of encouragement to take up disciplines which are of minor importance but are nearer people’s needs and their possibility of practising them. They are also fostered, to a certain extent, by the example and glamour that surrounds the performances of the athletes who take part in the Games, which extends to a whole range of sports that are little known or followed by the public at large. The opportunities created by the Games may thus be considered as real options, whose underlying values (contingent benefits) corresponds to their objective and subjective advantages in terms of well-being. The prices for exercising the options, on the other hand, are the costs to pay to keep running the new sports facilities also after the Games have ended and the value of the time to devote to the sport activities involved. Table 28. Estimated parameters of the sport practice option values generated by the Games

Amount of operating costs of facilities Users - Italy Hourly cost of sport practice per capita Average hours of sport practice per year Exercise cost of the option Annual benefit to health per capita Use value of free time Average remaining sporting life Expected benefit from option

400 Millions of euro 82,500 numbers 10 euro 60 hours 895,000 euro 733 euro 21.6 euro 10 years 1,673,925 euro


In order to estimate healthcare costs per inactive person the estimated totals provided by various studies22 were used, first dividing them by the adult population and then multiplying by two factors: 0.33 to obtain the number of inactive persons and 10 for the average remaining number of years of sporting life. The social cost given by this procedure in euro at 2015 value is 733 euro per inactive person per year. Consequently the benefit which society would gain from transforming an inactive person into an active person 22

Wang G, Pratt M, Macera CA, Zheng ZJ, Heath G. Physical activity, cardiovascular disease, and medical expenditures in U.S. adults. Ann Behav Med. 2004;28(2):88–94.20. Pratt M, Macera CA, Wang G. Higher direct medical costs associated with physical inactivity. Phys Sportsmed. 2000;28:63–70. "L'impatto economico dell'inattività fisica in Europa", Centre for Economics and Business Research (Cebr) and ISCA (International Sport and Culture Association) (2015). World Health Organization Office for Europe. Health Economic Assessment Tool for cycling. http://www.euro.who.int/HEAT. Andersen LB, Schnohr P, Schroll M, Hein HO. All-cause mortality associated with physical activity during leisure time, work, sports, and cycling to work. Arch Intern Med. 2000;160(11):1621–1628.

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would be 733 euro per year of average life, in addition to the value of the free time devoted to the practice of a sport, while the cost would be the value of the time devoted to the activity and the operating costs of the facilities. The value of the option is determined bearing in mind that the benefit is “contingent” i.e. it is uncertain, as it depends on circumstances and individual, idiosyncratic and stochastic factors. Table 29. Sport practice option values* Volatility Option value (%) 20 778.93 30

786.51

40

857.04


* The analysis considers a 9-year American option, with interest rate and dividend of 5%.

1.5.3.5 Benefits of social inclusion An important benefit at economic level is also the social impact of the organisation of the Paralympics. Just as the Olympics encourage a number of potential sportsmen and sportswomen to take up a sport, the corresponding Paralympics may do the same for potential disabled sportspeople, with greater beneficial effects on their quality of life and social inclusion. According to the Italian Plan for Sporting Activities, drawn up by the President of the Council of Ministers’ Office, in 2015 12,231 disabled athletes were registered with the 20 recognised Federations, divided among 1,295 Sports Clubs. Of these, 1,315 were registered for the 11 Sports Disciplines recognised for the Paralympics and 47,223 were registered with the Promotional Bodies recognised by the Italian Paralympic Committee (CIP) for a total of 60,769 members. The statistics also show that the disabled are particularly prone to lead a sedentary life: over 58% in the 6-44 years of age range, over 76% in the 45-55 age range and almost 90% for the over 65s. Therefore, the percentage of disabled persons who do not take any physical or sport activities is almost double that of able-bodied persons. The underlying value or contingent benefit of the real option of this additional opportunity are the objective and subjective advantages in terms of well-being. Following a similar process of reasoning to that for the increase in the practice of sport analysed above, it emerges that the price for the exercise of the option is the cost of running the new facilities after the Games have finished and the value of the time to devote to the sport activities themselves. Table 30. Estimated parameters of the sport practice option values generated by the Olympics

Amount of operating costs of facilities Users Italy Hourly cost of sport practice per capita Average hours of sport practice per year Exercise cost of the option Annual benefit to health per capita Use value of free time Average remaining sporting life Expected benefit from option

200 Millions of euro 45,240 numbers 15 euro 60 hours 607,160 euro 733 euro 21.6 euro 10 years 917,920 euro


42

The value of the option, in this case too, is also determined bearing in mind that the benefit is not a certain one because it depends on circumstances and individual, idiosyncratic and stochastic factors. Table 31. Sport practice option values* Volatility (%) Option value 20

315.89

30

362.08

40

412.34

Source: data processed by OpenEconomics * The analysis considers a 9-year American option, with interest rate and dividend of 5%.

1.5.4 Olympic village benefits The Olympic Village will be erected in the Tor Vergata area. 4,250 flats with an area of 120 sq. m. will remain at the disposal of the City of Rome. Some of these flats will be available to students and staff of the Rome Tor Vergata University, the city’s second university, and to families of patients in the University Hospital, and some to resident families and social projects. Our analysis assumes that, from 2025, the flats will be available for letting at an annual rent of 8,400 euro, which corresponds to an average price of 70 euro per sq. m. per year, 30% lower than the market price in the area. Considering an occupancy rate of 70%, total annual revenues will amount to 24.9 million euro. The table below summarises a breakdown of the revenues. Table 32. Revenues from the Olympic Village

Flats sq. M. price per sq. m. (per year) occupancy % Annual revenue

4,250 120 70 70% 24,990,000

num sq m euro euro


Considering extraordinary maintenance costs totalling 5% of the rent and day-to-day maintenance costs totalling 20% of the rent, net cash flow is just over 16 million euro a year. Furthermore, we make the prudent assumption that equivalent apartment blocks will be built in the same area from 2030 onwards. This expansion will be likely to cut the value of the cash flow during the following ten years, so that the present value at 2017 prices of the net future cash flows from the management of the flats in the Olympic Village turns out to be about 78 million euro. In order to estimate the consumer surplus benefits for users, we can assume a demand elasticity of 3 with respect to the prices of the flats, a prudent figure which implies that users are not willing to pay more than 33% over the price actually paid even if housing supply where to be reduced by 100%. Under this assumption, total consumer surplus is 12.5 million euro per year. The present value of the total benefits from the long-term utilisation of the residential accommodation created as a result of the construction of the Olympic Village is 139 million euro (discounted at 2017 values).

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1.6

Socio-economic assessment

The objective of a socio-economic assessment is to establish the economic advantage of investment projects by means of two basic processes:  

measuring individuals’ gains and losses using money as the unit of measurement (monetisation process); aggregating the monetary assessments of individuals’ gains and losses and expressing them as social gains and losses (functional aggregation of individual situations). Generally speaking, the difference between financial analysis and economic analysis lies in the “recipients of the effects ”, which, in economic analysis, is the set of persons who, at the social group level, are those who will benefit from positive effects of the project in view (social benefits) and, in the event of externalities, those who will incur the negative effects (social costs). The course followed is summarised in the figure below:

Socio-economic analysis

Supporting economic and territorial analyses

Quantitative analysis

Estimated internal benefits and costs

Supporting technical analyses

Estimated external benefits and costs Base scenario

Estimated social discount rate

Discounting economic flows

Estimated terminal value

EIRR - ENPV ECONOMIC PAYBACK PERIOD

Economic indicators Risk analysis

Sensitivity analysis

Economic opinion

Benchmarking analysis

1.6.1 Rome 2024 Games ENPV and EIRR The Economic Net Present Value of the Rome 2024 Olympic and Paralympic Games has been estimated considering the following components of economic costs and benefits: Costs: Construction costs Other investment costs Overrun costs Congestion costs Security costs Operating costs Benefits: Existence value of the Games Macroeconomic benefits Media consumer surplus National Sponsorship Merchandising net revenues 44

IOC contribution Italian consumer surplus for tickets Revenue from tickets for foreign spectators Revenue from tickets for italian spectators Increase in sports activities Social Inclusion Olympic village benefits The economic values stated refer to the difference between the scenarios with and without the Project, defined as the set of investments and management tasks related to hosting the Olympics in Rome in 2024. The results of our cost-benefit analysis are summarised in Table 33, which presents the details of the estimates of the individual components. The economic values directly and/or indirectly generated by the Games are taken into account in this cost-benefit analysis, including investment costs, operating costs, external costs, the symbolic values associated with the so-called “Olympic aura” and the direct values and options created by the sports and civil facilities and infrastructures. All the values are measured at economic prices (shadow prices) in the analysis, which take account of both market prices, when they exist and the opportunity costs of the goods and services (marketable and non-marketable), net of distortions caused by taxation, grants and market imperfections. Two other scenarios have been considered in the economic analysis in addition to the base: one pessimistic (worst) and one optimistic (best); the results are shown in the Appendix. The analyses have been conducted considering a period of time starting from the beginning of the first works (2017) and ending in 2035, the time at which it is assumed that the incremental effects of the benefits will be exhausted, and using a discount rate of 5%. Table 33 shows the breakdown of the cash flow in the intermediate scenario. The Economic Net Present Value is equal to 2.8 billion, with an Economic Internal Rate of Return of 31.1%. Table 33. Economic cash flow of the base scenario Economic cash flow


(millions of euro)

1,051 368 203 677 1,938 4,236 108 2,676 482 615 74 763 346 95 1,046 532 245 139 7,122 2,886 31.1%


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1.7

Sensitivity and risks analysis

Project risks were assessed using the Monte Carlo analysis, which is a particularly useful method when estimates of a project are uncertain owing to factors such as the stage reached by the preliminary construction engineering studies, the lack of data regarding benefits and costs and the presence of externalities and intangible effects. A distribution of probabilities based on the most probable estimate has been assumed for each of the variables that are deemed to be critically important for the outcomes of the project and/or for different combinations of such variables. Monte Carlo simulations thus enable these probability distributions of critical variables to be converted into an estimate of the range of possible cost and benefit values, each value being associated with the level of probability to which the estimate is accurate (confidence level). For the Rome 2024 Games, all the project costs have been considered, as critical variables and they have been assumed to be distributed according to normal distributions with a mean value equal to the value used in the cost benefit analysis in the intermediate scenario (base value), and a standard deviation of 30% of such a mean , prudentially truncating the minimum value so that in each simulation the average cost can rise but not fall. It has also been assumed that unexpected events which may cause cost overruns are positively related to investment costs. Normal distributions have also been used for benefits, as follows: 

distributions with a mean equal to base value, a standard deviation of 20% of the meanand a maximum value equal to 120% of base value have been used for Existence Value, Macroeconomic benefits, ticket surplus and tickets for foreign tourists;  a distribution with a mean equal to base value, a standard deviation of 40% of the mean and a maximum value equal to 120% of base value has been allocated to Sport practice option and Social inclusion option;  a distribution with a mean equal to base value, a standard deviation of 10% of the mean and a maximum value has been allocated to the occupancy rate and square meter rate of Olympic village apartments. The results of this analysis, which are summarised in Table 34, show that although very prudent assumptions have been made, by allocating relatively high probabilities to more unfavourable scenarios than those in the base estimates, the Economic Net Present Value of the Project in the base scenario, equal to 733 million euro on average, remains positive in over 85% of the cases. Table 34. Risk analysis results Risk analysis Base value

Average

Standard deviation

Minimum value

Maximum value

Costs

4,236

5,290

536

3,330

7,527

Benefits

7,122

6,023

415

4,602

7,433

ENPV

2,886

733

684 -

1,854

3,063

EIRR

31.08%

-7.17%

103.59%

13.02%

7.91%


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Figure 9. Risk analysis results - costs

Figure 10. Risk analysis results - benefits

Figure 11. Risk analysis results – ENPV and EIRR

47

48

2 Economics of the Olympic Games 2.1 Introduction For the host countries, the Olympic Games have provided an opportunity for carrying out major works even if sometimes those who have been too daring have had serious financial problems to deal with. This sounded an alarm bell for the International Olympic Committee (IOC), which decided to take out insurance cover for the Games. The first instance were the Athens 2004 Games, for which a cancellation insurance policy of 140 million euro was taken out, a tiny figure compared with the costs of hosting an Olympic event, which now start at 2.5 billion euro for the Summer Games and 1 billion euro for the Winter Games. The IOC takes great care to keep the costs of the Games down and has set up a committee which is in almost permanent session whose brief is to assess these costs and solve the problem of “gigantism”: it has been calculated that a National Committee spends over 30,000 dollars for every athlete entered for the Olympics. The organisational workload should be lightened by streamlining the programme, which includes no fewer than 28 sports in the Summer Games, thereby cutting down the number of athletes, which should not exceed 10,500. Apart from cost-cutting and organisational issues, there are other economic issues which, according to the convinced opponents of the Games, should be taken into consideration in order to discourage holding them (Preuss, 1998). Among these opponents, in a work23 dated 1998 Preuss studies the following: (1) the risk of the host city incurring too much debt; (2) not investing the funds allocated to put on the Games in other projects which would be more effective in social terms; (3) the inequitable distribution of the benefits from the Games, which almost exclusively favour the most wealthy classes; (4) the creation of jobs which are only temporary; and (5) the very real danger that putting on the Games may lead to an increase in the cost of living and rents in the host city. Shoval (2012) divides the history of mega-events24 such as the Olympic Games into four periods. During the first two, respectively from 1851 to 1939 and from 1948 to 1984, there was the rise and subsequent fall of the World’s Fair company, the most important mega-event organisers. The feature of the third phase, which began with the Los Angeles Olympic Games in 1984 and ended in 2000 with the Sydney Games, was the entry of TV companies and private enterprise into the organisation and management of the event. The economic framework of the Olympics changed during this phase: the era started in which massive earnings were gained above all from the sale of TV rights and secondly from the increase in marketing and sponsorships25. Additionally, the Sydney 2000 Olympics saw the arrival of a large number of companies which worked with the main sponsors to provide considerable financial support to the organisation of the event. About 1.2 billion dollars were spent on the organisation of the 2000 Games in Sydney, where great trouble was taken to reduce the environmental impact of the event to a minimum. In the period from 1997 to 2000 the IOC achieved revenues of about 2.6 billion dollars, which were broken down as follows: 356 million from the sale of tickets, 315 million from local sponsors, 579 million from the major sponsors, 1,332 million from TV rights. TV revenues from the Sydney 2000 Games reached the record figure of 1.8 billion dollars. The fourth phase, ongoing at present, considers a fresh vision of the Olympics in which the Games are to be seen as a cultural heritage for the future: their aim is to promote sustainable long-term growth while the basic principle of keeping costs down remains unaltered.

