Please Give Me Back My Two Dollars

liam-lentenDr Liam Lenten

First published in  The Australian Financial Review on 17 January, 2009.

An audio version (MP3 6.3MB) of this opinion piece read by Dr Liam Lenten is also available.

Supporters of Australia's bid to host the 2018 FIFA World Cup were delighted to hear about the Federal Government's decision to award $46.5 million to the FFA.  The money will help the sports governing body to launch a competitive bid in advance of the decision on hosting rights by the FIFA Executive Committee, expected some time in 2011.

The handout amounts to a little over $2 for every Australian resident.  As taxpayers, we are entitled to question how our taxes are spent.  In this case, I must admit that I am less than sanguine that my $2 (lets round it down for simplicity) will deliver any real benefits.

This is not purely because the probability of failing to win the bid is extremely high (for reasons described later), in which case the $46.5 million becomes a sunk cost.  Rather, it is the concern of what will eventuate in the unlikely event that Australias bid is successful.

During the week, sections of the sports media have been close to unambiguously supportive of this move.  This has taken the form of naïvely towing the standard line that hosting the World Cup will deliver untold tourism and other revenues and deliver a badly-needed cash injection, hence solving all our economic problems.

Government intervention in major event bids is not necessarily a bad thing.  The private sector will only factor benefits and costs that can be measured directly, whereas governments will also consider indirect costs and benefits.  They generally believe that positive externalities arising from the event (feel-good factor, marketing for future tourism, etc.) will easily outweigh negative externalities, such as noise and congestion.

However, not all is as it seems.  The problem with these standard arguments in favour of hosting these large events is that all estimates of costs and revenues outlined in the successful bid prove to be unrealistic once preparation progresses and the event itself approaches (PricewaterhouseCoopers estimates $5.3 billion added to GDP and 74,000 new jobs).

History is littered with examples of budgets that have blown out without logical explanation, mainly on the cost side: most obviously the 1976 Montreal Summer and 1998 Nagano Winter Olympics.  A few events held in Australia in the last 5 years or so failed to live up to the hype.  Recent work by Monash Universitys John Madden suggests that even the Sydney Olympics (considered a relative success financially) delivered little further economic benefit after the event concluded.

Why does history keep repeating itself?  With major events, the bidder is essentially a purchaser trading with a monopolist (FIFA in this case), and is dealing with an all-or-nothing proposition that is, the winner has to host the entire event, even though hosting only part of it may be the optimal quantity.  Therefore, overbidding is likely; meaning the successful city or country suffers from Winners Curse.  The curse will be more acute for the Australian bid, given the far greater deficiency of FIFA-standard stadia compared to rival bids (particularly Spain and England).

Before the football community issues a fatwa on me, Id like to assert that I am not anti-major events, much less am I anti-football (I call it by its proper name).  It is more that I simply do not have nearly enough faith in the highly-political fashion in which the FIFA Executive Committee goes about making decisions regarding the World Cup.

As an illustration, some may recall the questionable manner in which Oceania FIFA delegate Charlie Dempsey abstained from voting, awarding the 2006 World Cup to Germany, delaying FIFAs earlier in-principle agreement on staging a World Cup in Africa by four years.  Linked to that was the decision to award an automatic qualification spot in the World Cup finals to Oceania in 2002, yet within a year, the Conmebol (South America) confederation had manoeuvred the political pieces around to reverse the decision, handing them back half-a-spot.

While Conmebol may have some power, UEFA still holds the largest minority bloc on the Committee (9 of 24 votes, plus President Sepp Blatter), and the overwhelming majority of influence in Zurich.  Ultimately, I cannot believe for a nanosecond that UEFA will allow a third successive World Cup to be staged outside its shores, following South Africa and then Brazil in 2014 the latter is the first time we will see two consecutive tournaments outside Europe since the inaugural tournament in 1930.

Australia needs first to further its position in the World Game before a bid to host the Worlds largest single sporting event will be received as seriously by the rest of the World as it is by Frank Lowy and Ben Buckley.  While progress is being made here, key indicators will have to continue to improve, such as A-League attendances and the ranking of the mens national team.

As an alternative, perhaps future resources should be aimed at bidding for other FIFA events, for which Australia would have a more realistic chance of winning hosting rights (and at a far lower cost), such as the Womens World Cup or the Club World Championship.

In any event, while I can do without the $2 I'll simply forgo my usual morning flat white tomorrow and still be ahead on change the question of opportunity cost is nonetheless valid: what else could we have done with those funds in terms of health, education or social services?

Liam Lenten is a Senior Lecturer in Sports Economics at La Trobe University.