Professional Documents
Culture Documents
November 2010
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Contents
Key messages ..................................................................................................................................i Executive summary ........................................................................................................................ii 1 2 3 4 Background ......................................................................................................................... 1 The FIFA World Cup ............................................................................................................ 4 Framework of the analysis .................................................................................................. 8
3.1 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Some key preliminaries .......................................................................................................... 9 Infrastructure ....................................................................................................................... 12 Bidding costs ........................................................................................................................ 13 Security ................................................................................................................................ 13 Transport.............................................................................................................................. 14 Costs to Government ........................................................................................................... 14 LOC Budget .......................................................................................................................... 14 Impacts on other sporting codes ......................................................................................... 16 Broader impacts ................................................................................................................... 17 Summary of the costs of staging the World Cup ................................................................. 18 Tourism ................................................................................................................................ 20 Tourism and sporting infrastructure legacy benefits ........................................................... 23 FFA friendly matches............................................................................................................ 24 Other benefits ...................................................................................................................... 25 Ticket revenue ..................................................................................................................... 25 Economic welfare impacts of staging the World Cup .......................................................... 26 Broader impacts ................................................................................................................... 28 Economic welfare and labour market assumptions ............................................................. 29 Summary of the benefits of staging the World Cup ............................................................ 32 Quantification of costs ......................................................................................................... 33 Quantification of benefits .................................................................................................... 37 Results summary .................................................................................................................. 38 Key uncertainties ................................................................................................................. 39
7 8
Appendix A: Key analytical assumptions ..................................................................................... 47 Appendix B: Key results ............................................................................................................... 49 Appendix C: Net tourism impact of the World Cup .................................................................... 51 Appendix D: Principles for assessing major events ..................................................................... 54 Appendix E: The Access Economics CGE model .......................................................................... 57
While every effort has been made to ensure the accuracy of this document and any attachments, the uncertain nature of economic data, forecasting and analysis means that Access Economics Pty Limited is unable to make any warranties in relation to the information contained herein. Access Economics Pty Limited, its employees and agents disclaim liability for any loss or damage which may arise as a consequence of any person relying on the information contained in this document and any attachments.
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Charts
Chart 6.1 : Costs and benefits of hosting the World Cup Scenario 1: All stadia ..................... 34 Chart 6.2 : Costs of hosting the World Cup Scenario 1: Full stadia ........................................ 34 Chart 6.3 : Costs and benefits of hosting the World Cup Scenario 1: All stadia ..................... 35 Chart 6.4 : Costs of hosting the World Cup Scenario 2: Partial stadia.................................... 35 Chart 6.5 : Costs and benefits of hosting the World Cup Scenario 3: Overlay costs .............. 36 Chart 6.6 : Costs of hosting the World Cup Scenario 3: Overlay costs ................................... 36 Chart 6.7 : Benefits of hosting the World Cup ............................................................................ 37 Chart 6.8 : Costs and benefits of hosting the 2022 World Cup ................................................... 38
Tables