23

This work will be dealt with in more detail in the following paragraph. The Summer Games fall within the category of mega-events defined by Roche (2000). They are large-scale happenings usually with an international target. For example the Catholic Church Jubilee, the Olympic Games and the FIFA World Cup are mega-events which produce an increase in tourism, are widely covered by the media, have a substantial economic impact and stimulate urban regeneration. 25 Some figures are enough to show what giant strides this development took. There were 2,570 hours of TV transmission of the Seoul 1988 Games in 160 countries, 2,700 hours of TV transmission of the Barcelona 1992 Games in 193 countries, 3,000 hours of TV transmission of the Atlanta 1996 Games in 214 countries, more than 3,400 hours of TV transmission of the Sydney 2000 Games in 220 countries, while 221 countries saw more than 3,500 hours of TV transmission of the Athens 2004 Games. Marketing revenues increased from 350 million dollars in 1980 (Moscow, Summer Games and Lake Placid, Winter Games) to 790 million dollars in 1984 (Los Angeles and Sarajevo), 1,150 million dollars in 1988 (Seoul and Calgary), 1,870 million dollars in 1992 (Barcelona and Albertville), 2,660 million dollars (Lillehammer 1994 and Atlanta 1996), 3,750 million dollars (Nagano 1998 and Sydney 2000), up to 4,260 million dollars (Salt Lake City 2002 and Athens 2004). 24

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2.2

Impact of the Olympic Games: cost-benefit analysis

If properly oriented, the Games can provide Governments with the opportunity to implement sustainable development policies. Since the eyes of the world are turned on the host city while the Games are going on, it becomes the ideal stage for displaying sustainable development principles and examples (Furrer, 2002). Putting the Olympic Games on always leaves a lasting imprint on the host city or region and its inhabitants. For example the Games can transform the host city’s aspect by leaving it a legacy of new infrastructures, refurbished existing structures and the facilities that have been built for the Games themselves. According to Furrer (2002), hosting the Olympics cannot be considered as solely positive or negative, but always has mixed outcomes. As regards this theory, the benefits related to the concept of Olympic legacy and the costs of putting on an event of this magnitude are now set out. As far as the Olympic legacy is concerned, organising the Games may have a number of different impacts on the host city or region. These effects may be physical, economic, environmental, social, cultural, psychological, political and even ideological. The following types of benefits have been identified: 1) Economic benefits. The most widely publicised economic benefit comes from hosting the Games and from the prestige of putting the city that organises them on the map. The report commissioned by the Government of New South Wales finds that the Sydney 2000 Games also acted as a magnet for domestic and international tourism and swiftly accelerated the process of the enhancement of Australia’s international profile and brand in a manner which would not have been possible otherwise (PriceWaterhouseCoopers, 2002). In this sense the Games are seen as catalysts for growth. The successful organisation of a major event creates confidence in the city, stimulating subsequent investment (Metropolis, 2002). One of the characteristics of the Olympic Games is that they bring the host city an IOC contribution of over 1 billion dollars to cover the operating costs of the event (summer games). This investment also attracts other public or private investment which, in its turn, enables the city to improve the standards of its plants and infrastructures. In macroeconomic terms, the Games can be seen as an attempt by the host city or region to draw investment or set up new trade relations. Other expected benefits are increases in the levels of income and local employment; for example, the rise in the number of visitors, running the new sports facilities, the new or refurbished hotels, etc., create permanent jobs. In many cases the Olympic Games have closed their books with a profit which usually financed the local sports communities in the years that followed. The Salt Lake City winter Olympics produced a profit of 100 million dollars. 2) Infrastructural and urban regeneration benefits. Staging the Games can trigger fundamental structural changes to the cities and regions involved. The most substantial long-term transformations which take place in an Olympic city are the construction or refurbishment of sports facilities and multifunctional arenas, as well as the modernisation of transport systems and other infrastructures (water supply, energy supply and distribution, etc.). These long-term changes can take various forms: increases in airport capacity, new roads and railway lines, better public transport systems and large halls which can be used for big meetings. All these developments, together with additional hotel facilities, are not only a considerable improvement in the daily life of the host city’s inhabitants but a valuable legacy for local, regional and national tourism, also raising the standards of infrastructures to a level compatible with international tourism (Essex and Chalkley, 1999, pages 196-7). In some cases vast degraded areas have been regenerated on the occasion of the Games. The legacy of the Barcelona 1992 Games was a new seafront, a 5.2 km stretch of coastline which has been transformed and gives both visitors and residents attractive opportunities for their leisure time and entertainment. This experience repeated itself with the Athens 2004 Games when the entire Faliron shoreline was regenerated. With the Sydney 2000 Games the Homebush Olympic Park was created by reclaiming a decommissioned industrial area full of toxic waste. 3) Social benefits. The Games can provide a unique opportunity to exploit and improve the host community’s organisational, planning and execution capacity and ability. For example the enterprises in the sector enhanced their innovation capacity after playing their part in designing state-of-the-art facilities and services for the Sydney 2000 Games and over 100,000 persons were given expert training (Roper, 2002). The Games are also a chance to spread the practice of sports among all sections of the host population and to foster education in sport and Olympic values among the host country’s young generations. Values such 50

4)

5)

6)

as respect, tolerance, fair play, balance between body and mind and the pursuit of excellence among others contribute to the construction of a better and more peaceable world (Furrer, 2002). Psychological benefits. Many studies have shown that hosting the Olympic Games can create a sense of enthusiasm and pride among the local inhabitants, giving the impression of a community and of unity which may even transcend social and ideological divides. Environmental benefits. By their very nature, the Olympic Games entail new building and further pressure on the environment as a result of more traffic, higher water consumption and an increase in the production of waste. In spite of this they may lead to many environmental benefits such as new standards in the construction industry, the use of renewable sources of energy, cleaner technology innovations, improvements in the management of drinking and waste water, new waste management systems and environmental education schemes. Political benefits. The Games have had favourable impacts at political level, as in South Korea, where the Seoul 1998 Olympics launched the country on the international stage and improved its position among the Asian tigers (Metropolis, 2002). The Games may also be a good thing at the level of local politics, such as new forms of public-private partnerships to complete wide-ranging projects or speed up public investment decisions. For example in Athens there were valuable forms of cooperation among public authorities and between these and the private sector. The latest management practices can also spread to the various public bodies thus making them more efficient (Furrer, 2002).

These benefits, however, must not obscure the risks and snares which lie on the road to success. As regards this, in a 1998 work Preuss analysed the main arguments submitted by convinced opponents of the Games in a work based on documents and interviews of economics experts regarding the Olympic Games, with specific regard to the Games hosted in Atene (2004), Sidney (2000), Atlanta (1996) and Barcelona (1992). These arguments, which are of a specifically economic nature, are: (1) the risk of the host city incurring too much debt; (2) not investing the funds allocated to put on the Games in other projects which would be more effective in social terms; (3) the inequitable distribution of the benefits from the Games, which almost exclusively favour the most wealthy classes; (4) the creation of jobs which are only temporary; and (5) the very real danger that putting on the Games may lead to an increase in the cost of living and rents in the host city. In his work, Preuss tries to answer these arguments using a scientific method with the aim of correctly rephrasing the criticisms put forward. His analysis considers the effects of the Games and in particular the effects of the Games hosted in Munich, Montreal, Los Angeles, Seoul, Barcelona and Atlanta in the period from 1972 to 1996. The data to hand regarding various national economies have been homogenised using US GDP as deflator. Preuss rephrases these criticisms as follows: (1) the Olympic Games may leave the city in excessive debt if the sports facilities and transport infrastructures necessary for the Games to take place are almost non-existent and if there is no demand for such services on the inhabitants’ part; (2) the criticism that the money spent on the Games could be put to a better use by funding projects more responsive to social needs is wrong because the resources concerned would not be available if the Games did not take place; (3) generally speaking the Games are to the benefit of the whole population, in terms of new jobs and income increase. Nevertheless, the Games may give rise to a process of gentrification26 which favours the most wealthy classes more than others; (4) the Olympics create many short-term jobs and in some sectors create the conditions which stimulate permanent employment; and (5) the Games do not give rise to a lasting increase in the cost of living and rents. It has been shown that the price index only goes up in the sectors in which there is a strong rise in demand as a result of the staging of the Games. These sectors do not affect the consumer or rental price indices. Since Montreal 1976 – except for the Barcelona 1992 Games -, there has been no change in the consumer price index in the Olympic cities with respect to the other cities in the various host countries. The author’s analysis leads him, therefore, to claim that the criticisms put forward are often not expressed carefully and only consist of unsupported sentences which could be the result of the lack of a sufficient grasp of economics. Nevertheless also the supporters of the Games have too little knowledge of the events that have taken place previously, or their forecasts are too optimistic. Consequently, the arguments sustained by the opponents must be taken into consideration if they are expressed robustly and seem plausible, because the 26

This issue will be dealt with in more detail through the paragraph.

51

cities selected are not always suitable to host the Games. In a work written after 2000, Preuss returns to the criticisms that he had rephrased, particularly those in points (2) and (3), saying in his comparative analysis of the Olympic legacy that “in any case it remains to be seen whether another project could have brought greater benefits to the city and/or caused a socially more equitable distribution of wealth” (Preuss, 2000, page 100). In a work of 2002 based on Preuss’s 2000 study, Furrer discusses some of the main possible unfavourable effects of the Olympic Games on the host city and its inhabitants: 1) Overbuilding. The first image that comes to mind is that of costly and half unutilised “white elephants”, a term which describes the excessive size of the plants and facilities that have been planned in view of “Olympic queues” and ticket sales. White elephants are designed as shop windows for the local economy and the ability of its construction engineers instead of structures that harmonise with a long-term urban planning policy and meet the local inhabitants’ needs with regard to cultural and leisure facilities (e.g. the Australia stadium and the SuperDome for the Sydney 2000 Games and the stadiums for the 2002 FIFA World Cup Korea-Japan). Other types of white elephant are the new hotel facilities constructed for the Games: if the supply of rooms is too great after the Games have ended this may have severe repercussions on the host city or region’s hotel industry. 2) Inequitable distribution of benefits. The challenge for public authorities and those who implement town plans is to avoid a situation in which the positive effects of the Games mainly benefit the well-off classes. The findings of the various urban planning studies suggest that not only do cities with growing inequalities suffer from an increase in phenomena such as the marginalisation of social groups and in the crime rate but also lose many of their symbols and their overall selling power. So the issue of the equitable distribution of the benefits of the Games is an important one which has remained largely unresolved. Many observers have warned of the risk of an increase in inequalities between the different strata of society or the different geographic areas of the city. This potential negative influence may often be seen in relation to various factors such as the spatial concentration of the new Olympic facilities and infrastructures in specific areas of the host city; the gentrification processes27; increase in public debt (which may have a serious influence on future public investment in various services); lack of consultation with the local communities, which are deprived of their capacity to make decisions regarding problems that affect their future. The Metropolis study of the impact of large-scale events emphasises the risk of the centre of the host city usurping all the profits from the event to the detriment of the other localities in the conurbation or region (Metropolis, 2002). 3) Private interests. The consequence of seeing the Games as a business may lead to lack of public consultation in planning major projects. Many observers have tried to show that the anti-democratic procedures of the agencies responsible for planning big events may make them subservient to the interests of private capital. In her study of the Sydney 2000 Olympic Games, in which she tried to assess the impact of the Games on certain areas of the city, Owen pinpointed some features of this “local Olympics entrepreneurialism”: “increased centralisation of planning powers; increased privatisation of government operations; the relaxation of normal planning requirements; reduced or tokenistic community consultation; subversion of democratic principles; and reduced public accountability” (Owen, 2001, page 6). These views of the Games as managed by a restricted “business elite”, as well as those according to which the benefits of the event are inequitably distributed, have been partially confirmed in practice, while the evidence also suggests that candidate cities which fit the Games into a harmonious long-term process can achieve tangible benefits for most of their inhabitants. The survey of the positive and negative effects of the Olympic Games is to be included in a more general picture, leading to some considerations which contribute to a more detailed analysis of the matter. The first consideration is the temporary or permanent nature of the legacy in terms of its (tangible and intangible) beneficial and harmful effects. Generally speaking, the challenge that Governments and the leading parties face 27

Gentrification is the process whereby decaying working-class districts in the city centre are recovered with the use of private capital. The refurbishment of properties and the pacification of the area is followed by the settlement of a new type of middle-class tenants - in fact the new gentry - while the original inhabitants move to more outlying areas. The gentrified areas are then provided with the very latest commercial infrastructures and are meticulously promoted. This so-called rebirth of the city is wrongly publicised as an event which can bring benefits to all its inhabitants without distinction.

52

is to see that a permanent legacy is left to the host city. The best examples of these attempts are Olympic stadiums but the evidence shows that, on many occasions, Olympic facilities are oversize because post-Olympic needs have not been sufficiently taken into account. Scant attention has too often been paid in the past to the use of these facilities after the Olympics: it is only when the permanent needs of the host community are taken into consideration that investment in the construction of new sports facilities can be justified and, above all, it is only in these cases that they can have beneficial long-term effects. The Games are still an event which lasts two weeks, so that temporary installations could be preferred. Recent examples have proved that this policy could work: the capacity of existing sports facilities can be raised temporarily in order to sell as many tickets as possible during the Games, while the removable structures may be installed with multiple functions in mind. This could allow sports centres to serve the needs of the city and avoid an additional financial burden in terms of maintenance. This combination of new permanent Olympic sports facilities and temporary solutions can ensure a proper level of sustainability of the Games (Furrer, 2002). The use of sports facilities after the Olympics now seems to be an important part of the bidding process and is mentioned several times in the IOC’s “Manual for Cities Bidding for the Olympic Games”. More generally, the notion of the Olympic legacy has grown in importance in Olympic circles in the very recent years. In the last version of the Host City Contract, for the first time the IOC mentions the need to strive to leave a positive Olympic legacy. Furthermore, as laid down in the Olympic Charter, the IOC must take measures to promote a positive legacy from the Olympic Games to the host city and the host country, including a reasonable control of the size and cost of the Olympic Games and encourages the Organizing Committees for the Olympic Games (OCOGs), public authorities in the host country and the persons or organizations belonging to the Olympic Movement to act accordingly (New Rule 2.13 of the Olympic Charter). This new rule shows that from the point of view of the Olympic Games promoters the expression “sustainable Games” regards not only financially sustainable Games but Games whose benefits will be remembered and nurtured by the host city’s inhabitants for a long time afterwards. In short, the “Manual for Cities Bidding for the Olympic Games”, the Transfer of Knowledge Programme, the creation of the Olympic Games Knowledge Services, the OGGI (Olympic Games Global Impact) project, the Olympic Games Study Commission and the changes in the IOC guidelines all address the objectives of a better promotion of the Games and a better legacy for the host city. As such, these IOC initiatives may be considered as encouraging responsible and sustainable forms of business activities. They are valuable tools and guidelines for future candidate cities and for the organisers of the Games and help to maximise the potential benefits of the Games and to identify risks and potential harmful effects. The second consideration to be made regards the environment and thus the steps to safeguard it in preparing and staging the Games. Concerns regarding methods of planning and organising the Games which respect the environment have assumed greater importance in recent years. Nevertheless, there is a serious danger of promoters and organisers using expressions such as “Green Games” purely as a pretext and a front in order to enhance the reputation of the event. The concept may be a marketing tool and a “green facelift” like the “ecotourism” concept after the Rio Earth Summit in 1992. The Olympic Movement’s Agenda 21 sets out a plan of action for the members of the Olympic Movement to play an active part in promoting sustainable development. The IOC has made practical suggestions in order to minimise or remove the potential risks arising from the organisation of the Games, tending towards a reduction in the use of non-renewable sources of energy, the adoption of energy saving solutions, the use of less hazardous products and a reduction in the emission of polluting substances into the air, water and soil; the IOC suggests that the environmental impact of the event should be assessed both before and afterwards. Additionally, the materials used in the infrastructures created must be of a high standard of quality and durability and must be resistant to wear and tear and natural disasters. Accommodation facilities must be salubrious and must be run on a basis of the economical use of natural resources (IOC, 1999).

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2.3

Candidature process

The IOC starts the Games’ host city election exactly 7 years before the delivery of the event but the candidature process is launched even earlier. The formal bidding process laid down by the International Olympic Committee is divided into two phases. In the first a city starts as an “applicant city”, namely a city which submits an application to be a candidate for the Games which is examined by the IOC and ends as a “candidate city”, i.e. a city which may be elected by the IOC. The second phase consists in choosing the Games host city from the candidates. In order to perform this complex procedure, the first official approach begins about 9 years before. The Government responsible for the city concerned and the National Olympic Committee must formally commit themselves to an understanding that the Games will be organised in compliance with the conditions required by the IOC. Furthermore, the cities that submit their candidatures must deposit a symbolic sum to guarantee their full commitment and to cover the IOC selection procedure costs. The next appointment in the candidature process is some months later, when the applicant cities must answer the IOC questionnaire. The document includes basic preliminary information such as the motives behind the city’s desire to host the Games, the forecast impact, the legacy for the future, the city’s vision, the opinion of the Government and the people regarding the possibility of hosting the Games and legal aspects. Applicant cities must also provide specific documents such as budgets and projects for the construction of sports facilities and the Olympic Village and their plans for accommodation, transport and security. About 8 years 2 months before the event, the IOC selects the candidate cities, which must put then down a further deposit. These cities have about six months’ time to submit their bid in more detailed terms, including more exhaustive presentations of their plans to stage the Games. The IOC examines the material and visits each candidate city, assessing its capacity to host the event. A city must obtain more than half of the total votes of the members of the IOC in order to be selected. If no candidate obtains this number of votes, the city which has obtained the lowest number of votes is eliminated and the process is repeated.

