KNH 313 Sport Economics and Finance
Assignment #3

Economic Impact of the FIFA World Cup 2014 on the Host Destination Brazil

Table of Content

Introduction 3 Economic Impact 3-4 Event Tourism 4-5 Image and place marketing 5-6 Urban development and renewal 6-8 Social development 8-9 Conclusion/Discussion 9-11 Bibliography 12

Introduction The purpose of this report is to analyze and define the economic impact of the FIFA World Cup 2014 in Brazil. An economic impact report allows public sector bodies to analyze their economic return on investment and it also demonstrates how events drive economic benefits that enable event organizers to develop practices maximizing these benefits. (eventIMPACTS) In 2007 Brazil was announced as the host of the world`s biggest football event, the FIFA World Cup 2014. This will be the second time the country has hosted the competition, making Brazil the fifth country to have hosted the FIFA World Cup twice. This extraordinary event will be held from 12 June till 13 July and will take place in 12 stadia spread over Brazil. (Brazilian Federal Government)
This paper begins with an overview of the economic impact by hosting this event. Furthermore I will outline the impact of the 2014 FIFA World Cup on tourism, the destination image and the development of infrastructure. I will then conclude by identifying the social impact of this event and discuss its legacy and possible risk factors.

Economic Impact The term “Economic Impact” can be defined as a net economic change in a host community that results from spending attributed to a sports event or facility. (Crompton, 1995) This can be analyzed in terms of short and long effects. The economic impact of a major event refers to the total amount of additional expenditure generated within a defined area, as a direct impact of staging the event. For most events, spending by visitors in the host area is the biggest factor in generating economic impact. However, increasing of employment and increasing awareness of the region as a tourism destination are other important considerations. (Getz, 1997, p.51-61) Donald Getz, a leading academic instructor of event studies, divides the economic roles of an event into four parts: Events as Attractions, Event as Animators, Events as Image Makers and Events as Catalysts. 1. Events as Attractions - Mega-events are attracting tourists from outside the host nation, as well as domestic tourists. Visitors are spending more during the event in the host area and stay for a longer period of time. Thus increasing the demand for products and services.

2. Events as Animators –Many facilities and attractions are built fur the purpose of a big event. This creates incentives that will encourage traveling to the host destination again. Attractions and facilities can be structures such as shopping centers, museums, resorts, sports stadia or convention centers.

3. Events as Image Makers - Hosting a big event can create a positive image and increase the popularity of an area. Additionally, it counterbalances any negative imagery of the host region. As a result, tourists might be more interested in traveling to the host destination.

4. Events as Catalyst - Events also affect the development of the host region`s infrastructure and assist urban renewal. (Getz, 1997, p.51-61)

Hosting the FIFA World cup 2014 will bring significant impacts and benefits to Brazil. According to a report of Ernst & Young, Brazil’s economy impact will increase the total amount invested directly in event-related activities by five times as well as affecting various economy sectors. Brazilian’s economy will create a profit of approximately RS 142 billion by staging this event. The source of income is comprised of investment on infrastructure, organization, operating visitor’s expenses and the impact of the event on national production of goods and services. As a result of these World Cup related expenditures, there will be an impact on the population’s income of RS 63.48 billion and an additional tax collection of RS 18.13 billion by the local, state and federal governments. On a more negative note an increase in the population’s income results in a rise of demand of goods and services and this consequently can lead to inflation. (Ernst & Young Terco, 2010) Besides tourism and hospitality, the main industries that will profit from hosting the World Cup are construction, food and beverage, business services, utilities and information services. This will result in an output of RS 50.8 billion. Other economic segments that will succeed are business services, civil construction, and real estate services. In addition, the World Cup 2014 will create many jobs in the different industries over this period of time. An increase in external visitor spending will require an increase in level of employment within the region. Brazil estimates to have an increase of 3.63 million jobs, although this high number will not last for a long time period. This number relates to the “Pre-event” and “Event”. It is not usual that businesses would hire additional employees as a result of a sports event for a long term. As the demand only lasts for a short time period, they would rather replace their employees to required positions or employ additional short-term staff. (Ernst & Young Terco, 2010)