Table 2.1 : Government guaranteesError! Bookmark not defined.Error! Bookmark not defined. Table 4.1 : FIFA World Cup scenarios .......................................................................................... 10 Table 4.2 : Costs of the 2022 World Cup ..................................................................................... 11 Table 4.3 : Estimated stadium infrastructure costs .................................................................... 12 Table 4.4 : Budgeted expenditure of the 2006 World Cup Organising Committee .................... 15 Table 4.5 : Quantified costs of the World Cup and Confederations Cup .................................... 18 Table 5.1 : Benefits of the 2022 World Cup ................................................................................ 19 Table 5.2 : Fixture allocation ....................................................................................................... 20 Table 5.3 : Net tourism effect ..................................................................................................... 21 Table 5.4 : World Cup ticket allocation ....................................................................................... 25 Table 5.5 : Economic welfare benefits of staging the 2022 World Cup ...................................... 30 Table 5.6 : Sensitivity of economic welfare benefits to labour market assumptions ................. 31 Table 5.7 : Quantified benefits of the World Cup and Confederations Cup ............................... 32 Table 6.1 : World Cup costs ......................................................................................................... 33 Table 6.2 : World Cup benefits .................................................................................................... 37 Table 6.3 : Net benefits of hosting the 2022 World Cup............................................................. 39 Table 7.1 : Key risks of hosting a World Cup ............................................................................... 41 Table 7.2 : Sensitivity analysis of key inputs ............................................................................... 44 Table 7.3 : Impact of additional labour market capacity ............................................................ 45 Table A.1 : World Cup CBA key assumptions .............................................................................. 47 Table C.2 : Net tourism effect ..................................................................................................... 53
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Figures
Figure 4.1 : Stadia development scenarios ................................................................................. 11 Figure 4.2 : FIFA financial platform ............................................................................................. 15 Figure 5.1 : Macroeconomic expansionary effects ..................................................................... 30 Figure 7.1 : Risk analysis framework ........................................................................................... 40 Figure 7.2 : NPV of costs and benefits of the World Cup ............................................................ 43 Figure C.1 : Host nation net tourism effect ................................................................................. 51 Figure E.1 : Key components of AE-RGEM .................................................................................. 57
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Acronyms
AFL ARU BCA CA CBA CGE DRET FIFA FFA GDP GNP GST LOC NPV NRL PwC RWC TRA Australian Football League Australian Rugby Union Business Club Australia Cricket Australia Cost benefit analysis Computable general equilibrium Department of Resources, Energy and Tourism Fdration Internationale de Football Association Football Federation Australia Gross Domestic Product Gross National Product Goods and Services Tax Local Organising Committee Net present value National Rugby League PricewaterhouseCoopers Rugby World Cup Tourism Research Australia
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Key messages
This analysis examined the economic benefits and costs of Australia hosting the 2022 FIFA World Cup, with a focus on the direct financial aspects of the tournament. The study is intended to help governments better understand the nature and scale of the impacts of Australia hosting the event. Three distinct cost scenarios were examined, based on a different allocation of stadium infrastructure costs.
These stadium cost scenarios reflect underlying uncertainty regarding the nature and extent of stadium infrastructure commitments currently in the development pipeline, and therefore which stadium costs can be attributed to the tournament. In moving from scenarios 1 to 3, an increasing level of stadium development is not contingent on the tournament, therefore reducing the costs of the event.
The headline estimates for staging the 2022 World Cup under the three scenarios are presented below. Scenario
Scenario 1 Full stadia costs Scenario 2 Partial stadia costs Scenario 3 Overlay costs
Net benefit
-$1,477 million -$305 million $266 million
Stadia costs
$2,748 million $1,137 million $346 million
Note: Net benefit estimates expressed in net present value terms. Stadia costs are in real dollars (2010 prices).
By far, the major cost factor for the tournament relates to the development of stadium infrastructure. (Under Scenario 2, for example, stadium related costs comprise around 55% of all costs.) The financial benefits of the tournament arise predominantly through international tourism. Accordingly, the main uncertainties relate to these two dominant cost and benefit drivers.
In particular, a key risk of staging the tournament concerns cost overruns for major infrastructure works (irrespective of the different stadium scenarios). For example, a 10% increase in infrastructure costs will lower the net benefit by $81 million for Scenario 2.
While the 12-year tournament lead time adds considerable uncertainty to all benefit and cost elements, it also provides some important practical advantages. It potentially allows greater time and scope to put in place smarter, more integrated and cost effective solutions for tournament related developments, including in response to changing economic and market conditions. Hosting the World Cup will involve operational disruptions and financial costs to certain professional sports (the AFL, ARU, NRL and Cricket Australia) which use various stadia and facilities allocated for the event. The memorandum of understanding between the FFA and relevant sports will help frame ongoing discussions. These impacts are not expected to be large relative to other event costs but are potentially sensitive. The tournaments long lead time will also provide greater opportunities to manage these commercial issues. Many cost estimates and development schedules adopted in the analysis are based on preliminary assessments chiefly because of FIFAs 12-year bidding timetable. Over time, more information regarding event costs and other key policy parameters will help provide greater surety to the estimates.