2.3.1 Change in the candidature process and the new vision of the legacy concept The Montreal 1976 Games left the city with a deficit of about 1.2 billion dollars and gave rise to serious budget difficulties. This failure led to a certain reluctance to host the Games in the decades following: in fact in 1978 only Los Angeles and New York expressed an interest in putting the Games on; in the end they were delivered in the former, the only city to submit an actual bid to the IOC. The Los Angeles Games were a financial success and revived cities’ interest in hosting the mega-event as a generator of economic growth. The Los Angeles 1984 Olympic Games relied on sponsorships, TV rights, private sector investments and pre-existing facilities and achieved a profit of 225 million dollars. They were also estimated to have contributed about 2.4 billion dollars to the economy of the region. The Seoul 1988 Games followed, but real success was attained by the Barcelona 1992 Games. 6 cities took part in the bidding process for this edition and the delivery of the event had a notably positive impact on the local economy. Never did fewer than 5 cities potentially interested in hosting the Games take part in the candidature processes that followed the Barcelona Games and on two occasions there were 10 candidate big cities. In 1996, however, the Atlanta Games were criticised for their excessive commercialisation, which, in the final analysis, was considered harmful for the Olympic spirit. The IOC acted by amending the Olympic Charter to insert a legacy clause in Rule 2.13, in which the IOC’s role is defined. This clause states that the IOC “takes measures to promote a positive legacy from the Olympic Games to the host city and the host country, including a reasonable control of the size and cost of the Olympic Games, and encourages the Organizing Committees of the Olympic Games (OCOGs), public authorities in the host country and the persons or organizations belonging to the Olympic Movement to act accordingly”. After this the legacy clause was amended and the subsequent versions of the Olympic Charter stated that the IOC must “promote a positive legacy from the Olympic Games to the host cities and host countries.”

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The reduction in the length of the legacy clause, especially the omission of the phrase regarding “reasonable control of the size and costs of the Olympic Games”, revealed the intention not to officially formalise the problem of over-commercialisation and long-term sustainability. To this should be added the fact that the revenues that the host city expects to obtain from the Games are to some extent predictable, which gives the city some certainty with regard to the accounts for the Olympics operations. The results can be processed well in advance because the IOC manages the sale of TV rights and sponsorships a long time before the delivery of the event. About half of these revenues are taken by the IOC, which distributes them to the International Sports Federations and the National Olympic Committees, while the host city’s Organising Committee for the Olympic Games receives the rest and thus has a very clear idea of its receipts from the Games well before they begin. This figure serves as the basis to refer to for the preparation of an operating budget which assures the Games host city that it will almost certainly break even with respect to its operating costs. Now the Olympic Games are staged with the objective of breaking even, and not obtaining a surplus as happened in the past. The benefits deriving from staging the best possible spectacle (hard to quantify and thus not catered for in the budget) are considered greater than those from any operating account surplus. This new importance attached to legacy has had a considerable influence on the types of city which now submit bids and manage to reach the end of the process. In this regard, Shoval (2012) observes that many of the original motives for hosting the Olympics between 1984 and 2000 no longer exist if one looks at the latest international candidates, in particular London and New York. Global recognition appears superfluous for these cities; infrastructures could be created and urban development boosted more easily without hosting the Games. The justification for a bid, according to Shoval, lies in fear of competitors and the desire to keep a step ahead of rivals which are trying to improve their positions in the hierarchy of the cities of the world. For example London’s bid was partly motivated by its wish to keep up its cultural and economic status with respect to cities like Paris and Berlin. The motives which impelled London to host the 2012 Games were born of its desire to strengthen the importance of a city which is already internationally recognised as one of the world’s major financial and cultural centres. Of all the aspects of today’s Olympics, the opening ceremony is the best incarnation of the present stress on legacy. Over a century, the opening ceremony has evolved from mere parades of athletes to the production of spectacles costing millions of dollars. For example the cost of the opening ceremony at the Barcelona Games in 1992 was about 29 million dollars, and this amount gradually rose over the next decade, up to achieving 300 million dollars for the Beijing 2008 Games. The opening ceremony is considered an opportunity to show the host city and nation to the rest of the world. There are also direct financial returns from the sale of tickets, but these figures are modest because the most expensive tickets are set aside for members of the Government, foreign guests of honour and high-profile corporate personalities. The National Olympic Committee, the city itself and the country’s institutions trustfully invest millions of dollars in the ceremony with the aim of drawing the attention of the world to the host city’s cultural and economic achievements. For example London doubled its initial budget for the opening ceremony, adding another 64 million dollars not to lose the chance to put on a marvellous show for the rest of the world. Shoval (2012) observes that since it is possible to make a reasonable forecast of operating revenues, all the candidate cities present break-even budgets and the differences between the bids to put on the Olympic Games now mainly lie in the infrastructures with which the cities are equipped. The IOC tends to favour the world’s biggest cities already with a satisfactory infrastructural and cultural heritage. In 2000 the British Olympic Association was unofficially informed from the IOC officers that no bid from the United Kingdom would be taken into serious consideration unless it were London. London’s bid for the 2012 Games laid stress on infrastructural improvements and the success of its candidature was attributed in the first place to the commitment to regenerate the East End. The organisers tried to fill the gap between the city’s rich and poor providing the degraded eastern side of London with an Olympic Village. The greater attention paid to legacy has clearly revealed the wide gap to be filled between the present costs of putting on the Olympic Games and what they bring in terms of benefits using traditional assessment methods. In other words the positive effects of the event are not properly quantified, which causes a considerable imbalance between these and the costs. Quantification of the success of the Games relies on indicators such as growth in GDP and increased employment, but these indicators hardly justify the high cost of the Games and, 55

above all, do not sufficiently reflect the main motives related to the concept of the legacy from hosting them. In short, quantitative analysis of the Games has not yet gone as far as considering the new motives for wanting to host them. Cashman (2002) states that it is impossible, in practice, to establish the true cost of delivering the Olympics since the accounts are political documents and are notoriously unreliable. The benefits, according to this scholar, are similarly vague and after the Olympics have ended the assessment confines itself to verifying whether the benefits initially identified have been obtained. In the light of the evolution of the Summer Olympics and of the prices paid in a large part by the city and by its inhabitants, it has become fundamentally important to bring in new methods and indicators in order to assess the success of the Olympics for the host city. Since the organisers of the Games and the governors of the cities involved have laid greater stress on the less tangible benefits from hosting the Olympics, the methods for the economic assessment of the Olympics must, therefore, consider and quantify the benefits provided by the Olympic legacy. Three potential areas have been found in which the positive effects of the Olympic legacy can be felt: (1) philanthropic funding; (2) the crime rate; and (3) participation in sports. Marquis (2012) has found that when the Olympics are hosted, enterprises with their headquarters in the host city have raised the amount of their philanthropic donations. Another potential advantage from hosting the Olympic Games is a reduction in the crime rate. Theoretically, from the urban planning point of view, new modern buildings of quality and an increase in love of country should contribute to increasing a feeling of good neighbourliness, dissuading aspiring criminals from damaging other people’s private property and harming their fellow countrymen. According to Marquis, there will be a noticeable reduction in crime levels in the long term in areas where there has been a substantial amount of regeneration; there will be no significant changes, on the other hand, in other areas of the host city. On the contrary, another 2009 work of Baumann et al. shows that, on the occasion of the Olympics that took place in the United States, the crime rate on private property increased by about 10%. A third possible benefit from the Olympic legacy, particularly significant as a result of the London 2012 Games, is an improvement in the nation’s health through an increase in the rate of participation in sports. The success of the London candidature was partly due to the guarantee to foster greater participation in sports. In early 2012, however, the Government lowered the initial objective of an increase of about 1 million in the number of people practising a sport as a result of the delivery of the Games. Feblowitz (2012) argues that the effect on health of hosting the Games is negligible because the increase in the overall rate of participation in sport is not only based on the Olympic sports and requires both additional funds to those made available for the Games and funds for infrastructures. On the occasion of the Opening Ceremony of 127th IOC Session, in 2014, President Bach launch a new IOC program about safeguarding the Olympic values and strengthening sport in society called Olympic AGENDA 2020. The progam was based on five recommendation: Recommendation 1: Shape the bidding process as an invitation Introduce a new philosophy: the IOC to invite potential candidate cities to present an Olympic project that best matches their sports, economic, social and environmental longterm planning needs. 1. The IOC to introduce an assistance phase during which cities considering a bid will be advised by the IOC about bid procedures, core Games requirements and how previous cities have ensured positive bid and Games legacies. 2. The IOC to actively promote the maximum use of existing facilities and the use of temporary and demountable venues. 3. The IOC to allow, for the Olympic Games, the organisation of preliminary competitions outside the host city or, in exceptional cases, outside the host country, notably for reasons of sustainability. 4. The IOC to allow, for the Olympic Games, the organisation of entire sports or disciplines outside the host city or, in exceptional cases, outside the host country notably for reasons of geography and sustainability. 5. The IOC to include in the host city contract clauses with regard to Fundamental Principle 6 of the Olympic Charter as well as to environmental and labour-related matters. 56

6. The IOC to make the Host City Contract (HCC) public. 7. The HCC to include details of the IOC’s financial contribution to the OCOG. 8. Respect third-party legal interests by making contractual elements available on an “inconfidence” basis. 9. The IOC to accept other signatories to the HCC than the host city and the NOC, in line with the local context. 10. The IOC to provide the HCC at the outset of a given bid process. Recommendation 2 : Evaluate bid cities by assessing key opportunities and risks The report of the Evaluation Commission to present a more explicit risk and opportunity assessment with a strong focus on sustainability and legacy. 1. Introduce into the existing 14 Candidate City evaluation criteria a new criterion entitled: The Athletes’ Experience. 2. The IOC to consider as positive aspects for a bid: the maximum use of existing facilities and the use of temporary and demountable venues where no long-term venue legacy need exists or can be justified. 3. The IOC, in collaboration with Olympic Movement stakeholders, to define core requirements for hosting the Olympic Games. The field of play for the athletes to always be state-of-the-art for all competitions and to form part of the core requirements. 4. The IOC to clarify the elements for the two different budgets related to the organisation of the Olympic Games: long-term investment in infrastructure and return on such investment on the one hand, and the operational budget on the other hand. Furthermore, the IOC contribution to the Games to be further communicated and promoted. 5. The Candidate City Briefing to include an in-camera discussion between the IOC members and the IOC Evaluation Commission. 6. The Commission to benefit from third-party, independent advice in such areas as social, economic and political conditions, with a special focus on sustainability and legacy. Recommendation 3: Reduce the cost of bidding The IOC to further assist Candidate Cities and reduce the cost of bidding. 1. The Candidate Cities to be allowed to attend and make presentations only to: • IOC members during the Candidate City Briefing, • ASOIF/AIOWF respectively. This presentation may be combined with the Candidate City Briefing, • ANOC General Assembly preceding the vote, • IOC Session at which the host city is elected. 2. The IOC to bear the following costs: • costs incurred in relation to the visit of the IOC Evaluation Commission, • travel and accommodation for six accredited delegates for the Candidate City Briefing to IOC Members in Lausanne, • travel and accommodation for six accredited delegates for the Candidate City briefing to the ASOIF/AIOWF respectively, • travel and accommodation for six accredited delegates for the ANOC General Assembly, • travel and accommodation for 12 accredited delegates for the IOC Session at which the host city is elected. 3. Publication of the Candidature File to be in electronic format only. 4. The IOC to create and monitor a register of consultants/lobbyists eligible to work for a bid city. Formal acceptance of the IOC Code of Ethics and Code of Conduct by such consultants/lobbyists as a prerequisite for listing in the register. 5. The IOC to give access to bid cities, upon their request, to the Olympic Channel, if the creation of such Channel is approved. 57

Recommendation 4: Include sustainability in all aspects of the Olympic Games The IOC to take a more proactive position and leadership role with regard to sustainability and ensure that it is included in all aspects of the planning and staging of the Olympic Games. 1. Develop a sustainability strategy to enable potential and actual Olympic Games organisers to integrate and implement sustainability measures that encompass economic, social and environmental spheres in all stages of their project; 2. Assist newly elected Organising Committees to establish the best possible governance for the integration of sustainability throughout the organisation; 3. The IOC to ensure post-Games monitoring of the Games legacy with the support of the NOC and external organisations such as the World Union of Olympic Cites (UMVO). Recommendation 5: Include sustainability within the Olympic Movement’s daily operations The IOC to embrace sustainability principles: 1. The IOC to include sustainability in its day-to-day operations • The IOC to include sustainability in its procurement of goods and services, as well as events organisation (meetings, conferences, etc.). • The IOC to reduce its travel impact and offset its carbon emissions. • The IOC to apply the best possible sustainability standards for the consolidation of its Headquarters in Lausanne. 2. The IOC to engage and assist Olympic Movement stakeholders in integrating sustainability within their own organisation and operations by: • developing recommendations, • providing tools, e.g. best practices and scorecards, • providing mechanisms to ensure the exchange of information between Olympic stakeholders, • using existing channels, such as Olympic Solidarity, to help and assist in implementing initiatives. 3. To achieve the above, the IOC to cooperate with relevant expert organisations such as UNEP

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2.4

Review of the literature on the assessment of the impact of the Olympic Games

This section will present the studies that have been made into the effects of the Olympic and Paralympic Games for the host country, with the aim of providing a picture of the methodology adopted for these assessments and of the effects themselves. The more strictly economic effects will be considered, overlooking the social and environmental implications, important as they are (Bayliss et al., 2004; The New Zealand Tourism Research Institute, 2007; Smith, 2008). The literature that deals with the economic, and not only the economic, effects of the Games and of megaevents in general is very extensive. For example, see the review works (Kasimati, 2003 and 2006; PricewaterhouseCoopers, 2004; Matheson, 2006; The New Zealand Tourism Research Institute, 2007; Chen N., 2008; International Olympic Committee, 2011) that are summarized below.

2.4.1 Ex-ante and ex-post studies: the main methodological approaches and issues28 Generally speaking, studies that assess the economic impact of Olympic events may be classified under two headings: ex-ante studies (preceding the event) and ex-post studies (following the event). These studies tend to differ in objectives, in the methods that they follow and in their results. As the economic literature that deals with the impact of the Summer Olympics on the host cities must answer the Government’s questions regarding the actual costs of the event, they concentrate mainly on ex-ante assessments which provide the host city with a forecast of the amount of funding necessary to stage the mega-event and the potential benefits deriving from it.

2.4.2 Ex-ante studies More precisely, ex-ante studies mainly focus on the infrastructure costs that have to be incurred during the years preceding the event and on an estimate of the number of visitors expected, the number of days each visitor will stay and on the amount each visitor will spend per day during the event (Matheson, 2006). These studies use two main methodological approaches; (i) the input-output (I-O) method, which was among the first to be used in ex-ante studies; and (ii) the Computable General Equilibrium (CGE) models. With these two main methodologies, some studies use macroeconomic multipliers29 which, however, have proved to be a particularly controversial measurement owing to the arbitrariness involved in the choice of these multipliers: for this reason, they will not be taken into account. Ad-hoc summary models are also to be found among the less common ex-ante methodologies. For example in order to assess the impact of the Beijing 2008 Olympic Games on Chinese tourism, Chen H. (2008) used the Sparrow tourist expenditure model (1989), in which the supply of tourist services tends to adapt to demand in a flow model like that used in engineering studies. I-O Method. Introduced by economist Leontief in 1941, the I-O method was widely used in economic studies from the start (Blake, 2005). The classic I-O models are based on sectoral interdependence tables and do not 28

Extract from a Report on the economic compatibility for the assessment of Rome’s candidature for the 2020 Olympics and Paralympics prepared by the Economic Compatibility Commission for the assessment of Rome’s candidature for the 2020 Olympics and Paralympics. 29 The “multiplier” approach has sometimes been (mentioned by Kasimati, 2003 and 2006, who has considered the economic impact of the Athens Games) used to assess the impact of the Olympic Games by providing an estimate of the number of times a currency unit that has been spent in an economy is spent again within the borders of the same economy. The three most commonly used multipliers are the sales or transactions multipliers, the household income multipliers and the employment multipliers. The first multipliers measure the direct and secondary effects of the money that has been spent on economic activity and sales volumes; the second focus on the direct and indirect effects on household income, while the third measure the new full-time jobs created by the additional expenditure which has flowed into the economy. Although sales or transactions multipliers are those most commonly used in economic impact analysis, household income multipliers are the most significant in assessing the economic impact of hosting sports events, since they focus on the effects of the expenditure on the residents’ income, which is the aspect that is of the greatest interest to the host community. On the other hand employment multipliers are considered less reliable. Economic impact analysis based on multipliers is subject to many criticisms ranging from the dimensions of the multiplier used to the fact that by taking this approach the errors that could be made in determining the direct effect are also transmitted to the calculation of the secondary effect.