Event Tourism Nowadays sport event tourism is one of the fastest growing niche markets in the global travel industry. Many tourists are no longer satisfied with traditional concept of holidays, demanding entertainment. Events are the best way to generate short-term visits in addition to increasing public attention. Besides the significant numbers of foreign visitors, events also have a major impact on domestic travel within the host nation. According to a survey of Vanhoe and Witt (1987), mega events can reduce tourism outflows from the host country by half and increase inflow by a similar proportion. Moreover, it depends on the measurement of an event. (Getz, 1997, p.61) Elite or spectator-driven sport events, including the Olympics or World Cup, are attracting significantly more passive participants as visitors who are taking part, or involved in sport activities. With non-elite events instead, the number of active participants is larger than the number of spectators and it is therefore extremely challenging to plan or promote such events, especially for the tourism segment. Other factors that can influence the number of people attending the event include: the venue, the timing of the event, the cost of attending, the strength of media representation, the success of promotional or ticketing campaigns, as well as external factors, such as the weather. (Wright, 2007) As a result of hosting the FIFA World Cup 2014 Brazil, there will be an estimated increase in international tourist inflow by 79%, and studies show that in the following year that number will possibly rise. According to the report of Ernst & Young there will be 2.98 million additional visitors from 2010 till 2014. (Ernst & Young Terco, 2010) The highest source of income generated by hosting an event is the expenditure by visitors. That’s in fact one of the prime reasons that makes hosting such an event so attractive to countries. The most indirectly affected industries are hospitals, transportation, communication, entertainment and retail industries. Brazilian companies will benefit RS 5.94 billion by the tourist inflow. (Ernst & Young Terco, 2010) The increase in tourism, however, also has its downsides, with displacement being one of them. Displacement is a negative effect of hosting an event. It is characterized by regular visitors staying away and choosing other destinations in response to overcrowded and fully booked hotels or increased prices. Further negative effects may stem from a change in residents’ spending habits. (Preuss & Solber, 2007)

Image and place marketing Major events, such as the Olympics or the World Cup, can shape the image of the host country leading to a favorable perception as a potential travel destination. Due to their high media attention, events contribute to the brand image of tourism destinations and can thereby reinforce their positioning. With global media attention focused on the host city, even for a relatively short duration, the publicity value is enormous and this can be an important stimulus in the image formation process. A high value image of a region can influence the decision-making process of choosing a place to visit. In today’s tourism industry, it is not sufficient to just offer basic services such as good lodging, restaurants or landscapes. Tourists are looking for memorable experiences in memorable places. Participation in events can create these feelings. While it is true that visiting a destination can be, in itself a memorable experience, the additional thrill of taking part in an event can be even more gratifying. Although the experience of participating in an event is a one-time moment, it is still memorized and will therefore contribute to the process of image formation. Moreover, events can be used to correct negative images. In some cases they are even planned with the purpose of repositioning the image of a destination. (Getz, 1997, p.57-58) A prime example must be South Africa, which benefited a lot from hosting the FIFA World Cup 2010 in these regards. Several tourists were concerned about their safety before traveling to South Africa, however, the successful performance of this big football event certainly helped solidifying the destination’s image as a safe tourist location. (Anton, Alonso, & Rodriguez, 2011) For Brazil, the FIFA World Cup 2014 will be a great opportunity to promote the country and improve the image abroad to be listed as one of the most developed nations. Thousands of press professionals will transmit to billions of spectators not only the games, but images and content about the cities, the country and the culture. In order to upgrade the country’s image, the Federal Government is making a coordinated effort to put into action a great promotional plan before, during and after the event. RS 6.51 billions are the estimated investments in media and advertising, mostly concentrated in the year 2014. Depending on the success of the event, the country will not only have a greater national and international visibility during the tournament, but also several years thereafter. A good destination image will yield an increase in tourist activities, attracting foreign investments and securing credibility. (Ernst & Young Terco, 2010)

Urban development and renewal Hosting a big event requires expensive investments in sports facilities, as well as non-sport city-related infrastructure. The infrastructure can vary substantially from one city to another. So some cities provide infrastructures that allow event organizers to stage major sporting events with a very low level of investment, whereas other cities have to invest a lot in their infrastructure. Significant changes in infrastructure can create development pressures. The investments must fit into the city’s long-term plan to make the event economically successful. Therefore, the government of the host region has to arrange their long-term development plan with the necessary event-related structural requirements. This is of particular importance if the event-specific development exceeds the long-term demand from locals and visitors. (Preuss & Solber, 2007) Since major sport events affect different urban areas, the investments have to be allocated to these locations. Figure1 shows an overview of the structure, which can be required to host a large sporting event. It is divided into three segments: Sport and Leisure, Housing and Recreation, and Work and Traffic. The primary segment includes required stadiums, indoor arenas and special facilities such as swimming pools, for hosting the event. It deals with structures for the sole purpose of hosting the event. Therefore, it is necessary to plan its use after the event. Furthermore, it is essential to think about whether to build this type of infrastructure for short- or long-term. The secondary structure is compiled of an athletic and media village, a media and press center, training facilities, as well as parklands. At big sport events like the Olympics, it is quite usual to construct whole villages for athletes, referees and media representatives. The problem is that the event visitors use these billion-dollar creations only for a few weeks. The tertiary segment demonstrates all other elements that are necessary to host large sporting events, including the tourism structure. Because of the big event there will be a higher inflow on airports, as well as increased traffic in the region and higher demand on accommodation. Therefore it is essential to also focus on this development. (Preuss & Solber, 2007)

