CRISIL Young Thought Leader 2012
Economic impact and investing
opportunities of the two upcoming mega
events in Brazil - 2014 FIFA World Cup and
2016 Olympic Games
Nrisingha Prasad Ganguly
Final Year, IIM Lucknow
Contents
Executive Summary ................................................................................................................................ 3
1. Citius .................................................................................................................................................. 4
1.1 Brazil: Where it stands .................................................................................................................. 4
1.2 Experience of past host countries: All that glitters is not gold ..................................................... 5
1.3 Why Brazil might be able to buck the trend ................................................................................. 6
2. Altius ................................................................................................................................................... 8
2.1 Financing such huge investments ................................................................................................. 8
2.2 Sectors poised for maximum investment ...................................................................................... 8
3.Fortius ................................................................................................................................................ 10
Remarks and Recommendations ....................................................................................................... 10
Bibliography ......................................................................................................................................... 11
List of Tables
Table 1: Gross Domestic Investment to GDP (%) .................................................................................. 4
Table 2: Experience of past Olympic hosts ............................................................................................ 5
Table 3: Major Common Projects for the Olympic Games and the World Cup in Brazil ...................... 7
Table 4: Main projects for the 2016 Olympic Games ............................................................................. 7
Table 5: Sectors expected to witness the most investment ..................................................................... 9
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Executive Summary
After successfully bidding for the Olympics, Brazil finds itself hosting the two largest
sporting events in the world back to back- the FIFA World Cup in 2014 and the Summer
Olympics in Rio de Janeiro in 2016. Although, barring a few exceptions, experiences of past
host countries have been less than favourable, Brazil looks all set to change the trend.
The paper is divided into 3 parts, following the Olympic motto of “Citius, Altius, Fortius”Citius (faster) gives us a quick glance of where Brazil is right now from an economic
perspective, then briefly discusses the experiences of past host countries and concludes by
stating why we believe Brazil might be able to buck the trend.
Altius (higher) delves deeper to identify which are the major sectors that will witness a surge
of investment as a consequence of these two mega sporting events, the risks associated with
them and who will sponsor these investments
Fortius (stronger) sums up our learning and mentions the risks of simplifying our evaluation
and the steps the government can take to ensure these events have a lasting positive effect on
Brazil.
Barring the risk of cost overruns and implementation delays, these two sporting events look
all set to usher in an era of growth and prosperity for Brazil and announce its arrival on the
world stage.
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1. Citius
1.1 Brazil: Where it stands
After a brief pause in the third quarter of 2011, Brazil’s economy returned to growth as
government stimulus measures including tax cuts, led to an increase in domestic spending.
Compared to the earlier forecast of 3.1%, GDP growth is expected to slow down to around
2.2% for the year 2012, owing to the gloomy global outlook. Driven largely by domestic
consumption, its growth rate in the medium term is expected to increase to around 5.1% in
2013 and 4.8% in 2014. Currency is stable and 1 Brazilian R$ = 0.4915 USD (as of 5.11.12).
Huge untapped reserves of natural resources and strong domestic consumption demand
owing to an ever increasing middle-class, has established Brazil as a key investment
destination. Adding to its attractiveness are favourable government policies, simplification of
its regulatory and licensing procedures and easy financing options. It’s not surprising then to
find that Brazil witnessed a record 507 FDI projects in 2011 and was second globally in terms
of FDI value, behind China but ahead of India, the US and the UK.
From a comparative perspective though, over the last 10 years Brazil’s per capita GDP has
grown at a much slower rate (2.6%) than that of other emerging markets like China(8.5%),
India (7.5%) and Russia(4.5%). The low level of investment in general (and public
investment in particular) are thought to be the primary factors behind Brazil’s slow GDP
growth rate. The ratio of Gross Domestic Investment to GDP for Brazil has remained at
substantially lower levels than that of comparable economies (Table 1) and is expected to
limit Brazil’s growth rate to 4% unless there’s a substantial increase. The low public
investment to GDP ratio is mainly due to the fiscal adjustments Brazil has had to make over
the last 18 years to stabilise its debt to GDP ratio. These conservative policies have
substantially reduced Brazil’s fiscal vulnerability and now the economic policies in Brazil
have started addressing this crucial issue of investment.