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incorporate behavioural functions. Sectoral interdependence shows the network of interchanges of resources within a system composed of a heterogeneous combination of enterprises/production sectors. Since these models consider intermediate interchanges, they are useful if assessing the impacts on industry caused by variations in the demand for goods and their structure is relatively simple and efficient in terms of implementation costs. Nevertheless there is no integration between final demand and production structure, and they do not, therefore, allow multiplier effects to be taken into account, nor, on the other hand, can they consider possible crowding-out effects or possible conditions for supply, and thus their consequences on prices. Some maintain (Blake, 2005) that for these reasons I-O models systematically overestimate the impact of events. These considerations apply to the Regional Input-Output Modelling System (RIMS II), a model that is frequently used in studies into the effects of the Summer Games in the United States. Specifically, on the basis of an analysis conducted by Kasimati in 2003, RIMS II was used to assess the impact on the local economy deriving from the Los Angeles 1984 Olympic Games. An updated version of this model was used to analyse the economic impact of the Atlanta 1996 Olympic Games and in the Houston bidding process, in order to assess the effects of the 2012 Games. RIMS II can measure the economic effects of the Games at various levels of sectoral aggregation when initial tourist expenditure is known but it does not allow these effects on nearby areas to be assessed, as it is a single-region model. A model based on alternative input-output tables, also developed in the United States and known as IMPLAN (Impact analysis for PLANning), was used in the bidding process for the metropolitan area of Washington-Baltimore to assess the economic impact of hosting the 2012 Games (see Fuller and Clinch, 2000). In 1993 the I-O model was also used by KPMG Peat Marwick to assess the economic impact of the Sydney 2000 Olympics (Kasimati, 2003). In order to establish employment opportunities and the capacities required in the various phases of the London 2012 Olympic and Paralympic Games, in 2007 Cambridge Econometrics conducted a study for the Sector Skills Development Agency using the Regionalised Multisectoral Dynamic Model (RMDM) for the UK economy, a model which is a combination of econometric time series relationships and cross-section relationships (Cambridge Econometrics, 2007). CGE Model. In view of the problems raised by I-O models, ex-ante analysis opted for the adoption of Computable General Equilibrium (CGE) models which are considered to be a step ahead of the input-output method in assessing the impact of the Games and other mega sports events. The CGE model structure integrates the disaggregated and static representations of the economy from the I-O models with the dynamics of behavioural functions. Nevertheless, behavioural parameters are not usually estimated by means of regression functions, but deduced from the set of data for a single year or specified exogenously. CGE models are more expensive to develop than I-O models owing to their more complex structure and the greater quantity of data necessary. At an initial stage CGEs derive from an extension of I-O models based on the social accounting matrices (Social Accounting Matrix, SAM) conceived by Stone (1962) and developed above all by the World Bank (Pyatt and Round, 1979, 1985 and 1990; Tarr et al., 2001). Compared with I-O models, SAM develops an integrated representation of the relationships between production sectors and institutions (households, businesses, government, capital formation and the rest of the world) which takes the entire process of the circulation of income into account and not only, as in I-Os, the interdependences between final and intermediate production. At a later stage CGEs incorporated SAM but are able to combine their Keynesian characteristics with the basic elements of the Walrasian theory of computable general equilibrium to calculate various alternative static equilibriums. After this the structure of CGEs was enlarged to incorporate intertemporal effects and dynamic adjustments. CGE models can handle the effects of crowding-out and resources constraints. For example, in 2000 and 2005 Blake used a CGE model to analyse the economic effects of tourism in Spain and the impact deriving from the London 2012 Games, respectively; Li and Blake (2008) used a CGE model to assess the economic impact of international tourism on the Chinese economy during the Beijing 2008 Games. In order to assess the economic impact of the Sydney 2000 Olympics, a study carried out by the New South Wales Treasury in 1997 used a special CGE model version, the Monash Multi-Regional Forecasting Model (MMRF), which allows the impact of the Games on the New South Wales State and on the other States, as well as on the entire Nation, to be assessed consistently. Ex-ante studies which use CGE models also have weak points, which arise in particular from the choice of endogenous and exogenous variables and the identification and quantification of the shocks which can represent the event adequately. Furthermore their structure is complex and very rigid because the constraints 60

derived from economic theories may sometimes prevent them from being able faithfully to represent the characteristics of the country under consideration. Like the I-O model, the CGE model is also subject to the risk of over-optimistic estimates of benefits. Giesecke and Madden (2007 and 2011) find three sources of this risk: failure to treat public inputs as costs; elastic factor supply assumptions and overestimation of foreign demand impacts by including the expenditure deriving from induced tourism. In fact the two authors conducted an ex-post analysis which found no sign of an induced tourism effect. Cost-benefit analysis. Unlike the I-O and CGE approaches, cost-benefit analysis, as a method of assessment, clearly distinguishes positive impacts (benefits) from negative impacts (costs), quantifying them in monetary terms and presenting the final value of the project in terms of net present value (NPV), which is compared with the value that can be obtained from other investment programmes. Apart from purely economic impacts, costbenefit analysis also considers the social, environmental and other kinds of effects which affect individuals’ interests. Consequently with this approach the impacts of projects financed from public funds can be calculated more precisely, justifying the decision that has been taken more accurately and efficiently from a social point of view (Boardman et al., 2006; Lenskyj, 2000). The following stages in a typical cost-benefit analysis (Boardman et al., 2006) are: (1) statement of the other projects that can be carried out; (2) choice of the implementing body; (3) identification of positive and negative impacts; (4) forecast of the useful lives of the project and of the alternatives; (5) monetisation of all the effects identified in (3); (6) discounting the costs and benefits; (7) calculation of the net present value of the project and of the alternatives; (8) sensitivity analysis; and (9) final choice. The estimate of the net effects on the national and regional economy of putting on sports events is one of the most salient examples of the differences between the results obtained by analysing impact with the I-O and CGE methods and the cost-benefit approach. Studies conducted using the former two methods conclude that staging sports events have favourable effects on public budgets and on the national and regional economies. On the other hand the results given using the cost-benefit approach are, at least in financial terms, unfavourable for the local economy (see, for example, Long, 2005; Owen, 2005; Rappaport and Wilkerson, 2001; Shaffer, Greer and Mauboules, 2003). Moreover, some of the economic benefits, such as the increase in the number of tourists and in employment rates (or a reduction in unemployment rates), the increase in the number of new industrial plants, the rise in the number of taxpayers and the increase in revenues from the management of sports facilities, which are often assumed before the project is delivered, do not materialise in most cases. For example, only 31% of the Atlanta Olympic Committee’s expenditure for the Summer Olympics had a positive impact on the local economy (Baade, Matheson, 2002). The impact of the Olympics on the local employment level has been studied by Green (2003). His research, based on various Olympic Games (Lake Placid 1980, Calgary 1988, Salt Lake City 2002 and others), showed that there was more work in Olympic cities/regions owing to the construction or enlargement of facilities before the Games but that in the period after the Games this increase was set off when the number of jobs fell drastically. In short, the study showed that there was no long-term positive effect on the local/regional employment levels (Green, 2003). When a city is named to host the Olympics, the organisers often underestimate the expected costs of the Olympic projects. Apart from the accounts published by the Olympic Committees, the candidate cities’ bids might not give full information regarding the capital expenditure required to deliver the Olympic Games and the improvements in urban infrastructures necessary in order to host them. In other cases Organizing Committees are forced to raise their budgets while work on the execution of their Olympic projects is in progress in order to be able to construct the Olympic facilities in time and in compliance with the rules and with the commitments they have made to the IOC. For example the organisers of the Summer Olympics in Athens in 2004 initially budgeted for a cost of 1.6 billion dollars, but spent 16 billion dollars in the end. The costs of the Beijing 2008 Olympic Games were originally estimated as 1.6 billion dollars but when all the expenses on the necessary infrastructures were counted the cost rose to 40 billion dollars. Putting on the Games in Barcelona in 1992 the Spanish Government accumulated a total debt of 4 billion dollars, while the Catalan Government incurred a debt of 2.1 billion dollars. Finally, in spite of the final surplus of 28 million dollars received from the Organizing Committee of the 1998 Winter Games at Nagano, the public debt allocated to various levels of the Japanese 61

Government reached the figure of 11 billion dollars (Zimbalist, 2010, page 10). Note, however, that Zimbalist’s data have been challenged as not fully reliable To sum up, the results of the studies based on cost-benefit analysis conclude that most large-scale sports events, such as the Olympics, were not a good thing for the state budget in financial terms. Nevertheless staging mega sports events may be useful for society and the local residents in that improvements in urban infrastructures help to raise living standards. A range of political aspects should also be considered, such as increased prestige for the country concerned and for the host city, and moral factors such as the host population’s pride and patriotism. Indeed these are the aspects which lead Governments to bid to put on the Olympics and other largescale sports events. Unfortunately the contributions of these factors in terms of benefits and costs are still hard to estimate accurately using the cost-benefit method, while they are completely overlooked in traditional economic impact analyses.

2.4.3 Ex-post studies An ex-post analysis examines the economic situation in the geographic area involved in the Olympic event before and after, trying to isolate the event from the influence of other factors which could have arisen at the same time and have contributed to its economic impact (Baade and Matheson, 2002). The question is, in fact, to make a correct definition of the situation as it would have been if the event had not taken place (the counterfactual or base situation). Ex-post studies, therefore, attempt to provide details of the economic impact of a particular mega-event on the basis of various economic indicators, such as GDP changes, per-capita income of the host city’s residents compared with other similar cities, employment rates, sales of various goods, occupancy of hotel facilities, airport traffic, etc.. The features of the two main ex-post methods may be summarised as follows. The first method uses other similar cities which have not hosted such an event as bases for reference (situation in the absence of the event) and compares their performance with that of the city hosting the Olympic event. This requires the identification of variations in different economic indicators between the two cities before, during and after the mega-event. The second method uses the past as the counterfactual situation, calculating the economic identifiers only of the host city during the Olympic event and comparing them with those of the same city over different periods of time. In some cases ex-post analysis has relied on ad hoc sample surveys: this is a less utilised qualitative method, consisting in submitting questionnaires to a control group before, during and after the mega-event. This method may be used to evaluate more judgmental aspects of the mega-event, such as its impact on the host country’s image. Baade and Matheson (2002) conducted an ex-post analysis for the assessment of changes in employment in Atlanta and Los Angeles, which were attributable to the 1996 and 1984 Games, respectively. These two authors took an econometric approach based on behavioural functions with dummy variables for the Olympic event. On the basis of these ex-post studies, the coefficients estimated for the Games did not prove to be statistically significant. Although this econometric approach is relatively simple and flexible, it is not able to provide a sufficiently complete picture of the economic situation observed. Apart from the methods mentioned, Giesecke and Madden (2007 and 2011) assessed the economic impact of the Sydney Olympics by conducting an ex-post analysis based on a dynamic CGE model. In 1995 and 2002 Brunet conducted two descriptive ex-post analyses which sought to summarise the impact of the Barcelona 1992 Olympics from a number of different points of view (costs incurred, sources of finance, urban transformation, employment, etc.), also evaluating the legacy of the mega-event. On one hand ex-post studies should be encouraged because they could be useful to potential host cities, which could pick out areas for improvement on the basis of past experiences, but they are subject to certain specific problems. Particularly, as Baade and Matheson (2002) and Matheson (2006) stress, the biggest issue is the identification of the economic impacts perceived as the results of a mega-event and their separation from normal economic fluctuations, which have been seen to be very hard to isolate in vast metropolitan areas. 62

2.4.4 The contingent valuation method A contingent valuation is a “non-market” type of analysis because it entails the attribution of a monetary value to goods and services which have no reference market and are thus considered public goods. This approach is based on interviewing individuals in order to see how willing they are to pay for a certain event to be held or not (Coates and Humphreys, 2003). Specifically, the interviewees are asked to state whether they are willing to pay for some non-market goods by answering an open or closed question questionnaire. The expression “contingent” refers to the fact that the interviewees are asked to state their willingness to pay for hypothetical events to take place (Walker and Mondello, 2007). Scholars obviously find that this is a controversial method because it is based on the assessment of hypothetical scenarios (Walker and Mondello, 2007) which, in some cases, could be overestimated by the interviewees. In spite of this intrinsic weakness, some scholars have shown that willingness to pay determined by means of the contingent valuation method is more realistic than that obtained using other methods, such as, for example, the conjoint analysis (Sattler and Nitschke, 2003). On the other hand empirical findings concerning possible overestimates of the hypothetical scenarios by the interviewees are controversial. For example some studies show an overestimate on the part of the interviewees of willingness to pay for a hypothetical scenario as compared with the present scenario (Johannesson, Liljas and Johansson, 1998; Kealy, Dovidio and Rockel, 1988; Seip and Strand, 1992), while other empirical works do not report substantial differences (Carlsson and Martinsson, 2001; Sattler and Nitschke, 2003). Some studies have tried to allow for the problem of overestimating willingness to pay by correcting the results obtained using ex-ante or ex-post techniques (Johnson, Whitehead, Mason and Walker, 2007; List, 2001; Whitehead and Cherry, 2007). Nevertheless, in view of the weakness of this method, it is suggested that caution should be exercised in interpreting the results obtained through a contingent valuation. This method has been widely used in quantifying the success of sport events (Humphreys, Johnson, Mason and Whitehead, 2011; Ratzel and Weimann, 2006; Wicker, Prinz and von Hanau, 2012). As regards estimating the value of hosting mega sport events, a work by Dwyer, Mellor, Mistilis and Mules in 2000 emphasises the importance of the method in assessing the value of their intangible effects. In a study by Atkinson et al. in 2008, the citizens of London, Manchester and Glasgow were asked to express their willingness to pay to host the 2012 Olympics in London on the basis of the possible intangible benefits from holding the event. According to the results, the residents of London would have been willing to pay an average of 22 pounds, those of Manchester 12 and, finally, those of Glasgow 11. The authors suggest that intangible benefits should be taken into account in a cost-benefit analysis in order to justify holding big sport events. Other studies based on the contingent valuation method have argued the importance of the intangible effects of big sport events (Barget and Gouguet, 2007; Süssmuth, Heyne and Maennig, 2010). Finally, some other studies have focused on quantifying national sporting success in an Olympic competition (Ratzel and Weimann 2006; Wicker et al., 2012; Humphreys et al., 2011), finding that achieving a national sporting success in an Olympic competition or in the Football World Cup is very important and assumes a value for the citizens.

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2.5

The quantification of economic effects in the literature

Existing studies are not always explicit in specifying the data on which the assessments have been made, especially, the amount of the costs incurred in order to gain the benefits which arise from these costs. Obviously a decision to use public funds to host the Games cannot be justified to the community without a clear statement of the benefits which it will derive from their being held, possibly compared with an alternative use to which these funds could be put. In the review which follows, the first studies set out are those which clearly express the magnitude of both costs and benefits, the survey being completed with those which only state the benefits. Generally speaking, four distinct phases must be taken into account in quantifying costs:    

bid/planning phase: costs in bidding process and host nation’s presentation of a complete plan for the Olympic event; build-out phase: costs of investments such as the construction of infrastructures (such as stadiums and swimming pools) and the improvement or creation of transport networks, accommodation and infrastructural connections; hosting phase: operating costs of organising the Games and security expenses; post-event phase: costs of maintaining the stadiums and facilities created to host the Olympic Games.