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Executive summary
The FIFA World Cup is the biggest sporting event in the world, attracting a wider audience and following than the Olympics. The 2006 World Cup in Germany had a total cumulative television audience of over 26 billion, and, while official estimates from the 2010 tournament in South Africa are yet to be released, FIFA has anticipated a similar television audience. The FFA is currently bidding for Australia to host the 2022 FIFA World Cup and the Australian Government has committed $45.6 million in financial support (an earlier bid to host the 2018 tournament has been formally withdrawn). If Australia is successful, the event has the potential to deliver considerable benefits to the community. But it will also involve a range of significant costs and risks, many of which will be directly borne by government. The FFA submitted its bid book to FIFA for consideration on 14 May 2010. The proposal includes 12 stadia across 10 host cities nationwide, and would see World Cup matches played across six states and territories. A successful Australian bid would see the World Cup held in an Asian Football Confederation member nation for only the second time in the tournaments 80 year history. This report, which was commissioned by the Department of Resources, Energy and Tourism, examines the economic benefits and costs of Australia hosting the 2022 World Cup. The analysis aims to inform ongoing policy decisions regarding the Commonwealths involvement in staging the tournament and accordingly takes a national whole-of-economy focus.
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Details
All stadium construction, upgrade and overlay costs associated with the 12 stadia in the bid book allocated to the World Cup. Stadia costs incurred directly as a result of Australia hosting the World Cup, specifically upgrades to stadia in Townsville and Newcastle, and new stadia in Blacktown and Canberra. Includes all overlay and temporary costs for other stadia required to become FIFA compliant. Overlay costs for the 12 stadia nominated in the bid book.
The three scenarios considered in the analysis reflect current uncertainty regarding how infrastructure costs can be attributed to the tournament. Under the FFAs bid, a suite of 12 stadia has been proposed: some of these are yet to be built, others will require substantial upgrade and refurbishment and all will require a level of overlay for the tournament. Almost all the major greenfield stadia contained in the bid are under some degree of active development consideration independent to the World Cup process (for example, Perth and Adelaide Oval). The three scenarios considered reflect the likelihood of those stadium works being developed irrespective of Australia staging the World Cup in 2022. Moving from scenarios 1 to 3, a greater level of stadium development is essentially pre-committed and not contingent on the tournament, therefore reducing the cost of the event.
Analytical findings
The three stadia cost scenarios have a substantial bearing on the net financial impacts of hosting the 2022 FIFA World Cup. Staging the event is expected to result in a net cost under Scenario 1 and 2, and provide a net benefit under Scenario 3 (based on the allocation of stadia costs outlined in Table ii above).
Scenario 1 (full stadia costs) results in a net cost of $1.5 billion. Scenario 2 (partial stadia costs) results in a net cost of $305 million. Scenario 3 (overlay costs) provides a net benefit of $266 million.
The significant differences between each scenario are driven by the allocation of stadia costs, with all other aspects of the tournament common to each scenario. For example, the significant difference between Scenario 1 and 2 (which both involve a net financial cost) is due to around $1.6 billion of stadium construction being allocated away from the tournament. Scenario 3 provides a net gain of $266 million from hosting the tournament. This is due to all permanent stadium construction costs being allocated to the baseline, with only overlay costs of $346.2 million allocated specifically to the World Cup. Stadium infrastructure and security costs account for the majority of costs under each scenario, with security being the major cost component under Scenario 3. Stadium costs vary from $2.7 billion under Scenario 1 to $346.2 million under Scenario 3.