Country
Brazil
Average (2007 to 2011)
18.1
2012 (expected)
19.6
India
31.3
29.3
Russia
21.6
21.1
South Africa
20.7
19.6
Mexico
21.2
22
Colombia
23.7
26
Table 1: Gross Domestic Investment to GDP (%)
(Source: Jose Roberto Afonso, Reuniao do Conselho de Economia da Associacao Comercial
de Sao Paulo, April 26, 2010)
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1.2 Experience of past host countries: All that glitters is not gold
Hosting major events such as the Olympics and the FIFA World Cup involves substantial
costs which primarily include cost of construction of sports venues and facilities for the
participants and staff, transportation, security and of course, the cost of producing
ceremonies. The benefits of course are many- prestige and happiness of the host country and
its citizens (difficult to quantify), boost in tourism, investment in infrastructure which might
have long term benefits and of course, any gains from the future use of the facilities post the
World Cup/Olympics. The obvious question is whether these benefits outweigh the costs to
justify the massive investments in the first place. A brief look at the past might shed some
light on the answer.
Year and Host
1976- Montreal, Canada
Estimated Costs
$1.2 billion
Comments
Considered a huge financial
failure, took the city 30 years
to pay off its debts
1980- Moscow, Russia
$ 2 billion
Amidst boycott and cost
overruns, considered a failure
1984- Los Angeles, USA
$ 546 million
Widely considered to be a
financial success
1988- Seoul, South Korea
$ 4 billion
1992- Barcelona, Spain
$ 9.4 billion
1996- Atlanta, USA
$1.8 billion
2000- Sydney, Australia
$ 3.8 billion
2004- Athens, Greece
$ 14 billion
Huge cost overruns, a
financial failure
2008- Beijing, China
$ 40 billion
Government widely criticised
for over spending and
showing-off
2012- London, UK
$ 14 billion+
Initial reports have a negative
assessment, too early to say
Apart from Los Angeles, the
only other financial success
Table 2: Experience of past Olympic hosts
(Source: International Journal of Olympic History; Forbes; Standard & Poor’s)
Los Angeles (1984) is widely considered to be a financial success. It has to be kept in mind,
however, that it was the sole bidder for the 1984 games (and enjoyed favourable terms) and
the boycott of the games by the likes of USSR also reduced security and other expenses.
Moreover, it had to make little investment in construction of new facilities as most of the top
universities and colleges in the city already had world class sports infrastructure.
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Barcelona (1992) is another case which is widely cited as a success story, in particular for
boosting Barcelona’s image as a tourist destination. Spain had joined the European Union
around the same time and so, it’s difficult to isolate the positive impact of the Olympics from
those that entailed from joining the EU.
In a recent paper (Samantha Edds, April 2012), the economic impact of the 1992, 96 and the
2000 games have been assessed by comparing them with a same- country/state/region that
did not host the games through the examination of infrastructure, prestige and general
financial growth models over a 9 year period. The paper finds that apart from one section
(construction during the 92 Barcelona games), the Olympics did not have any significant
impact on the host city/country.
It has been found that over the last 50 years, Olympics cost overruns have averaged around
179% (researchers at Oxford) with even the London Olympics (2012) costing more than
double the initial estimate of $6.5 billion.
The forceful shutdown of Chinese factories in a desperate attempt to reduce pollution during
the Beijing (2008) games compounded the economy’s woes, already feeling the heat of the
recession. Extravagant spending on large stadiums with little post-Olympics usage led to such
huge maintenance costs that the government found it cheaper to demolish some of these
stadiums than maintain them. Large unutilised stadiums with huge maintenance costs,
popularly referred to as “White Elephants”, were also a legacy of the 2010 FIFA World Cup
in South Africa.