The results of quantifications of the cost of organising the Olympic Games as shown in existing publications are reasonably consistent, even if this amount is only usually only quite a small portion of their overall cost, while there is more difficulty when it comes to calculating the cost of investments in infrastructures. For example, from 2002 to 2006 Beijing invested about 36 billion dollars in infrastructures for the 2008 Games (Hsuan-Wei Kang, 2007), while operating costs came to only 2.6 billion dollars (Na Chen, 2008). The difficulty in quantifying investments in infrastructures arises from the arbitrary nature of a decision to classify an expense as a direct and not an indirect investment. The case of Barcelona is a striking example: direct investments made to host the 1992 Games (Brunet, 1995) amounted to about 1 billion dollars, while indirect investments were seven times higher than the former, coming to 7 billion dollars. As regards the assessment of benefits, in a 2002 study Preuss gives quite detailed information regarding the revenues received and estimated for various Olympic events. The author states various different items of revenue: revenues from TV rights; revenues from sponsorships; revenues from the sale of tickets to attend the mega sports event and revenues from “special means of financing” such as gadgets, stamps and lotteries connected with the Games. The economic effects of hosting the Games may be estimated in terms of growth in employment and/or GDP. As regards this, it must be borne in mind that ex-ante studies are liable to the risk of over-optimistic estimates of the benefits (Shaffer et al., 2003, page 4; Crompton, 1995; Hudson, 2001)30, a particularly common risk for studies adopting the I-O method. Some ex-ante studies also use economic multipliers which, as has already been pointed out, are a rather controversial form of measurement. This is the case of the Athens Olympics: some studies which focused on the economic effects of these Games used macroeconomic multipliers and ended in estimating an economic impact from the Olympic event in a medium GDP scenario which was well outside the range of values in which the estimated results for other Olympics are included. In short, except for the Athens 30

The reasons that have been found for overestimating revenues are: (1) in economic impact analysis, the expenditure on a project has a positive effect on the economy studied. Thus, in practice, all investment projects assessed by means of economic impact analysis usually have relevance for public expenditure; (2) capital investment costs are usually treated as benefits on the grounds that they further stimulate economic activity through the multiplier effect. Nevertheless, in a situation in which the initial costs are substantial while the induced effect on the remaining economic activities is low, it seems permissible to wonder whether such investments satisfy the criterion of efficiency; (3) the crowding-out effect of public investment on possible private investments are not taken into account in economic impact analysis; (4) additional jobs created by investment projects are calculated as if the local or regional economies had high unemployment rates before the projects were completed. The increase in jobs, however, is often taken up by migrants coming not only from other areas of the country involved in the Games but even from abroad. Moreover, the new jobs tend to be temporary rather than permanent; (5) in economic impact analysis opportunity costs are very often ignored because it is presumed that production capacity is underused in the economy involved in the Games and thus, not being employed, may be employed at an opportunity cost of zero, which is not really the case.

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Olympics for which, as specified, over-optimistic benefits were estimated, the total economic impact in terms of GDP passed from 2.3 billion dollars for the Los Angeles 1984 Olympics at 1984 values (with a GDP percentage impact of 0.47% in the year of the Olympics; PricewaterhouseCoopers, 2004) to 13.2 billion dollars for the Beijing 2008 Olympics (with an expected annual GDP growth of 0.8% from 2004 to 2008; Ralston et al., 2008). In any case a broad-based viewpoint has to be taken when assessing these economic effects, also considering the impact on the whole country and not only on the individual state or city hosting the Games. Specifically, in a study conducted in 2005 Blake assessed the impact of the London 2012 Games. The results obtained showed that the effects in terms of GDP were higher for London than for the entire United Kingdom; in particular, the GDP increase in the period from 2005 to 2016 is equal to 1.9 billion pounds for the United Kingdom, while it is equal to 5.9 billion pounds for London. As well as publications regarding tangible benefits, there is recent literature which focuses on estimating the intangible benefits from staging mega sport events (Maenning and Porsche, 2008). Many researchers have shown that there is a considerable feeling in favour of hosting big football events (Allmers and Maennig, 2009; Kavetsos and Szymanski, 2010). Other intangible effects are bound up with the host country’s image, the sentiment of national pride and greater knowledge and practice of elite sports (Atkinson et al., 2008; Barget and Gouguet, 2007; Jinxia and Mangan, 2008). Intangible effects may also derive from the sporting success of the nation’s athletes in the Games or other mega events. Sporting success may create public goods such as sentiments of national pride (Allison and Monnington, 2002; Johnson, 2008), local unity (Castellanos, Garcia and Sànchez, 2011) and a feeling of well-being among the population (Forrest & Simmons, 2003). As public goods, their main characteristics are that they are non-excludable and non-rivalrous in their consumption (Downward, Dawson and Dejonghe, 2009), so that every citizen can derive a benefit from the attainment of sporting successes, for example by talking about the winning athletes. Success in sport may make people happier and can influence the perception of their own financial position and that of their country (Dohmen, Falk, Huffman and Sunde, 2006). Some research has stressed the importance of sporting success, suggesting that Governments are increasingly aware of the value of success in elite sports (Green and Houlihan, 2005, page 1). The value of success in the Olympics, however, is difficult to measure because it is an intangible. Literature suggests that various factors affect the value of sporting success: they may be divided into capital consumption, intangible and socio-economic factors. The first factor is the repetitive consumption of sport (Schellhaaß and Hafkemeyer, 2002), for example watching the Olympics on TV. The intangible factor is the cultural significance or the non-use value of sport events. In other words these intangible assets are linked to the concept of nominal capital, which involves the effects generated by honour, prestige and recognition. The study of the population of Canada by Humphreys et al. in 2011 concludes that these intangible elements have a significant influence on the value of success in the Olympics, a value which is different according to individuals’ socio-economic backgrounds; specifically, the context in which a person lives and the related income can play a crucial role in the quantification of the value of Olympic success (Becker, 1962). Ex-post studies analysing the impact of an Olympic event after it has taken place do not always find confirmation of the benefits estimated in ex-ante studies. Giesecke and Madden (2007, 2011) use a CGE model to estimate the impact of the Sydney Games trying to eliminate potential benefit overestimation factors (such as not including public inputs among costs, overestimating tourist demand from abroad and elastic factor supply assumptions). Specifically, on the basis of the analysis conducted by the two authors, the Sydney Games generated a loss of 2.1 billion dollars in Australia’s public and private consumption in terms of present value. A number of ex-post studies focus on the impact of the Olympic event in terms of employment (Baade and Matheson, 2002; Hotchkiss et al., 2002; Tucker, 2006; Ahmar, 2008). Overall these studies show that an Olympic event can have positive effects on employment in the host country, but that these effects are often transitory and limited to the year of the Games.

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3

Historical data on the Olympic Games Table 35. Cities Bidding for the Olympic Games - 1984-2016

Year of the start of the candidature process 1978

Year of the Games

Host City

Other Candidate Cities

Applicant Cities

1984

Los Angeles

none

none

1981

1988

Seoul

none

1986

1992

Barcelona

1990

1996

Atlanta

1993

2000

Sydney

Nagoya Paris, Belgrade, Brisbane, Birmingham Athens, Toronto, Melbourne, Manchester, Belgrade Beijing, Manchester Berlin, Istanbul

1997

2004

Athens

Rome, Cape Town, Stockholm, Buenos Aires

Istanbul, Lille, Saint Petersburg, San Juan, Seville

2001

2008

Beijing

2005

2012

London

2009

2016

Rio de Janeiro

Toronto, Paris, Istanbul, Osaka Paris, Madrid, New York, Moscow Madrid, Tokyo, Chicago

Bangkok, Cairo, Havana, Kuala Lumpur, Seville Havana, Istanbul, Leipzig, Rio de Janeiro Baku, Doha, Prague

none none none


Table 36. Participating countries, number of athletes, opening and total costs - 1992-2012

Host Year of the Games 1992 1996 2000 2004 2008 2012

City Barcelona Atlanta Sydney Athens Beijing London

Participating countries 169 197 200 201 204 205

Number of participating athletes 9,356 10,318 10,651 10,625 10,500 10,973

Costs of opening ceremony $29 million $40 million $40 million $77.5 million $332 million $127 million

Total costs (approximate figures) $6 billion $1.2 billion $4 billion $8.9 billion $40 billion $15-20 billion


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Table 37. Potential impacts of the Olympic Games Positive Increase in economic activities

Economic impacts

Job creation Increase in labour supply Rise in living standards Rise in income

Physical and environmental impacts

Socio-cultural impacts

Construction of new facilities Recovery of degraded areas Improvement in local infrastructures Preservation of the heritage Promotion of the environment Spin-off for sport Diffusion of less polluting manufacturing and social standards Permanent increase in the degree of interest and local participation in the types of activities associated with the event Increase in the host community’s capacities and its ability to organise, plan and implement projects Making the practice of sport more widespread among all strata of the host population Diffusion of the Olympic message and values among the young

Negative High costs of staging the event (costs of opening ceremony, security, construction of mega-facilities, etc.) Increase in local authority debt Tax increases Possibility of better alternative investments Insufficient capital and poor estimate of the costs of the event Environmental damage Overcrowding Architectural pollution Unused or underused facilities Destruction of the heritage Gentrification processes

Marketing activities which may be personal or private

Potential increase in crime

Social displacement

Increase in local pride and community Tendency to adopt defensive attitudes spirit with regard to the host region Psychological impacts

Greater awareness of visitors’ Hostility perceptions Joyous and relaxed atmosphere during the event Enhanced international recognisability Distorsion of the true nature of the of the host country and city event to reflect the values of an elite Development of planners’ skills

Political impacts

Impossibility of attaining objectives

Increase in public-private partnerships Increase in administrative costs Use of the event to justify unpopular decisions Corruption Failure to cover costs

Source: data processed by OpenEconomics based on Furrer’s study (2002)

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Table 38. Positive legacies and negative induced effects of staging the Olympic Games

Positive Philanthropic donations Participation in sport

Tangible effects

New venues for events Urban regeneration Extra-jobs A new start-up of businesses Infrastructures for general use Increase in tourism Better environmental conditions Marketing the host city International reputation Experience and know-how Image, identity Love of country

Intangible effects

Negative (as induced effects) Unnecessary facilities Increase in public debt Temporary nature of extra-jobs and economic activities Tax increases

Bad image Social injustices Loss of other investment opportunities Over-crowding

Opportunities for local businesses Renewal of community spirit Production of ideas Production of cultural values Popular memory Education Greater civic sense

Source: data processed by OpenEconomics based on studies by Preuss (2006) and Essex and Chalkley (1998)

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Table 39. Main valuation methods used to assess the effects of the Olympics Type of study

Methods

Characteristics _They are useful if assessing the impacts on industry caused by variations in the demand _Their structure is simple and efficient in terms of implementation costs _They are based on sectoral interdependence Input-Output (I-O): RIMS tables and do not incorporate behavioural IMPLAN RMDM functions _There is no integration between final demand and production structure _They do not allow multiplier and/or crowdingout effects to be taken into account _They overestimate the impact of the event _They integrate the I-O models with the CGEs (including dynamic models) dynamics of behavioural functions _They can handle the effects of crowding-out MMRF and resources constraints _They are more expensive to develop than I-O SAM models _They overestimate the impact of the event _Problems relating to the choice of endogenous and exogenous variables and the identification and quantification of the shocks

Economic Multipliers: Ex-ante studies Transactions Multipliers (TM) Household Income Multipliers (HIM)

Employment Multipliers (EM)

Cost-benefit Analysis

Results _They are focused on the infrastructure costs that have to be incurred, on an estimate of the number of visitors expected and the amount each visitor will spend per day during the event _The economic effects may be estimated in terms of growth in employment and/or GDP _ They conclude that staging sports events have favourable effects on public budgets and on the national and regional economies _The total economic impact in terms of GDP passed from 2.3 billion dollars for the Los Angeles 1984 Olympics at 1984 values (with a

Empirical literature: Blake 2005; PricewaterhouseCoopers 2004; Ralston et al., 2008; Kasimati, 2003; Fuller and Clinch, 2000; Cambridge Econometrics, 2007; New South Wales Treasury, 1997; Giesecke and Madden 2007 e 2011.

_They are used to assess the impact of the Games by providing an estimate of the number of times a currency unit that has been spent in an economy is spent again within the borders of the same economy _The TMs measure the direct and secondary _This is a particularly controversial method; effects of the money that has been spent on unreliable results economic activity and sales volumes _HIMs focus on the direct and indirect effects on household income _EMs measure the new full-time jobs created by the additional expenditure which has flowed into the economy _The results conclude that most large-scale _It clearly distinguishes positive impacts sports events, such as the Olympics, were not a (benefits) from negative impacts (costs), good thing for the state budget in financial quantifying them in monetary terms terms and were unfavourable for the local economy

_It presents the final value of the project in terms of NPV, which is compared with the value that can be obtained from other investment programmes

_Some of the economic benefits, such as the increase in the number of tourists and in employment rates, the increase in the number of new industrial plants, the rise in the number of taxpayers and the increase in revenues from the management of sports facilities, which are often assumed before the project is delivered, do not materialise in most cases

_It considers the economic impacts, as well as the social, environmental and other kinds of effects which affect individuals’ interests

_The organisers often underestimate the expected costs of the project

Empirical literature: _With this approach the impacts of projects can Boardman et al. 2006; Lenskyj 2000; Long 2005; be calculated more precisely Owen 2005; Rappaport and Wilkerson 2001; Shaffer et al. 2003; Green 2003.

69

Type of study

Methods

Comparison of the situation with and without the Event considering similar cities

Characteristics

Results

_Ex-post studies attempt to provide details of the economic impact of a _They require the identification of particular mega-event on the basis of variations in different economic indicators various economic indicators, such as GDP between two similar cities, which have changes, per-capita income of the host not hosted the Games, before, during and city’s residents compared with other after the mega-event similar cities, employment rates, sales of various goods, occupancy of hotel facilities, airport traffic, etc. _The biggest issue is the identification of the economic impacts perceived as the results of a mega-event and their _They do not always find confirmation of separation from normal economic the benefits estimated in ex-ante studies fluctuations, which have been seen to be very hard to isolate in vast metropolitan areas _A number of ex-post studies focus on the impact of the Olympic event in terms of employment. These studies show that an Olympic event can have positive effects on employment in the host country, but that these effects are often transitory and limited to the year of the Games

Ex-post studies

Empirical literature: _This method uses the past as the counterfactual situation, calculating the economic identifiers only of the host city during the Olympic event and comparing them with those of the same city over Comparison of the situation different periods of time with and without the Event _The biggest issue is the identification of considering the host city’s past the economic impacts perceived as the results of a mega-event and their separation from normal economic fluctuations, which have been seen to be very hard to isolate in vast metropolitan areas _This is a less utilised qualitative method _It consists in submitting questionnaires to a control group before, during and after Ad-hoc sample surveys by the mega-event submitting questionnaires _This method may be used to evaluate more judgmental aspects of the megaevent, such as its impact on the host country’s image

Baade and Matheson 2002; Giesecke and Madden 2007 and 2011; Brunet 1995 and 2002; Matheson 2006; Hotchkiss et al. 2002; Tucker 2006; Ahmar 2008).

_Baade and Matheson (2002) conducted an ex-post analysis for the assessment of changes in employment in Atlanta and Los Angeles, which were attributable to the 1996 and 1984 Games, respectively. These two authors took an econometric approach based on behavioural functions with dummy variables for the Olympics.

70

Type of study

Methods

Characteristics

Results

_This method is used to assess the intangible _This method has been widely used in effects of a mega- event quantifying the success of sport events

Contingent valuation

Questionnaires which estimate individuals’ willingness to pay for a certain event to take or not to take place

_The interviewees are asked to state whether they are willing to pay for some non-market goods by answering an open or closed question questionnaire

_Some studies focused on estimating the value of hosting mega sport events emphasise the importance of the method in assessing the value of their intangible effects

_The expression “contingent” refers to the fact that the interviewees are asked to state their willingness to pay for hypothetical events to take place

_Intangible benefits, expressed through the calculation of willingness to pay, should be taken into account in a cost-benefit analysis in order to justify holding big sport events _Other studies have argued the importance of the intangible effects of big sport events

_This is a controversial method because it is based on the assessment of hypothetical scenarios which, in some cases, could be overestimated by the interviewees (on the other hand, empirical findings concerning possible overestimates by the interviewees are controversial)

_Some studies have focused on quantifying national sporting success in an Olympic competition, finding that achieving a national sporting success in an Olympic competition or in the Football World Cup is very important and assumes a value for the citizens

Empirical literature: Humphreys et al. 2011; Ratzel and Weimann _It is suggested that caution should be 2006; Wicker et al 2012; Dwyer et al. 2000; exercised in interpreting the results obtained Atkinson et al. 2008; Barget and Gouguet 2007; Sussmuth et al. 2010; Maenning and Porsche, 2008; Johnson 2008; Kavetsos and Szymanski 2010.