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The benefits of the tournament arise predominantly through international tourism. The event is expected to attract large numbers of overseas spectators, as well as officials and the teams themselves. The welfare gain from the direct expenditures from these arrivals is projected to be $726 million in net present value terms (estimation of the welfare gain from direct expenditures from overseas parties is discussed below). The next largest benefit is generated from the LOC, which is largely funded by FIFA. LOC expenditures in Australia for the 2022 World Cup are estimated to have a total welfare gain of around $173 million. Table ii below details the key costs and benefits of staging the World Cup. On a per capita basis, hosting the 2022 World Cup would involve a financial cost of around $66 per person under Scenario 1 and provide a benefit of around $12 under Scenario 3. Table ii: Net benefits of hosting the 2022 World Cup
Benefit / Cost Scenario 1 Full stadia NPV Benefits Tourism (incl. legacy) LOC expenditure Television broadcasting Other World Cup related Total Benefits Costs Bidding Infrastructure Transport Security Cost to Government Other Total Costs Net Benefit Benefit per person ($) 45.6 1,947.8 49.8 333.2 97.1 62.5 2,535.9 -1,477.2 -66.0 45.6 775.8 49.8 333.2 97.1 62.5 1,364.0 -305.3 -13.6 45.6 204.1 49.8 333.2 97.1 62.5 792.3 266.4 11.9
Australian Government contribution Based on FFAs Infrastructure Consortium estimates Based on transport assessment report by Arup Estimates provided by Attorney Generals Department Host city agreements and government guarantees Training facilities and costs incurred by other sports
$ million 726.1
1,058.7
1,058.7
1,058.7
Note: Per capita estimates based on a population of 22.38 million as at July 2010, Australian Bureau of Statistics.
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At a higher level, the Australian economy will look very different in 2022 (just as it looked different 12 years ago in 1998). This adds to the uncertainty regarding the likely costs of hosting the tournament and the benefits which would potentially accrue across the economy as it is very difficult to project prevailing macroeconomic and labour market conditions this far ahead. However, the long lead time, which is a result of FIFAs joint bid process, does have some advantages in that it can potentially allow greater time and scope to put in place smarter and more integrated solutions to be developed. Where possible, information should be updated over time by reflecting the current economic and social environment.
Sensitivity analysis
As noted, the main uncertainties of the analysis concern the largest benefit and cost drivers of the event namely, the level of expected tourism revenues and overall stadium development costs. Table iii shows the sensitivity of these estimates to the overall analysis. For the 2022 World Cup, a 10% increase in the cost of stadium construction would lead to a $198 million decrease in the overall net result to negative $1,675 million under Scenario 1. The variance from the same percentage cost increase is less pronounced under Scenarios 2 and 3 due to a smaller construction cost component, with the net benefit lowered by $81 million and $24 million respectively. Should tourism revenue be 10% greater than projected, this would increase the overall outcome by around $72.6 million across all scenarios, resulting in a net cost of $1,405 million under Scenario 1 to a net gain of $339 million under Scenario 3. Table iii: Sensitivity analysis of hosting the 2022 World Cup
Expenditure / Benefit item
Base Case +10% construction costs -10% construction costs +10% tourism revenue -10% tourism revenue +10% transport & security -10% transport & security Long run labour supply
Note: NPV estimates use a real discount rate of 4.5%. The long run labour supply sensitivity test relaxes the full employment assumption and shows the economic impact in which spare capacity in the labour market can respond to increased demand generated by the tournament.
Another important analytical parameter is the full employment assumption adopted in the GE modelling. The labour supply condition has a large bearing on the economys ability to respond to increased demand from the World Cup through increased employment, and therefore the extent to which economic welfare can increase. Department of Finance and Deregulation guidelines state a full employment condition is to be taken when examining the general equilibrium impacts of policy proposals. Such a condition, which is consistent with the
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conservative approach adopted in the analysis, ensures that any expansionary impacts are more constrained than if there was excess capacity in labour and other factor markets. Relaxing the long run labour supply assumption improves the net result by around $680 million across all three scenarios. It results in a net tournament cost of $797 million under Scenario 1, and a net positive result of $374.7 million and $946.4 million for Scenarios 2 and 3 respectively.