In October 2007, Brazil was announced to be the host country for the FIFA World Cup 2014.
From that time on, a great effort has been made to prepare the country to host the mega event in an organized, competent and cheerful way. The Brazilian Government has organized the infrastructure development relatively similar to the above-mentioned framework. Additionally, they have divided priority actions into planning cycles, related to each project’s criticality and deadline. The first cycle, beginning after the 12 host cities were announced in 2009, deals with urban mobility, stadia, airports and ports. As these projects have a longer completion time, they need to begin immediately. The FIFA has clearly defined standards for the hosting stadiums, related to accessibility, safety, comfort, lighting, structure and services. As some selected stadia did not meet all these requirements, they had to adopt these and three additional stadia had to be built in Natal, Recife and Salvador. (Brazil Government, 2010 ) RS 4.62 billion were spent on renovating and building the stadia, which represents the main individual cost component of the 2014 World Cup. Since there will be an increase of tourist inflow, the public sector had to invest in airports, ports and urban mobility. Throughout June and July 2014 the World Cup will generate approximately an additional flow of 2.25 million passengers at Brazilian airports. (Ernst & Young Terco, 2010) The second cycle directs to Tourism infrastructure, Security, Energy, Telecommunications and IT, and Environmental Sustainability. The implementation of this kind of infrastructure has started in 2010. There will be an increase in demand for hotel complexes in host cities, not only because of the event itself, but also because of other tourism activities such as hiking, due to the nation’s increase in international exposure as a tourist destination. To handle this high demand for accommodation, RS 3.16 billion (Ernst & Young Terco, 2010) were invested in the Tourism sector. In addition to this, fan parks will be built in all twelve host-cities in order to entertain tourists. These fan parks feature entertainment activities, sale of food and drinks, parties, big screens to broadcast live matches, and stages for concerts between matches. (Brazil Government, 2010 ) The third and last cycle focuses on actions that must be planned in advance, but that can only be implemented during the period just before the competition, such as airway routes, airports, ports, transportation, and urban mobility operations. (Brazil Government, 2010 )

Social Development Another benefit of hosting a mega event is the enhancing knowledge and skills of the citizens, especially in the tourism sector. It can be seen as a “Soft-Infrastructure” development. (Preuss & Solber, 2007) There will be a high demand of human resources during the tournament as well as during the period of preparation, which starts 5 years before the actual event. Direct and indirect service providers related to the World Cup, including tour guides, volunteers, hotel and restaurant staff, taxi drivers, bus drivers, and public servants must be prepared to receive tourists from all over the world. The objective is to create a positive image of the country; therefore an international service standard must be developed starting from service at airports to activities related to tourism and trade. In order to develop this image, the governments and their partners will be responsible for helping society prepare for the event and have adequate training to provide quality services. (Ernst & Young Terco, 2010) Regarding human resources, the Volunteering Program is one of the Cup’s flagships. Thousands of volunteers, mostly students, but also a significant rate of senior citizens, will be responsible for supporting fans and especially foreign tourists. For their effort, they receive training, uniforms, meals and spending money. 15 000 volunteers are estimated to be needed for the world cup in Brazil. In terms of legacy, the Volunteering Program has great qualities, as it may be associated with the training of personnel in IT, foreign languages, and social inclusion. (Ernst & Young Terco, 2010)