71

4 Appendix 4.1 Methodology for estimating TV Benefits Figure 12 shows the TV services demand curve as a function of unit cost (by time units). For viewers, costs include both the opportunity cost of the time spent watching television, the unit cost of any services purchased on line and the cost of hardware (TV set, set-top boxes, etc.). Figure 12. Consumer surplus P’ Prezzo TV service price -

del servizio TV P*

d’

d”

d P0

P1

C

A

B TV services quantity

0

q0

q1

Quantità di servizi TV

72

In Figure 12, Po represents price and qo the quantity of TV services requested in the scenario without the Project. It can be imagined, in order to put the problem of unit cost into focus, that the quantity of TV services is

P

measured as the quantity of services per hour. At initial price 0 , except for the last quantity made use of, consumers are willing to pay a higher price, in terms of time, cost of the services and cost of the hardware, than the available technology requires and market supply asks. These prices, which represent willingness to pay corresponding to lower amounts of consumption of watching time, are measured by the ordinates of demand curve d. The present consumers, therefore, receive a benefit corresponding to the surface under the demand

P P *C

curve of traditional TV and measured by the area of triangle 0 . The range of viewing and interactive services connected with the 2024 Olympics as a result of the multiplication of options and the introduction of services which were not previously available thus leads to an improvement in the price/quality ratio, allowing the possibility of cutting the price, measured as the cost per hour paid by the user. The improvement in these opportunities will result in an increase in the willingness to pay of all consumers (and for all the quantities consumed). In other words the demand curve will move to the right. It will presumably become less elastic (i.e. less sensitive to price variations) and will move clockwise with respect to the traditional technology curve. This process will take place gradually; the figure shows two demand curves, one intermediate, d’, and one final (i.e. after the shift has ended), d”. Users will request quantity q1 at the new equivalent cost P1(lower owing to the improvement- in quality that has intervened), with a gain in consumer surplus equal to the areas of trapeze

P0 P1 BC

under the new demand curve and in the area between the old curve and the new one. These two areas are the difference between consumer surplus with the supply of services related to the Olympics and surplus without the innovation. The variation in demand will have two components: (a) on one hand the increase in the number of users will be the result of the “generated” demand, where generated means the consumption that starts when the Olympic Games are being held and which consists in the enjoyment of characteristics - the viewing, analyses, images, expansion of the possible choices and the number of services which would not be offered without the Project; and, on the other hand (b) the range of images and viewing related to the Olympics will modify the habits of those who will give up other ways in which they use their free time after these new experiences and prefer the opportunities for enjoyment made possible by sport as a spectacle and by the analyses and interactive activities associated with the Games. This phenomenon of diversion of consumption will be a function of the prices and competitiveness of what TV offers. The increase in the number of users in (a) can be divided, in its turn, into two categories: (a’) the additional consumption created; and (a”) the greater level of utilisation of characteristics such as the quality and wide range of choices, consumption being equal. Obviously the second category is attributable to the diversion of consumption, because it regards the consumption which would exist even without the Project but which, moving to TV as a result of the project, is able to enjoy an improvement in quality together with a reduction in prices. In Figure 1 the portion of demand related to the “diverted” consumption which benefits from TV’s lower cost

P P CB

and improved characteristics (quality, more services, etc.) is constituted by the minor base of trapeze 0 1 , representing “generated” demand, i.e. the difference between the major base and the minor base. It should be noted that the demand considered in Figure 1 is the aggregate of the characteristics of the TV coverage of the Olympic Games that is offered. This aggregate includes characteristics such as the quality of the signal, the quality of the programmes and the number of services. The reasoning that has been adopted up to this point, then, can also be applied to measure the specific benefit to direct users from each of these sources of benefits. Of course if the benefit from the improvement in quality can be measured in relation to the reduction in price and the consequent increase in demand for TV “time”, the surplus determined by the improvements in the other characteristics of the service must be measured estimating the increase in demand arising from the value that the users attribute to these characteristics. Accordingly, a series of parameters must be found to summarise the users’ satisfaction. These parameters may be calculated as increases in shadow prices (i.e. willingness to pay for the individual characteristics), the characteristics themselves and the increase in the time devoted to TV audio-video services. 73

4.1.1 TV coverage of the Games and consumer surplus As we argued in the previous paragraph, TV coverage of the Games generates two different effects: (1) an improvement in the quality of TV goods and services; and (2) the introduction of new goods and services. Both (1) and (2) involve changes both from the previous situation and the most probable scenario without the Project. Since the use of TV, measured as viewing time, would have a higher unit cost (i.e. a price increase) as a result of improvements and innovation, it is not immediately clear whether household well-being would rise as a consequence of coverage of the Olympics. If on one hand it could be assumed that there would be an increase in demand for this coverage, price being equal, and that there would thus be a rise in well-being, the increase in cost that the TV viewer will have to pay in order to enjoy these improvements will reduce the corresponding consumer surplus. More generally, the increase in consumer well-being, in monetary terms, can be measured by assessing its shadow price. In the situation without the Project, the value of enjoying traditional TV can be expressed as:

V0  P0* q0

, where

V0 is the TV viewer’s enjoyment value in terms of willingness to pay (WTP), q 0 is the P0*

quantity enjoyed, expressed in units of time; and is the unit value the viewer attributes (the shadow price). The net benefit to the viewer is equal to the difference between willingness to pay and cost at market price:

B0  ( P0*  P0 )q0

. If the real income (including the opportunity cost of free time) allocated to watching TV is

B  y (P*  P ) / P

y0  P0 q0

0 0 0 0 . The difference between , the benefit to the consumer may be expressed as: 0 shadow price and market price, on the other hand, may be expressed as consumer surplus which, if elasticity is (locally) constant (Haussmann, 2003), may approximate to:

P0* 

P0  0  1 , where  0 is the elasticity of demand (in absolute terms) with respect to a price in the vicinity of

the market price (i.e. the actual unit cost of TV time for the viewer)31. This quantity is greater than 1 because in markets which are not perfectly competitive, it would be irrational for enterprises to operate within a price range for which demand is inelastic. In fact if the response of demand to a price increase were to be less than proportionate (inelastic demand), it would be advantageous to continue to raise the price because the revenue would rise more than in proportion. Therefore, the benefit may be expressed as: be negative if

B0  y0 /(0  1)

1  0

, and will not

. The introduction of a new service (or of a new range of services) will provide a benefit ( 0  1 ) ( y  y0 ) B  B1  B0  y0  1 ( 0  1)(1  1) (1  1) 32. That is to say, the benefit will be in proportion to the equal to difference in elasticities and the increase in the income allocated to the new consumption. For example, if

 0  1,5 , benefit B0 , measured as a percentage of the consumer’s total income, will be double the portion of

31

Consumer surplus is defined as willingness to pay over market price. It can be measured as the area below the demand curve, between market price and the maximum price at which demand is zero. For a constant elasticity function, this price is infinite so that consumer 

surplus is measured by the integral:

 Ap

P0



dp 

P0 q0 1

, where

q  Ap  is the demand for the good in question expressed as a

function of the price of the good itself (the other prices are included in constant A and are assumed to be constant). 32 Subtracting the benefit without the Project from the benefit with the Project, the result is a consumer surpl us increase of =

y1  y0  y  y y1 y y (  1)  y1 (1  1)  1 0 0 1 . As  0  1 0 = (1  1)(0  1) (1  1)(0  1) 1  1 0  1 (1  1)(0  1) y  y0 1  0  y0 y1  y0  ( y1  y0 ), after replacing and simplifying, the result is: B  1 . (1  1) (1  1)(0  1)

B 

74

B0 1   2) y 1,5  1 income allocated to TV ( 0 , while the increase in the benefit, as a percentage of total income, assuming that the portion of income allocated to TV rises from 5% to 7% and that elasticity falls from 1.5 to 1.2,

B / y  0,05 will be equal to: the consumer’s total income.

1,5  1,2 0,07  0,05 0,3 0,02   0,05   (1,5  1)(1,2  1) (1  1,2) 0,1 0,2 0.15+0.1=0.16, i.e. 16% of

1 1 0,07  0,05 B / y  0,5[(  )  ] 1,2 1,5 1,2 : = 0.083+0.017 =0.1 The increase in well-being resulting from the introduction of a range of new TV and digital services (such as those made possible by TV coverage of the Olympics in the cloud era) thus has two components, the first of which is reduction in the elasticity of demand (increase in willingness to pay for every given quantity) and the second the increase in the portion of income intended for the purchase of the new good. For the 2024 Summer Olympics, the innovations in mind do not only consist of TV hours which can be enjoyed in the traditional manner, but a whole range of services conveyed by cloud (mobile telephones, computers and other communication devices). Since this range increases the number of goods at the consumer’s disposal without taking the place of any one good in particular, the increase in well-being tends to coincide with the portion of income intended for the purchase of new goods/services, while if any are replaced, the decrease in benefit due to the reduction in consumption of the traditional good has to be taken into account. In this case the major component is the reduction in the elasticity of demand which the introduction of a higher quality good causes. As can be seen from the examples, for small variations in the portion of income devoted to a group of substitute goods the variation in well-being is dominated by the elasticity effect, i.e. the fact that the demand curve moves towards the right and becomes more inelastic, since the consumer is willing to pay more for the same quantities of goods owing to the improvement in quality or for added characteristics or services which were not previously available.

4.1.2 Estimation of consumer surplus and benefits from TV coverage Italy’s info-entertainment market is dominated by television, which is present in 96.2% of homes and seen by virtually 100% of the population. According to the ISTAT survey of “Household consumption in Italy” (ISTAT, 2013), the average Italian household spent 125 euro per capita on radio, television and allied products in 2012. Overall, actual expenditure is moderate, just 0.7% of individual income (17,600 euro per capita in 2012). According to research by “The Global Media Intelligence Report”33, Italians spend an average of 223 minutes per day watching TV programmes. These hours have a considerable value, both owing to their opportunity cost, equal to 21.60 euro per hour34, and because they partly respond to their interest in commercials, which, in their turn, pay for viewers to be provided with programmes virtually free of charge. The supply of TV services related to coverage of the 2024 Olympics, including the new interactive services and the accessibility provided by cloud, will give rise to a physiological increase in TV viewing among Italian users as a consequence of greater demand for TV and the increase in the capacity of TV services to satisfy users’ individual requirements. It is estimated that the increase will be 30 seconds/day if the Games are hosted in Rome and 27 seconds per year if the host city were to be another. Furthermore, an increase in annual expenditure on radio and television and allied products is expected in the Olympics year, estimated as 5 euro per year if the Games are hosted in Rome and 4.5 euro per year if the host city were to be another. The table below shows the present situation and the scenarios with and without the Rome 2024 Project.

33 34

The Global Media Intelligence Report – September 2013 – eMarketer Team, Starcom Mediavest Group. The monetary value of the stock of human capital in Italy - ISTAT 2014.

75

Table 40. Parameters for estimating TV use value - Base scenario Status quo Italians over 14 years TV viewers (%) TV viewers (num) viewing per day (min) viewing per year (hours) hourly use value of TV (euro) Source: data processed by OpenEconomics

Olympics in Rome

52,405,290 96.20% 50,413,889 223.00 1,356.58 21.60

52,405,290 96.20% 50,413,889 223.50 1,359.63 21.60

Olympics Benefit of elsewhere Olympics in Rome 52,405,290 52,405,290 96.20% 96.20% 50,413,889 50,413,889 223.45 0.05 1,359.32 0.30 21.60 21.60

Table 41. Estimated TV use value - Base scenario

annual use value per capita (euro) annual expenditure per capita on radio and TV products euro) elasticity of demand consumer surplus per capita - use (uro) consumer surplus per capita – expenditure (euro) consumer surplus per capita - total (euro) total consumer surplus (euro)

Status quo

Olympics in Rome

29,302.20 125.00 1.50 58,604.40 250.00 58,854.40 2,967,079,187,585

29,367.90 130.00 1.50 58,735.80 260.00 58,995.80 2,974,207,711,486

Olympics Benefit of elsewhere Olympics in Rome 29,361.33 6.57 129.50 0.50 1.50 1.50 58,722.66 13.14 259.00 1.00 58,981.66 14.14 2,973,494,859,096 712,852,390


The value of consumer surplus is based on minimum and absolutely prudent estimates is 712 million euro. Although some experts argue that there is no difference in coverage and access in a country in which the Games are held compared with another company selected in its place, this is refuted by the evidence of the Turin Winter Olympics, which recorded a 515% increase in viewer hours compared to the Salt Lake City Olympics35. The assumption considered in this analysis, therefore, is a prudent one if compared with the success of the coverage of the Turin Winter Olympics, which consisted of more than 284 hours of live broadcasts, 519 million viewing hours with persons over 4 years of age increasing their TV consumption each by about 9.5 hours (IOC, Sport Marketing Survey, 200636). The following are the consumer surplus values in two alternative scenarios: one best and the other worst. Table 42. Parameters for estimating TV use value – Best scenario Status quo Italians over 14 years TV viewers (%) TV viewers (num) viewing per day (min) viewing per year (hours) hourly use value of TV (euro)

52,405,290 96.20% 50,413,889 223.00 1,356.58 21.60

Olympics in Rome 52,405,290 96.20% 50,413,889 223.50 1,359.63 21.60



Table 43. Estimated TV use value - Best scenario Mc Hugh, D. (2006) A Cost-Benefit Analysis of an Olympic Games, Queen’s Economics Department Working Paper No. 1097. ‘Olympic Fever’ gripped the Italian nation, with host broadcaster RAI airing over 284 hours of coverage, contributing to one of the strongest Winter Olympics broadcasts in Italian history, as viewer hours reached 519 million, an increase of 517% from Salt Lake 2002. The appetite of the viewers was highlighted, as, on average each individual over the age of 4 consumed 9.5 hours of Winter Olympics coverage. The popularity of the Winter Games was clear to see, with the Opening Ceremony attracting 10.7 million viewers (market share - 37.2%), surpassing RAI’s highest sport audience of 2005 by 5%. © IOC 32 Market Highlight. 35 36

76


Status quo

Olympics in Rome

29,302.20 125.00 1.50 58,604.40 250.00 58,854.40 2,967,079,187,585

29,367.90 130.00 1.50 58,735.80 260.00 58,995.80 2,974,207,711,486

Olympics Benefit of elsewhere Olympics in Rome 29,354.76 13.14 128.00 2.00 1.50 1.50 58,709.52 26.28 256.00 4.00 58,965.52 30.28 2,972,681,178,928 1,526,532,558


Table 44. Parameters for estimating TV use value – Worst scenario Status quo Italians over 14 years TV viewers (%) TV viewers (num) viewing per day (min) viewing per year (hours) hourly use value of TV (euro)

52,405,290 96.20% 50,413,889 223.00 1,356.58 21.60

Olympics in Rome 52,405,290 96.20% 50,413,889 223.50 1,359.63 21.60



Table 45. Estimated TV use value - Worst scenario


Status quo

Olympics in Rome

29,302.20 125.00 1.50 58,604.40 250.00 58,854.40 2,967,079,187,585

29,367.90 130.00 1.50 58,735.80 260.00 58,995.80 2,974,207,711,486

Olympics Benefit of elsewhere Olympics in Rome 29,365.27 2.63 129.80 0.20 1.50 1.50 58,730.54 5.26 259.60 0.40 58,990.14 5.66 2,973,922,570,530 285,140,956


77

4.2

Impact of the situation with the Project in the construction period Impact Unskilled labour - Lazio Region (except for Rome)

103.99

Skilled labour (except for Rome)

1,006.94

Capital (except for Rome)

1,348.75


622.40


4,927.22

Capital – Rome

6,551.25

Households 1

381.07

Households 2

858.42

Households 3

899.31

Households 4

1,424.52

Households 5

1,770.84

Households 6

1,877.62

Households 7

3,496.55

Businesses

6,186.86

Crop and animal production, hunting and related services activities

238.28

Forestry and logging

9.66

Fishing and aquaculture

8.63

Mining of coal Extraction of crude petroleum and natural gas, mining support service activities Mining of metal ores Other mining and quarrying Manufacture of food products and beverages

2.58 63.17 7.89 19.82 290.26


28.97


28.78

Manufacture of wearing apparel and of articles in leather and of fur

87.74

Manufacture of leather and related products

40.26

Manufacture of wood and of products of wood, manufacture of articles of straw and 45.75 plaiting materials (except furniture) Manufacture of paper and paper products

61.06

Printing and reproduction of recorded media

108.80

Manufacture of coke and refined petroleum products

151.30

Manufacture of chemicals and pharmaceutical products

119.57

Manufacture of rubber and plastics products

80.83


347.52

Manufacture of basic metals

136.82


949.54


361.27

Manufacture of electronic components, boards, computers and peripheral equipment93.62 Manufacture of electrical equipment and non-electrical domestic appliances Manufacture of telecommunications equipment