Concluding comments
Hosting a tournament the scale of the FIFA World Cup requires a significant commitment from government to meet the requirements set out by the governing body. Given the World Cup will not be held for 12 years, there is considerable uncertainty surrounding not only the overall costs of the tournament but which costs will be borne by State or Commonwealth governments. Once a host nation for the World Cup is selected, government (and thus taxpayers) would bear significant risk of either tournament cost overruns or that benefits are lower than expectations. It should be noted that upside potential also exists (that is, costs are lower and revenues higher than expected) but this is less likely and indeed has not been the general experience with staging mega sporting events. The fundamental conclusion drawn from this analysis is that, except under the most favourable cost conditions, the expected financial benefits from tourism, team and media spending are not sufficient to outweigh the significant costs of stadium construction and operational services required to host the event. These financial estimates would need to be
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considered in conjunction with the broader social and cultural benefits which the tournament is likely to yield. An important procedural aspect given high levels of uncertainty is to clearly establish responsibility for all costs of staging the event. This would include costs to be borne by the LOC and especially between States and the Commonwealth. Host city agreements are entered into by the States involved, but may present considerable risks for the Commonwealth for instance, to meet any funding shortfall from the States or LOC. Should Australias bid succeed, the general environment and relationship with FIFA will change as the bilateral engagement will no longer occur in the context of a competitive bid process. It is understood that a more inclusive process between FIFA and the host country will emerge in which there is likely to be some scope to modify or refine aspects of tournament commitments according to changing circumstances. Indeed, there is greater potential for such revisions given the long lead time for the tournament. Where this occurs, there may well be material cost and risk implications for government and any such proposals should be carefully scrutinised. Access Economics November 2010
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Background
Access Economics was engaged by the Department of Resources, Energy and Tourism to examine the costs and benefits of Australia hosting the 2022 FIFA World Cup. The Australian Government previously committed $45.6 million to the Football Federation of Australia (FFA) to proceed with a bid to host either the 2018 or 2022 FIFA World Cup. In June 2010, the FFA formally withdrew its bid to host the 2018 tournament and is only progressing its bid for the right to host the 2022 FIFA World Cup. This report is based on a broad framework and methodology for assessing the costs and benefits of hosting major events which is the subject of a separate companion report. An outline of this approach is provided in Appendix D.
Policy context
Australian governments have helped facilitate a range of high-profile sports and cultural events. The potential for events to generate considerable economic and social flow-on benefits across the community provides a legitimate basis for government support. This facilitation typically comes in a variety of forms from direct financial support for bid preparation, marketing campaigns and infrastructure to the provision of security, public transport requirements and improvements to civic amenities. Given this range of involvement, and as a matter of good public policy, it is important that major events are subject to a rigorous assessment of their overall costs and benefits. It should be recognised that bidding for the World Cup is not strictly a decision for the Australian Government but for the FFA. In practice, however, given the scale of the event, high levels of government sponsorship are necessary. Indeed, FIFA require a comprehensive range of formal guarantees be provided by national governments to support bids by respective football associations. The decision to bid can therefore be best considered a joint decision between the FFA and government. This raises a series of complex issues concerning how the costs and risks associated with managing the bid and potentially staging the tournament are allocated between private parties like the FFA and different levels of government. The broad costs and benefits associated with hosting the World Cup are outlined in Box 1. While a decision to bid is ultimately a yes or no proposition, various options are possible for structuring a (compliant) bid. These can have material implications for costs and revenues. For example, there is an array of options regarding host cities and venues, including whether to develop new facilities or upgrade existing arenas. Essentially, a bid could be prepared to be relatively cheaper or more expensive and these options will each have different community welfare outcomes. Importantly, they may also affect the probability of a successful bid.
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Infrastructure legacy Improved stadium and training facilities Tourism legacy A successful tournament and positive image of Australia is expected to increase tourism in the years following the event Qualitative impacts National pride An increase in community spirit and national pride Reputation enhancing A successful tournament would enhance Australias reputation for hosting major events and may lead to other events big awarded to Australia in the future
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Box 2: World Cup tournament The tournament involves 64 matches over 4 weeks.