Though one may question whether hosting major sporting events worsened/triggered it, it is
interesting to note that the two of the countries worst hit by the Euro crisis- Greece and
Portugal- hosted major sporting events in the not-so-distant past (the Athens Olympics and
the Euro football tournament, both in 2004).
1.3 Why Brazil might be able to buck the trend
Brazil finds itself in an unprecedented position, hosting a slew of major events- the UN world
conference on sustainable development in 2012, the FIFA Confederations Cup in 2013, the
FIFA World Cup in 2014 and finally the Olympic Games in Rio de Janeiro in 2016.
The most obvious advantage of hosting such major events one after another, are the cost
synergies that Brazil will enjoy. So, although Brazil should enjoy the benefits that hosting
such events brings individually, the costs it will have to bear will be far less than what
hosting such events separately would have entailed. For instance, of the R$25billion that Rio
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de Janeiro will be spending to host both the events, the bulk of the investments (about 80%,
in fact) that the World Cup requires are essential for the Olympic Games as well (Table 3).
Table 3: Major Common Projects for the Olympic Games and the World Cup in Brazil
(Source: Brazilian Sports Ministry)
Another aspect where Brazil can do significantly better than its predecessors is the
composition of expenditures. Sports related expenditures are expected to constitute only 20%
of the total costs, far less than that of previous hosts (in case of London, for example, the
corresponding figure was 40%). Most of the investment will be in upgrading of the public
infrastructure in general and public transportation in particular (Table 4).The “legacy” of
such investments is expected to be highly positive and provides the government with
incentives to promote such investments.
Table 4: Main projects for the 2016 Olympic Games
(Source: Brazilian Federal Government)
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2. Altius
2.1 Financing such huge investments
For the Olympics in Rio, the public sector will provide 95% of the funding mainly through
the Banco Nacional de Desenvolvimento Economico e Social (BNDES), the Brazilian
Development Bank. The other 5% will be financed by the Olympic Authority. For such novel
investments as the Olympics will entail, there’s no precedent and hence predictability and
stability of cash flow is a difficult task, making investment risky. Unsurprisingly, we find that
no commercial bank has been able to match BNDES’s offerings of long term loans at below
market rates.
BNDES has created specific programs to cater to the unique needs of these sporting events.
For example, the R$4.8 billion “ProCopa Arenas” program is aimed at the construction and
revamp of stadiums in the 12 cities that will host the FIFA World Cup limited to a maximum
of R$400 million per project. The R$1 billion “ProCopa Turismo” program is aimed at
modernisation of national hotels in the 12 cities, subject to a minimum amount of R$3
million. For the 2016 Olympics, BNDES has budgeted direct investment of R$ 12.5 billion
which will be inclusive of investments in the Olympic venues, transportation and even
security. The government owned saving bank, Caixa Economica Federal is expected to
finance most of the R$3.1 billion investment in the Olympic Village.
Investors might be worried that lending out such huge sums at below market rates might hurt
BNDES’s credit ratings. However, its ability to remain profitable by maintaining low
overhead costs should hold it in good stead. Constitutionally mandated funding should ensure
adequate liquidity for the bank. In case of any crisis, the government is expected to come to
its immediate rescue, given its critical role in Brazil’s economic strategy.
Research by GS ECS has shown that individual countries’ currencies tend to appreciate more
in the run-up to hosting the Olympics. Moreover, Dick and Wang (2008) find evidence that,
on average, host stock markets are positively affected by Olympic host announcements.
These provide new avenues for investors to take advantage of during the 2016 Rio Olympics
2.2 Sectors poised for maximum investment
Sector
Major players and projects
Engineering and 3 large players- Construtora
Norberto Odebrecht S.A. (CNO),
Construction
Camargo Correa S.A. ( Camargo)
and Construtora Andreda Guiterrez
S.A. ( ConsAG)
These companies have strong
balance sheets and necessary cash
reserves, crucial for projects whose
financing have not yet been
finalised and even act as promoters
for certain projects
Features/ Risks
Uncertainty of revenues
since Brazil has little
precedence of pricing
naming rights and suites
Pressing deadlines for both
the events are expected to
substantially increase the
working capital
requirements and might
temporarily increase the
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leverage of these
companies
Telecom and
Media
Transportation
Intense competition in the industry.