156.12 92.80


18.35


16.76


45.50

Waste collection, treatment and disposal activities, materials recovery, other waste management 41.02 services Electricity, gas, steam and air conditioning supply Water collection, treatment and supply Construction Wholesale and retail trade and repair of motor vehicles and motorcycles

533.23 112.46 2,882.05 644.35


2,184.48


1,404.99


894.29


1,577.23


217.42

Air transport

226.28

Warehousing and support activities for transportation Postal and courier activities, telecommunications, publishing activities

549.45 2,106.10


947.23


230.18


325.32


1,869.97


1,132.91


176.82


3,175.63


4,241.82

Education Human health and social work activities Sewerage Activities of membership organisations

813.47 1,114.31 164.34 17.31


288.12


566.32


238.58

Central Government

1,868.04

Local Government

1,330.60

78

4.3

Impact of the situation without the Project in the construction period Impact Unskilled labour - Lazio Region (except for Rome)

75.97


735.69


989.42


452.18


3,595.59

Capital – Rome

4,750.28

Households 1

277.68

Households 2

625.57

Households 3

655.59

Households 4

1,038.26

Households 5

1,290.83

Households 6

1,368.53

Households 7

2,547.45

Businesses

4,495.11


174.16


7.06


6.32

Mining of coal Extraction of crude petroleum and natural gas, mining support service activities Mining of metal ores Other mining and quarrying Manufacture of food products and beverages

1.87 46.68 5.38 15.06 212.19


21.15


25.21


64.65


30.11

Manufacture of wood and of products of wood, manufacture of articles of straw and 38.16 plaiting materials (except furniture) Manufacture of paper and paper products Printing and reproduction of recorded media Manufacture of coke and refined petroleum products Manufacture of chemicals and pharmaceutical products Manufacture of rubber and plastics products Manufacture of other non-metallic mineral products Manufacture of basic metals

45.17 80.80 109.22 88.53 64.28 295.88 98.99


491.49


450.61

Manufacture of electronic components, boards, computers and peripheral equipment79.56 Manufacture of electrical equipment and non-electrical domestic appliances

160.47


104.80


40.56


21.90


58.25

Waste collection, treatment and disposal activities, materials recovery, other waste management 29.19 services Electricity, gas, steam and air conditioning supply Water collection, treatment and supply Construction Wholesale and retail trade and repair of motor vehicles and motorcycles

393.31 81.90 1,903.25 510.05


1,580.26


1,023.03


650.36


1,140.30


158.32

Air transport

161.29

Warehousing and support activities for transportation Postal and courier activities, telecommunications, publishing activities

394.16 1,523.13


689.72


165.91

Activities auxiliary to financial service and insurance activities Real estate activities Rental and leasing activities, travel agency, business support activities

235.67 1,434.41 663.52


131.93


2,171.32


3,094.70

Education

594.97


811.84

Sewerage

120.10


12.32


238.91


411.83

Activities of households as employers of domestic personnel Central Government Local Government

173.85 1,361.55 969.61

79

4.4

Annual impact in the period of full operation Impact Unskilled labour - Lazio Region (except for Rome)

2.24


21.50


29.15


36.78


280.74

Capital – Rome

355.98

Households 1

19.60

Households 2

57.60

Households 3

74.84

Households 4

118.29

Households 5

155.25

Households 6

166.03

Households 7

243.08

Businesses

-

11.13


-

0.01


-

0.02


-

0.02

Mining of coal

-

0.02

Extraction of crude petroleum and natural gas, mining support service activities

-

0.05

Mining of metal ores

-

0.05

Other mining and quarrying

-

0.06

Manufacture of food products and beverages Manufacture of tobacco products

4.28 -

0.11


0.23


0.69


0.90

Manufacture of wood and of products of wood, manufacture of articles of straw and plaiting materials (except furniture) -

0.04

Manufacture of paper and paper products

0.13


-


0.04 3.04


3.86


-

0.77


-

0.88


-

0.81


-

0.81


-

0.61


-

0.01


-

0.36


-

0.19


-

0.10

Manufacture of motor vehicles, trailers and semi-trailers

-

0.48


-

0.14

Manufacture of furniture and other manufacturing, repair and maintenance Waste collection, treatment and disposal activities, materials recovery, other waste management services

0.44 -


0.12 0.31


-

0.33

Construction

-

1.59


-

2.49


-

0.85


-


4.67 504.70


-

1.62


-

0.64

Air transport

-

0.34


-

0.68


-

4.64


-

2.22


-

0.63


-

0.78


-

5.32


-

0.48

Production of software, consultancy and related activities, information and other information service activities

-

3.00

Scientific research and development

-

0.29


-

4.86


-

13.31

Education

-

1.61


-

3.39

Sewerage

-

0.38


0.04

Arts, sports, entertainment and amusement and recreation activities Other service activities Activities of households as employers of domestic personnel

36.34 -

1.82 1.05

Central Government

220.68

Local Government

109.90

80

4.5

Impact on employment in the situation with the Project in the construction period Impact on employment in the situation with the Project – construction period

Unskilled labour


Unskilled labour Rome

Skilled labour

Skilled labour Rome

298

304

136

142


3

4

2

2


4

4

2

2

Mining of coal

0

0

0

0


2

5

4

13


0

0

0

0


11

32

28

81


455

97

181

239


2

4

5

9


5

10

13

26

16

30

39

77

1

3

3

7

Manufacture of wood and of products of wood, manufacture of articles of straw and plaiting7materials (except 25 furniture) 17

62

Manufacture of wearing apparel and of articles in leather and of fur Manufacture of leather and related products Manufacture of paper and paper products

13

43

31

107


39

137

96

344

8

29

21

73

22

72

54

182

Manufacture of coke and refined petroleum products Manufacture of chemicals and pharmaceutical products Manufacture of rubber and plastics products Manufacture of other non-metallic mineral products Manufacture of basic metals

10

28

26

72

132

295

325

741

9

35

22

89

133

505

328

1,270


81

306

199

770


32

132

79

332


15

63

38

159


35

145

87

364

8

5

20


Manufacture of electro-medical instruments and equipment, measuring equipment, watches 2and clocks Manufacture of motor vehicles, trailers and semi-trailers

4

14

9

36


5

18

12

45


6

23

14

58

Waste collection, treatment and disposal activities, materials recovery, other waste management 10 services 41

25

104


33

304

82

765


10

90

24

226

852

3,297

2,525

9,972


25

250

114

1,183


74

582

345

2,756


85

852

394

4,034


135

975

626

4,615


180

922

835

4,367


31

238

142

1,125

Air transport

19

112

86

529


47

223

220

1,054


Construction

37

200

1,295

7,210


0

710

0

6,809


0

83

0

795


0

106

0

1,018


2

142

9

537


0

13

2

140

36

3,273

Production of software, consultancy and related activities, information and other information 4 service activities 313 Scientific research and development

1

147

14

1,539


158

1,292

1,617

13,522


735

7,682

3,006

32,070

Education

303

2,057

1,237

8,586


180

1,888

736

7,880

54

142

220

594


0

3

9

128


3

24

150

1,221 1,594

Sewerage

Other service activities Activities of households as employers of domestic personnel

Total

14

32

663

176

0

8,652

0

4,159

25,174

24,896

123,180

81

4.6

Impact on employment in the situation without the Project in the construction period Impact on employment in the situation without the Project – construction period

Unskilled labour



Skilled labour

Skilled labour Rome

218

222

99

103


3

3

1

1


3

3

1

1

Mining of coal

0

0

0

0


1

4

3

10


0

0

0

0


9

25

21

62 333


71

132

175


1

3

3

7


5

9

12

23

12

22

29

56

1

2

2

5

Manufacture of wood and of products of wood, manufacture of articles of straw and plaiting materials (except6 furniture) 21

14

52


Manufacture of wearing apparel and of articles in leather and of fur Manufacture of leather and related products

Printing and reproduction of recorded media Manufacture of coke and refined petroleum products Manufacture of chemicals and pharmaceutical products Manufacture of rubber and plastics products Manufacture of other non-metallic mineral products Manufacture of basic metals Manufacture of fabricated metal products (except machinery and equipment) Manufacture of machinery and equipment NEC

9

32

23

80

29

101

71

255

6

21

15

53

16

53

40

135

8

23

20

57

112

251

277

631

7

26

16

64

69

261

170

657

101

382

248

960


27

112

67

282


16

65

39

163


40

164

98

411


4

18

11

46


8

32

20

79


6

24

15

59


7

29

18

74

Waste collection, treatment and disposal activities, materials recovery, other waste management services

7

29

17

74

24

224

60

565

Electricity, gas, steam and air conditioning supply Water collection, treatment and supply

7

65

17

164

563

2,177

1,667

6,585


19

198

90

936


54

421

250

1,994


62

620

287

2,938


98

709

455

3,356


130

667

604

3,157


22

173

103

819

Air transport

13

80

61

377


34

160

158

756


26

144

936

5,214


0

517

0

4,958


0

60

0

573


0

77

0

737


2

109

7

412


0

8

1

82

Production of software, consultancy and related activities, information and other information service activities 3

289

33

3,024


1,148

Construction

1

110

10


108

883

1,105

9,246


536

5,605

2,193

23,397

Education

221

1,504

905

6,280


131

1,375

537

5,741

39

104

161

434


0

2

6

91


3

20

124

1,012 1,159

Sewerage


Total

10

23

482

129

0

6,305

0

3,039

18,392

18,087

89,890

82

4.7

Net impact on employment in the construction period

Net Impact on employment – construction period

Unskilled labour



Skilled labour

Skilled labour Rome

80

82

37

38


1

1

0

0


1

1

0

1

Mining of coal

0

0

0

0


0

1

1

3


0

0

0

0


3

8

7

20


26

49

64

122


1

1

1

2


1

1

2

3


4

8

10

20


0

1

1

2

Manufacture of wood and of products of wood, manufacture of articles of straw and plaiting1materials (except 4 furniture)3

10


3

11

8

28

10

35

25

88


2

8

6

20


6

19

14

47


2

6

5

15

20

44

48

110


Manufacture of other non-metallic mineral products Manufacture of basic metals Manufacture of fabricated metal products (except machinery and equipment) Manufacture of machinery and equipment NEC

3

10

6

25

64

244

158

612

-20

-76

-49

-190


5

20

12

50


0

-2

-1

-4

-5

-19

-11

-47


Manufacture of electro-medical instruments and equipment, measuring equipment, watches-3and clocks -11

-6

-26


-4

-17

-11

-43


-1

-6

-4

-14


-2

-6

-4

-16

Waste collection, treatment and disposal activities, materials recovery, other waste management 3 services 12

7

30

21

201

Electricity, gas, steam and air conditioning supply Water collection, treatment and supply Construction Wholesale and retail trade and repair of motor vehicles and motorcycles

9

80

3

24

7

61

289

1,120

858

3,387 247

5

52

24


21

161

96

762


23

232

107

1,097


37

266

171

1,259


50

255

231

1,210


8

65

39

306

Air transport

5

32

25

152


13

63

62

298


10

55

358

1,996


0

193

0

1,851


0

23

0

222


0

29

0

281


1

33

2

125


0

6

1

58

3

249

Production of software, consultancy and related activities, information and other information 0 service activities 24 Scientific research and development Professional activities Public administration and defence, compulsory social security

0

37

4

391

50

408

511

4,276

199

2,077

813

8,673

Education

81

552

332

2,306


49

512

200

2,139

Sewerage

15

38

59

160


0

1

3

37


1

4

26

208 435


Total

4

9

181

48

0

2,348

0

1,121

6,781

6,809

33,291

83

4.8

Annual impact on employment in the period of full operation Unskilled labour


Skilled labour

Skilled labour Rome


0

0

0

0


0

0

0

0


0

0

0

0

Mining of coal

0

0

0

0


0

0

0

0


0

0

0

0


0

0

0

-1


2

3

13

19


0

0

0

0


0

0

0

1


0

0

1

2


0

0

0

0

Manufacture of wood and of products of wood, manufacture of articles of straw and plaiting materials (except furniture)

0

0

0

0


0

0

0

1


0

0

0

0


0

1

2

4


1

2

7

17


0

0

-1

-2


0

-1

-3

-5


0

0

-1

-1


0

0

-1

-3


0

-1

-1

-4


0

0

0

0


0

0

0

-1


0

0

-1

-2


0

0

0

-1


0

0

-1

-3


0

0

0

-1


0

0

1

2

Waste collection, treatment and disposal activities, materials recovery, other waste management services

0

0

0

-1


0

0

0

1


0

0

0

-2

Construction

-1

-2

-5

-15


0

-1

-2

-13


0

0

-1

-3


0

-3

-5

-38


93

584

1,344

7,307


0

-1

-3

-13


0

-1

-2

-9

Air transport

0

0

0

-2


0

0

-1

-4


0

0

-11

-45


0

-2

0

-45


0

0

0

-6


0

0

0

-7


0

0

0

-4


0

0

0

0

Production of software, consultancy and related activities, information and other information service activities

0

-2

-1

-56


0

0

0

-7


0

-2

-9

-58


-3

-26

-36

-282

Education

-1

-4

-9

-48


-1

-6

-9

-67

Sewerage

0

0

-2

-4


0

0

0

1


0

3

72

432


0

0

-8

-14


1

0

145

0

90

538

1,471

7,018

Total

84

4.9

Alternative scenarios

The benefits of TV coverage and the use of digital media are by far the most substantial but in addition to the base scenario whose results have been set out above, two other scenarios were considered: one pessimistic (worst) and one optimistic (best). The following differences emerge between the base scenario and the others: 



in the pessimistic scenario the value of the surplus TV benefit is considered to be 193 million euro, a portion of 60% of the entire value of the macroeconomic benefits, a negative value for the merchandising, a portion of 50% of the entire value of ticketing surplus and revenues and a portion of 30% of the entire value deriving from the sports activity option, from social inclusion and from Olympic village; in the optimistic scenario the value of the surplus TV benefit is considered to be 1.03 billion euro, the 200% of the value of merchandising, sports activity option, social inclusion. Table 46. Economic cash flow of alternative scenarios


Worst Scenario

Best Scenario

1,051 368 203 677 1,938 4,236 108 1,638 193 615 -68 382 346 95 1,046 160 74 70 4,657 421 10.4%

1,051 368 203 677 1,938 4,236 108 2,676 1,033 615 148 763 346 95 1,046 1,065 490 139 8,524 4,288 41.4%


4.9.1 Sensitivity and risk analysis In the worst scenario the average ENPV is about -1.08 billion euro, positive in 2.5% of cases. Finally, in the best scenario ENPV is positive in over 98% of cases with an average value of 1.6 billion euro. For the Rome 2024 Games, all the project costs have been considered, as critical variables and they have been assumed to be distributed according to normal distributions with a mean value equal to the value used in the cost benefit analysis in the intermediate scenario (base value), and a standard deviation of 30% of such a mean , prudentially truncating the minimum value so that in each simulation the average cost can rise but not fall. It has also been assumed that unexpected events which may cause cost overruns are positively related to investment costs. Normal distributions have also been used for benefits, as follows: 85

  

distributions with a mean equal to base value, a standard deviation of 20% of the meanand a maximum value equal to 120% of base value have been used for Existence Value, Macroeconomic benefits, ticket surplus and tickets for foreign tourists; a distribution with a mean equal to base value, a standard deviation of 40% of the mean and a maximum value equal to 120% of base value has been allocated to Sport practice option and Social inclusion option; a distribution with a mean equal to base value, a standard deviation of 10% of the mean and a maximum value has been allocated to the occupancy rate and square meter rate of Olympic village apartments.