There are 32 national teams that contest the tournament, split into 8 groups of 4 teams in the early stage Group Matches. This stage comprises 48 matches, with the final matches in each group played simultaneously. Following the group stage, 16 teams (the two top teams in each group) proceed to the knock-out stage of the tournament. This stage is an elimination tournament where teams play each other in one-off matches. The subsequent rounds of the tournament include: Round of 16 winners of each group play the runner-up of another group Quarter-finals Semi-finals Third-place match (contested by the losing semi-finalists) World Cup final Host countries will also stage the FIFA Confederations Cup a year before the respective World Cup. A principal aim of staging this much smaller event is to test the required infrastructure before the World Cup. The tournament is contested between the host country, the winner of the previous World Cup and winners of the six FIFA confederation championships. The tournament involves 16 matches over 2 weeks.
The 8 competing nations are split into 2 groups of 4 teams for the Group Matches. This stage comprises 12 matches, with the final matches in the group played simultaneously. Following the group stage, the two top teams in each group proceed to the semi-finals of the tournament. The winners proceed to the Confederations Cup final and a third-place playoff is contested between the losing semi-finalists.
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Cost benefit analysis (CBA) is a tool used to determine whether or not the full economic costs of a policy change are outweighed by its full economic benefits that is, whether the policy has a net benefit for society. Ideally, a CBA examines all the monetary and non-monetary (or intangible) costs and benefits of a policy or project to society. This includes its economic, social and environmental impacts. The broad stages of a cost benefit analysis generally comprise: 1. Defining the scope and objectives The first stage of the CBA requires an investigation of the project and its context including an outline of key objectives and beneficiaries. 2. Defining the baseline scenario and counterfactual cases A CBA only measures the incremental benefits and costs of the policy change scenario which occur over and above the business as usual scenario. Thus, to review the potential benefits and costs of a project, in this case the World Cup, it is necessary to specify the counterfactual case, that is, Australia not hosting the World Cup. This examines what could be expected to occur in the absence of the project and compares this to the potential incremental impacts of the project itself. 3. Specifying the various costs and benefits of different scenarios Understanding of the chain of causation of the project is necessary. The benefits expected to flow from the project, its costs and viable project options should all be examined. As noted, only costs and benefits additional to the business-as-usual case should be included in the analysis. Given the high level of uncertainty surrounding stadium redevelopments over the next 12 years and the allocation of costs to the World Cup or the business as usual scenario, the Department has provided three scenarios with which to analyse costs associated with stadium construction. The three scenarios considered reflect the likelihood of stadium works being developed irrespective of Australia staging the World Cup in 2022. The scenarios are discussed further in Chapter 4. 4. Quantifying the various costs and benefits, where possible This is arguably the most fundamental and challenging part of a CBA. Monetary values need to be assigned to costs and benefits where they exist in the year in which the revenue or cost will be borne. 5. Discounting past and future costs and benefits to net present values The costs and benefits of projects often accrue over a number of years. Thus, the valuation of costs and benefits should take into account the time in which they occur. A net present value approach is utilised to discount future benefits and costs to a present value. Choosing an appropriate discount rate can be challenging and must often account for the specifics of a project.
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Conducting sensitivity tests for uncertainties Future costs and benefits are typically subject to uncertainty. For estimates with a high degree of uncertainty, information relating to the margin for error should be provided and a sensitivity analysis conducted. A sensitivity analysis generally substitutes different estimates for key variables (including the discount rate and major benefit and cost factors) and calculates the impact of these on the overall outcome. Decision-makers are thus provided with information on the impact of key parameters, which can highlight risks and the main areas of uncertainty.