Recent 4G spectrum auction
witnessed the 4 major operatorsTelefonica Brasil, Claro, TIM and
Oi- bidding a total of around R$ 2.5
billion.
Globo, a large player in the media
sector, won the transmission rights
to both the 2014 World Cup and the
2016 Olympics
About R$12billion investment in
this sector for the World Cup and
an additional R$11 billion for the
Olympics
Roads- major players are CCR and
EcoRodovias
4 major Bus Rapid Transit(BRT)
projects underway in Rio, totalling
about R$5.8 billion
Car Rentals- Influx of tourists
should boos this industry
Largest player is Localiza
Ports- R$ 7.7 billion investment to
revitalise Maravilha Port
R$1.1 billion investment to
integrate Novo Rio bus station,
Santo Dumont Airport, the Dock
stations and the Ferry Docks
Mobile penetration already
high (130%) and so major
investments would be in
technology and broadband
capacity for existing lines
Company sells ad space
related to the events in
advance and disburses its
own payments in
instalments- reduces cash
flow pressures but means
that the company will have
to bear the higher costs of
covering the event
Privatisation of roads being
undertaken on a large
scale.
Projects expected to have
lower margins because of
greater competition for
concession awards
Instead of investing heavily
in fleet expansion, car
rental companies are
simply expected to raise
the price
Revitalisation of such a
large area is expected to
have significant long term
economic benefits
Table 5: Sectors expected to witness the most investment
(Source: http://www.rio2016.com; Standard & Poor’s)
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3.Fortius
Remarks and Recommendations
We find that reports and Brazilian govt. documents seem to suggest that Brazil might be able
to conduct both these major sporting events successfully, in the true sense of the word. One
needs to be cautious, however, in evaluating the costs and benefits. There is always a risk of
overstating benefits if one fails to take into account the crowding and substitution effects
(usual tourists might stay away, spending on stadiums could have been spent on health and
education, etc.). There is also the risk of cost overruns, especially if there are implementation
delays since in case of such huge investments, something the Brazilian bureaucracy is
notorious for.
Development banks such as BNDES should refrain from investing in non-public
infrastructure projects such as stadium renovation and pass on the risks (and profits) of such
projects to commercial banks. Even in case of infrastructure projects, the government should
seek to share some of the risks by entering into Public-Private Partnerships(PPP). The private
players can share the risks among themselves by forming consortiums. The legal system
should be fast and robust to ensure all contracts are enforced, critical for the success of
infrastructure projects. The government has a crucial role to play, in assuring investors,
incentivizing them and at the same time making sure that so-called economic deadweight loss
is minimised by ensuring transparency.
As Pierre de Coubertin, father of the modern Olympics, said in his “Ode to Sport”“O Sport, You are progress! To serve you, a man must improve himself physically and
spiritually”
Once these improvements are in place, Brazil looks all set to announce its arrival on the
world stage.
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Bibliography
Oxford Economics(2012). The Economic Impact of the 2012 London Olympic and Paralympic Games.
Oxford.
Edds, S. (2012). Economic Impact of the Olympic Games Through State Comparisons.
Maennig, W., & ZImbalist, A. (2012). International Handbook on the Economics of Mega Sporting
Events. Hamburg.
Standard & Poor's (July, 2012). Brazil Gears Up For The Games.
Goldman Sachs(2012). The Olympics and Economics 2012. Goldman Sachs.
Ernst &Young (2012). Capturing the momentum : E&Y's 2012 attractiveness survey- Brazil.
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http://www.thedailybeast.com/articles/2012/07/30/do-the-olympics-boost-the-economy-studiesshow-the-impact-is-likely-negative.html
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http://www.bbc.co.uk/news/business-11809426
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