Table 47. Risk analysis results Risk analysis

Base value

Average

Standard deviation

Minimum Maximum value value

Costs

4,236.1

5,290.2

536.4

3,329.8

7,526.8

Benefits - Worst scenario

4,657.2

4,203.9

236.9

3,377.9

4,971.4

Benefits - Best scenario

8,524.0

6,944.6

523.6

4,816.3

8,657.7

588.6 - 3,451.0

860.8

ENPV Worst scenario

421.1 - 1,086.3

EIRR Worst scenario

10.4%

ENPV Best scenario

4,287.9

EIRR Best scenario

41.4%

-1.9% 1,654.4 22.7%

4.0%

-6.9%

754.7 - 1,440.9 9.5%

-6.0%

47.8% 4,268.3 124.3%


Figure 13. Risk analysis results – Worst scenario – benefits

86

Figure 14. Risk analysis results – Worst scenario – ENPV and EIRR

87

Figure 15. Risk analysis results – Best scenario – benefits

Figure 16. Risk analysis results – Best scenario – ENPV and EIRR

88

4.10 Social Accounting Matrix – SAM The problem of estimating a Social Accounting Matrix (or sub-matrix) may be formalised as a problem of constrained maximisation in the framework of the generalised cross-entropy model (GCE) proposed by Golan, Judge and Miller (1996). Although the basic method is quite simple both in set-up and solution, it can be used to provide a series of variations, as regards the availability of the data and the properties of the estimations, which make it particularly interesting both from the theoretical point of view and from the point of view of the use of the estimated matrices. In general terms the question of estimating may be expressed as follows. Each coefficient bij of the matrix should be considered as the expected value of a random variable whose support is [z1,z2,…,zm] and whose probability is [p1ij, p2ij,…pmij]. The values of the support indicate the range of possible values for each coefficient. Since the coefficients of the SAM are portions of the totals of the columns, their range goes from zero to 1, or, if operations are based on transactions instead of coefficients, between zero and the value of the sum of each operator’s transactions. The range of support values considered may consist of a discrete series of values or of a continuum in the interval under consideration. For simplicity, it is assumed that the first assumption is true and that it is possible to specify the same set M of values which are possible but not equally probable for each coefficient. Given the a priori qmij estimations of the probabilities associated with the possible values of each coefficient, the a posteriori estimations are obtained, resolving the problem: (1)

max H = -ååå pmij log pmij ³0

m

i

j

pmij qmij

under the constraints:

åp

mij

(2)

=1

m

åå p

z =1

mij m

(3)

i

m

åå p

z v = vi*

mij m * j

(4)

j

m

v

v

where * j is the vector of the preset column totals and i* is the vector of the preset line totals. The objective function in (1) has been called cross-entropy. In fact it is not an entropy indicator, but is the sum of entropy measurements, as defined by Shannon (1948), of each column of the matrix in question and of each

H jm = -å pmij log pmij

i element of probabilistic support [p1, p2,…pm]. More precisely, the function can be defined as the level of column entropy for the mth state of nature. This function measures the quantity of information contained in the probability functions of each column for each state of nature, essentially as the logarithmic difference from uniform distribution. When the information only consists of the constraint that the sum of probabilities must be 1, entropy is highest and the best

estimation of the probabilities of the jth column is that they are all the same and equal to 1/ M (where M is the number of elements in a column). Entropy, therefore, is a measurement of the degree of information additional to an a priori estimation (that all the events are equally probable), defined starting from the absence of pre-existing information. If there is a more precise a priori estimation or opinion, for example in the form of an a priori probability qmij , instead of a complete absence of information, this may be incorporated in the logarithmic term of the entropy measurement:

H jm = -å pmij log i

pmij qmij . 89

The new measurement of entropy takes the a priori probability specified as the information benchmark instead of uniform distribution as in the original measurement. Given a flow and coefficient matrix like SAM, then, a different entropy measurement can be set for each column (or line) or also for each value of stochastic support zm. The cross-entropy is the sum of these line or column entropies: it is not an entropy in itself but only one of the possible ways of measuring, in a single synthetic index, the entropy that can be associated with the lines and columns of the SAM. Instead of proposing a mere sum of the entropies, they can be weighted in more sophisticated indices in order to take into account the different values that can be attributed to the information in the SAM according to the dimensions of the flows, their variability, the reliability of the statistics, etc. Returning to the problem (1)‐(4), the estimation of coefficients bij is given by: (5)

bij = å pmij zm m

.

Defining the Lagrangian, allowing angle solutions and resolving by pmij, an estimation can be obtained for a distribution of m matrices x and a priori value function coefficients of the probabilities and shadow prices of the constraints:

bmij = pmij zm =

qmij zm[exp(-(g ij + l j + mi v*i )zm )]

åq

mij

[exp(-(g ij + l j + mi v*i )zm )]

(6) whose expected value is : m

bij = å pmij zm m

(7)

å q z [exp(-(g + l + m v )z )] = åq [exp(-(g + l + m v )z )] mij m

ij

j

i *i

m

m

mij

ij

j

i *i

m

m

q

Therefore, a prior distribution mij may be characterised, for example, as a normal distribution, with the same average and variance, with respect to: (8) (9)

0 bij0 = Ebmij = å qmij zm m

,

i =1, 2...I

,

j =1, 2...J

0 Var(b) = E bmij - bij0

Prior distribution, then, is the distribution of the coefficients of the unbalanced matrices derived from the totals. Even if the estimation in equation (7) is based on a sophisticated constrained optimisation, it is an RAS estimation and may be calculated by means of an iterative rescaling algorithm of the lines and columns of the matrix that is being estimated. In fact the estimation itself can be interpreted as an adaptation of an original

x = z exp(-g )

m ij , so that this estimation that is proportionate to a function of the expected value of variable mij variable observes the constraints given by the known values of the sums of the lines and columns. In practice, as an “internal” solution cannot be derived from this equation, an iterative calculation algorithm has to be followed in order to make the estimation in (7). This algorithm consists first of all in stating a support, i.e. a series of possible values [z1, z2, …, zm] with their corresponding probabilities [q1, q2, …, qm] for each coefficient. When these values have been stated, the coefficients can be estimated applying equations (3), (4) and (7) through a stochastic simulation (the equivalent of extracting a sample from a certain number of observations of zm).

90

The Social Accounting Matrix estimation The SAM estimation experiment is based on a schematised procedure which constructs NxN-dimension SAMs with the help of data processing software starting from databases assembled from national accounting data and other official national and regional statistical sources. Figure 1 presents a summary of the estimation procedure in the form of a flow chart. Figure 1: SAM stochastic estimation process Assembly of the databases of national and regional accounts in historical series and of actual economic data Detrending the variables of the database with historical series and assembly of multivariate distribution (average, variance and correlation matrix)

Assembly of the intermediate exchanges matrix from the ISTAT matrices of supply and use

Assembly of the relationships between economic, institutional and foreign sectors to balance the accounts

Retrieval of a pseudo-sample of 1,000 values for each of the variables in the database

Assembly of the 1,000 matrices resulting from the simulations which are as near as possible to the coefficients of the national matrix but consistent with the totals of the Monte Carlo simulation

Assembly of the following matrices: coefficients, inverse matrices, standard deviation of flows, coefficients and inverse matrices; matrix T of flows, coefficients and inverse matrices.

A substantial number of sources are taken into consideration to create the SAM, the main one of which is certainly ISTAT, the Italian Statistical Institute. The estimation procedure starts with collecting and arranging the data provided by the institutional sources. Starting from the historical series collected, the base statistics utilised for the estimation of the SAM can be calculated, in particular those of the intermediate exchanges matrix, i.e. the Input-Output (I-O) matrix. If read down the columns, the intermediate exchanges matrix shows the flows of the purchases of the intermediate goods of each production sector from all the others; i.e. it represents each sector’s purchases from the other sectors in order to reach the level of production observed. In the same way, along the lines it shows the sales made by each production sector to each of the other production sectors. 91

In addition to the data for the individual economic and institutional sectors, the ISTAT figures provide the historical series for the years 1995-2010 of the tables of supply and use from which the national intermediate exchanges matrix can be reconstructed. Therefore, the intermediate exchange matrix has been estimated by using the supply and use tables published by the ISTAT for the period from 1995 to 2010. The symmetric tables of intermediate exchanges can be obtained from the supply and use tables. The use table shows how goods and services were used for each product and each type of use, shows the components of gross added value and is constructed at purchase price. The supply table shows the total availability of resources classified by product and by sector, distinguishing between the production of the internal sectors and imports and is usually constructed at basic price. The supply table contains three important matrices: production, imports and the measurement matrix. Specifically, a measurement matrix is one which contains all the flows from the supply of and demand for margins and net tax on the product which are necessary in the framework of the SUTs (supply and use tables) to connect the different concepts of the measurement of product flows (purchase prices and base prices). Starting from the supply and use tables at base prices, symmetric input-output tables can be constructed converting the “sector-by-product” information in the SUTs into “product-by-product” or “sector-by-sector” statistics using technical and statistical information regarding the structure of the inputs or using specific information regarding production technologies. In this way traditional product-by-product or sector-by-sector matrices can be obtained which result in supply and use being united in a single table. In the symmetric table derivation procedure, input-output relationships are modelled on the basis of certain assumptions and thus both the inputs and outputs of the secondary productions are re-allocated by means of two possible mathematical methods based on an assumption of product technology or sector technology. Under the first assumption, it is taken that the input structure of a technology which produces a certain product is the same everywhere the good is produced (each product is produced with the same technology, regardless of where it is manufactured). Under the sector technology assumption, it is taken that the inputs are consumed in the same proportions in each production activity carried out by a sector: principal products and secondary products are all manufactured using the same technology, i.e. the same input structure. In this way four symmetric tables can be derived depending on the technology assumptions made. The balanced matrix was considered in this estimation, assuming a product technology. According to this assumption, there is only one technique to produce each product and therefore each product has its typical input structure. In order to calculate a product-by-product table with product technology, the secondary products are transferred from the sectors in which they are produced to the sectors of which they are the primary products: in this process the columns of the SUTs are transformed from reference to sectors to reference to products. The supply matrix will therefore become diagonal and the columns of the intermediate part of the resulting symmetric matrix will now contain the input structures of each product. The input structure of the primary producer is certainly the starting point to obtain the input structure of the product. A primary producer must be identified for each product, thus determining the flow measurement:

Uij = åkaik mkj

U

m

a

where ij is the input i requested by producer j; kj is product k produced by producer j; ik is input i required to produce a unit of output k. A producer thus produces a certain number of products and each product requires a different set of inputs; the amount of inputs required by producer j will be the sum of the inputs required by each of its outputs form of a matrix it will be:

mkj

. In the

U = AM therefore:

A =UM -1 A represents the matrix of the direct product-by-product coefficients; multiplying them by the product output levels the intermediate part of the symmetric I-O product-by-product table is obtained. 92

Completion of the Model After estimating the intermediate exchanges matrix, the production and institutional factor sectors were estimated to complete the model: labour, capital, households, businesses, government, capital formation and rest of the world. The starting point for estimating household accounts was a detailed analysis of the historical series of the ISTAT surveys of household expenditure and the Bank of Italy surveys of household budgets. The ISTAT survey is based on a sampling pattern in two stages, the first of which is stratified: the first stage units are the municipalities, the second are households. Italian territory has been divided into 227 strata on the basis of the type of municipality, the number of its inhabitants and the Region it belongs to. Specifically, 107 of these strata are composed of a single municipality (Self-Representing Municipalities, SRMs) and include all the provincial capitals and four other municipalities which are not provincial capitals but take part in the survey every month. The other municipalities (Non-Self Representing Municipalities, NSRMs) are grouped within each Region in such a way as to obtain strata with similar numbers of inhabitants. 120 more strata are formed in this manner, composed of more than one municipality, from which three sample municipalities are drawn to take part in the survey in the first, second and third month of each quarter respectively. In short, overall, the survey involves 467 municipalities, 107 SRMs and 360 NSRMs. All the 107 SRMs and 120 out of 360 NSRMs take part in the survey each month. This ensures that each of the 227 strata into which the country of Italy is divided is represented each month of the year. The second stage units are the Households: the sampling pattern has been set up in such a way as to involve about 28,000 households in 2005, i.e. about 2,350 per month resident in the 227 municipalities which take part in the survey from time to time. In all, each year this survey gathers information on about 24,000 households, which are applied to the total population by means of specific weights and reconciliation coefficients. Of all the information gathered, the main data considered were those relating to consumption, income, Region, the kinds of work done by the members of the household and household income. The Bank of Italy survey focuses much more closely on household budgets with respect to expenditure; it is constructed on a sample of 7,768 households with 19,551 individuals, 13,009 of whom in receipt of an income. Of the 7,768 households, 3,957 are panel families, i.e. families that have also been interviewed in the previous survey (or also in surveys before that), while the remaining 3,811 are families that have been interviewed for the first time in said survey. The income aggregation plan adopted in the analysis is the same as that utilised by the Bank of Italy and is presented in Table 1.

93

Table 1: aggregation plan of the variables in the household budget survey Name

Description

YL

Income from subordinate employment

YL1 YL2 YT YTP YTP1 YTP2 YTA YTA1 YTA2 YTA3 YTA31 YTA32 YM YMA1 YMA2 YC YCA YCA1 YCA2 YCF YCF1 YCF2 YCF3 YCF4

Net remuneration Additional non-monetary amounts Pensions and net transfers Pensions and arrears Pensions Arrears Other transfers Financial aid (redundancy fund, etc.) Scholarships Alimony and gifts receipts payments (-) Net income from self-employment Net income from self-employment Profits and other investment income Capital income Income from properties Effective rents Imputed rents Income from financial capital Interest income from deposits Interest income from Government bonds Returns from other securities Interest expense (-)

Income account: Y = YL+YT+YM+YC The symbol (‐) indicates that the item enters the calculation of the hierarchically superior aggregation with the minus sign. Source: Bank of Italy By integrating the two databases, applying them to the total population and normalising them to the total amounts of income and expenditure in ISTAT’s national and regional budgets a database has been constructed that is consistent with the national accounts, based on the classification of households under different consumption classes. Public institutions at various levels are disaggregated by analysing the data in the Ministry of Economic Development database of regional public accounts (RPAs).

Aggregation of the data and the SAM estimation Since the data regarding income from employment, added value, investments and net indirect taxes per sector have a different aggregation from that used in estimating SAMs, the data have to be disaggregated until the number of sectors necessary for the estimation is reached. The unbalanced national accounting matrix is 94

reconstructed by aggregating the data available, the data generated and the data estimated. For the matrix estimation, the economic sectors have had to be broken down into internationally tradable and non-tradable. The stochastic simulation procedure begins with an estimation of the variance-covariance matrix of the variables in the database net of the trend (where there is one). Stochastic simulation is based on the retrieval of samples on the basis of the statistical information contained in the available historical series. Normal distributions are allocated to the data, with averages equal to base year values and a standard deviation equal to the standard deviation of the detrended variable. The variables are correlated to each other through the correlation matrix estimated on the basis of the historical series. The variables for which only base year values are available are also randomised allocating them a normal distribution with an average equal to the known value and a standard deviation of 20% of the average. All the distributions are truncated from zero. Then 1,000 random samples are retrieved from the normal multivariate distribution constructed in this manner. As for the construction of the base year matrix, 1,000 unbalanced matrices can be obtained, each corresponding to a retrieval of the set of variables. Otherwise, and when there is a historical series covering a long period of time (bootstrapping), 1,000 samples can be retrieved without any replacement of the (detrended) observations corresponding to the available historical series. From the unbalanced matrices, using the RAS method 1,000 balanced SAMs are generated, each with the result of a retrieved sample as a column constraint. To balance the SAMs the following constraint must be imposed: column total = line total A series of indicators which represent the outputs of each estimation can also be extrapolated from each simulation. Among the outputs which can be obtained are: 

Distribution of probabilities of the estimation of the coefficients;



1,000 balanced SAMs;



Average matrix;



Error matrix;



Statistics regarding coefficients;



Distribution of probabilities of the estimation of the coefficients of the inverse matrix (multiplier matrix);



1,000 inverse matrices (multipliers);



Average multipliers;



Statistics regarding multipliers;



Breakdown of the matrix into I-O, Institutions, I-O/institutions, Institutions/I-O and multipliers of the broken-down matrix. The average matrix is the “flow matrix”, showing the flows between production and institutional sectors, expressed in millions of euro in the base year and is assembled as an average of the 1,000 balanced matrices. Data utilised 

  

ISTAT, historical series of national and regional budgets: Added value by sector; Available household income; Household consumption per good; Capital and mixed household income; Income from labour by sector; Gross fixed investments by producer sector and by proprietor sector; Local production units by sector; Net indirect taxes; Total net exports; Final Consumption Expenditure for Non-Profit Organisations (NPOs) and Public Administration (PA); Historical series of household consumption surveys; Transport statistics; Supply and use tables; REGIONAL PUBLIC ACCOUNTS (Ministry of Economic Development): historical series of: Expenditure of each PA by economic category; Income of each PA by economic category; MINISTRY OF ECONOMY AND FINANCE: Historical series of Personal and Corporate Taxes; Bank of Italy: Regional Economies, Imports from the rest of the world by sectors; Regional Economies, Exports to the rest of the world by sectors; Historical series of household budget surveys. 95

5

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