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This chapter focuses on the costs of Australia hosting the World Cup in 2022. The main costs associated with hosting the World Cup relate to the upgrade of current stadia to FIFA standards and the construction of new stadia. Given that the CBA only includes costs over and above the business as usual scenario, ie Australia not hosting the World Cup, the allocation of infrastructure costs between the baseline and the World Cup is a key assumption. Stadia development costs are separated into construction and overlay costs. Overlay costs refer to more temporary costs of preparing stadia to ensure they meet FIFA requirements for example changing seating arrangements for a rectangular pitch and are assumed to occur in the tournament year. All other (non-stadium) costs of staging the tournament are consistent across all three scenarios. Given the high level of uncertainty surrounding stadium redevelopments over the next 12 years, the Department has provided three scenarios with which to analyse costs associated with stadium construction (see Table 4.1). Table 4.1: FIFA World Cup scenarios Scenario
Scenario 1 Full stadia costs Scenario 2 Partial stadia costs
Details
All stadium construction, upgrade and overlay costs associated with the 12 stadia in the bid book allocated to the World Cup. Stadia costs incurred directly as a result of Australia hosting the World Cup, specifically upgrades to stadia in Townsville and Newcastle, and new stadia in Blacktown and Canberra. Includes all overlay and temporary costs for other stadia required to become FIFA compliant. Overlay costs for the 12 stadia nominated in the bid book.
The three scenarios considered in the analysis reflect current uncertainty regarding how infrastructure costs can be attributed to the tournament. Under the FFAs bid, a suite of 12 stadia has been proposed: some of these are yet to be built, others will require substantial upgrade and refurbishment and all will require a level of overlay for the tournament. Almost all the major greenfield stadia contained in the bid are under some degree of active development consideration independent to the World Cup process (for example, Perth and Adelaide Oval). The three scenarios considered reflect the likelihood of those stadium works being developed irrespective of Australia staging the World Cup in 2022. Moving from scenarios 1 to 3, a greater level of stadium development is essentially pre-committed and not contingent on the tournament, therefore reducing the cost of the event. A conceptual representation of the analytical baseline for each of the three stadia scenarios is set out in Figure 4.1, with the key cost components of Australia hosting the World Cup summarised in Table 4.2 below.
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Scenario 2
Partial stadia costs
Scenario 3
Overlay costs
Overlay
Overlay
Overlay
Contingent stadia
Contingent stadia
Contingent stadia
Pre-committed stadia
Analytical baseline
Pre-committed stadia
Pre-committed stadia
Comments
Bidding cost budget allocated to 2010 (sunk cost) Based on FFA Infrastructure Consortium estimates Based on FFA commissioned transport assessment report by Arup Based on Department of Attorney Generals estimate for State and Commonwealth government security costs incurred during the World Cup and Confederations Cup Cost of upgrading and building new training facilities Cost incurred by State and Commonwealth governments in meeting the government guarantees and host city agreements Total operational cost based on PwC scenario estimates
Security
560.0
560.0
560.0
53.5 150.9
53.5 150.9
53.5 150.9
50.0 3,691.2
50.0 2,079.5
50.0 1,289.1
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4.1 Infrastructure
4.1.1 Stadiums
A FIFA requirement for hosting the World Cup is for at least 12 stadiums with a minimum capacity of 40,000 for the group stage and increased capacities as the tournament progresses. Infrastructure costs range from $2.7 billion under the full stadia scenario to $346 million under the overlay cost scenario, based on estimates provided by the FFAs Infrastructure Consortium. The costs of individual stadium upgrades are listed in Table 4.3 below. The costs are based on upgrades to meet FIFAs technical requirements to host a World Cup match, or full construction costs if the stadium is built specifically for the World Cup. Table 4.3: Estimated stadium infrastructure costs Stadium
New Perth Stadium Adelaide Oval Melbourne Cricket Ground Stadium Australia Sydney Football Stadium New Western Sydney Stadium Redeveloped Energy Australia Stadium Suncorp Stadium Redeveloped Gold Coast Stadium Redeveloped Dairy Farmers Stadium New Canberra Stadium (CS4 Option) Redeveloped Geelong Stadium Total of 12 selected stadiums
Source: FFA estimates
Given the significant costs of providing stadium infrastructure, these have been considered in the sensitivity analysis (see Section 7.1.2).