Conclusion/Discussion Brazil has one of the five largest economies in the world, and through hosting the FIFA World Cup and the Olympics in 2016, the economy has even more potential for growth. (CIA, 2012) The World Cups’ direct impact on the Brazilian Gross Domestic Product is supposed to be RS 64.5 billion for the period of 2010-2014. (Ernst & Young Terco, 2010) If Brazil succeeds in obtaining the necessary investments and performing the actions in time, capitalizing on the World Cup’s legacies and turning them into permanent assets, the event will have a tremendous socio-economic impact on the country. The impact generated by hosting the event can be divided into 3 categories: direct impact, indirect, and induced impact. The direct impact consists of the investments due to the event, the operation of the event, and spending by visitors. As a result of the direct impact, there will be an increase in production, employment, income and tax collection. This increase demonstrates the indirect impact. So for example, hosting such a mega event requires improvements in urban infrastructure. Therefore, there’s a need for employment to build this structure as well as a growth of demand in raw materials. This leads into a gain in production and salaries paid to the employees, which on the other hand, creates an impact by increasing household spending. So if an employee gets a higher wage, then he or she will spend more on goods and services. This affects industries that are not directly involved in hosting the event, otherwise known as the multiplier effect, and it shows that a direct impact of 1 percent on the Brazilian`s economy will involve a further 0.5 percent. (FIFA World Cup, 2011) Hosting the FIFA World Cup 2014 is one of the biggest opportunities for Brazil to strengthen their economy and social well-being within the population. It will create legacies in various forms of fixed capital: tangible capital, human capital, technology and brand capital. Tangible legacies, as a result of hosting the event, are stadiums, buildings, urban mobility, infrastructure, telecommunication, ports and airports. Human capital can be recognized, as the gain in education and training provide inclusion of the population in the volunteering program, improvement in health and safety, and the increase in the population’s well-being through increased incomes. Safety is one of the most important legacies generated by the FIFA World Cup 2014. Training and investment in the equipment will not secure only safety during the tournament, but it contributes to the reduction of violence after the event period as well. The technology capital, gained through hosting the event, contains security and telecommunication equipment. The increase in awareness and international publicity can be understood as brand capital. (Ernst & Young Terco, 2010) In order to provide a successful event, Brazil has to consider external and internal risks incurred by hosting the event. First of all, a possible internal risk could be a delay in the development of infrastructure. This includes the building of the stadia, urban infrastructure as well as the renewal in the hospitality segment. These structures have to be ready in time for the Confederations Cup, which is even a year earlier than the World Cup. Due to the high time pressure involved in this process, there is an increased probability of errors, which represents an additional challenge in this domain. (Ernst & Young Terco, 2010) Furthermore there could be risks involved in planning and decision-making process, because of the tradition of vertical down planning in a Brazilian company. This means, the central government takes the decision and spreads them out to local organization points. As a result there is little local autonomy and a lack of monitoring and control over the alignment of agents responsible for the stipulated policies. In addition there is little feedback on the effectiveness and efficiency of decisions, made by the government. From the bottom up perspective this lack of alignment can lead to coordination problems. Another risk is the possible high amount of opportunity cost, which could be significantly high in hosting an event. As the direct impact of the event is temporary, the return on investments depends on how much the host country capitalizes on the event´s legacies. Therefore, investments have to be accomplished efficiently. (Ernst & Young Terco, 2010) Whereas all above mentioned risks can be avoid through an effective management, external risks cannot be controlled. Unstable international and national macroeconomics scenarios could prevent visitors from attending the event. Furthermore, it could affect the availableness of foreign capital for investments. (Ernst & Young Terco, 2010) In summary, from the macroeconomic view, Brazil will benefit from the investments and expenditure by visitors. The microeconomic perspective shows the impact of people’s education and income, the increase in economic activities by small companies, the country’s exposure in the world media, consequential effects on tourism, reduced violence and crime, as well as the social benefits from investments in infrastructure. The FIFA World Cup 2014 is one of the biggest opportunities for Brazil to show the world the country’s potential to host one of the major events in the world.

Bibliography

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4. CIA. (2012). The World Factbook - Brazil. Retrieved from CIA- The World Factbook: https://www.cia.gov/library/publications/the-world-factbook/geos/br.html

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Secondary Structure – Housing & Recreation 1. Athletic Village & Media Village 2. Media and Press Center 3. Training Facilities 4. Parklands

Tertiary Structure – Work & Traffic 1. Traffic: airport, mass transportation, Roads 2. Tourism: hotels, attractions 3. Sewage, Telecommunication, Fiber optic cabling etc.

Primary Structure - Sport &Leisure 1. Stadium 2. Indoor Arena 3. Special Facilities: swimming pool, shooting range, rowing course, equestrian, facilities, etc.

Figure1 – Structural demand of sport events on cities (Preuss & Solber, 2007)