4.1.2
Each team competing in the World Cup is allocated a training venue, which is located close to their accommodation and match venues. Strict requirements concerning exclusivity of use, clean venues and other FIFA rules apply. Upgrades to venues include, where required, resurfacing of pitches, change rooms, seating capacity, lighting, insurance and media requirements. The FFA and PwC have conducted a review of training venues and Access Economics has adopted the cost estimates made as part of this study. Hosting the World Cup will require an upgrade of approximately 69 training venues. The estimated cost of upgrading training venues is determined by the current quality of each training site: low, medium and high. The cost per site based on this rating is $1.5 million (low), $0.8 million (medium) and $0.1 million (high). The estimated total cost of the new training venues is around $54 million.
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4.3 Security
During both the World Cup and Confederations Cup, the provision of security for athletes, officials and spectators will involve substantial costs. Some costs will be incurred in the lead up to these events for example, through risk assessment and training. However, the significant security resource deployment during the event will be the largest cost component. Security costs are aggregated into three tiers:
Tier 1 security within stadiums. Tier 2 security within state borders excluding Tier 1 costs. Tier 3 Commonwealth Government security costs which include airports, sea ports, Australian Federal Police, ASIO and the Attorney Generals Department.
Security costs are allocated by tier to the FFA (Tier 1), state governments (Tier 2) and the Commonwealth Government (Tier 3). Total security costs for the World Cup and Confederations Cup are estimated at $560 million for State and Commonwealth governments with Tier 1 costs considered as part of the LOC budget. The security cost estimate has been provided by the Attorney Generals Department. Various security challenges with the World Cup have been raised, including the large number of international spectators and the city-wide nature of the security footprint. It is difficult to compare security costs between events due to the different structure of each event, and in particular with events held pre and post 11 September 2001. Two major events held in Australia were the Sydney 2000 Olympic Games and the 2006 Melbourne Commonwealth Games, with the security costs for these around $1511 million and $161 million respectively. The difficulty in basing any security costs on these events is that each was concentrated in one major city, whereas the World Cup would be a national event taking in 10 host cities.
Olympic Co-ordination Authority, A report on the financial contribution by the New South Wales Government to the Sydney 2000 Games, 2002
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4.4 Transport
Transport costs are estimated at $82.9 million based on a specialist transport assessment by Arup which was commissioned by the FFA. The report includes costs incurred by each State based on the number of matches held and includes the following factors:
airport parking, rental vehicle and staff costs; road traffic management costs, in respect of key routes to be utilised during both the World Cup and Confederations Cup; public transport; FIFA fan fest transport; information and volunteers; and vehicle fleet costs.
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Table 4.4: Budgeted expenditure of the 2006 World Cup Organising Committee2 Expenditure
World Cup cities Field offices Volunteers Miscellaneous Transport and traffic Security Budget reserve Media Personnel Stadiums Organisation costs Total
Share of Costs
3% 3% 5% 6% 6% 6% 11% 13% 14% 14% 19% 100%
As in previous World Cup tournaments, the LOC budget is primarily funded by FIFA through its financial platform. The primary source of funds is generated through ticket sales to the event. World Cup ticket revenues initially flow through to FIFA which then funds the operations of the LOC, which is established as a FIFA subsidiary. A preliminary budget is required by each bidding nation with a final budget and funding arrangement negotiated between the LOC and FIFA once the host nation is selected. Figure 4.2 below shows the flow of funds between the LOC and FIFA. Other sources of supplementary funding for the LOC are also available. The LOC may generate its own revenues from certain commercial activities and it is also possible that some government contribution might be sought although this would appear to represent more of a contingency rather than form a foundation funding. Figure 4.2: FIFA financial platform
Tournament expenses
Ticket revenue
LOC
Primary funding
FIFA
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Training venues In addition to stadium requirements for match days, FIFA also require that teams have access to base camps (chosen individually and separately financed by the competing nations) and training venues in close vicinity to match day venues. It is not expected that training venues currently used by other sporting codes will be required for the exclusive use of the World Cup Access Economics has not quantified any costs relating to training venue availability.
Local amenity
Hosting the World Cup will involve some costs associated with the loss of local amenity. Key impacts are likely to comprise major and partial road closures, and changes to public transport timetables to ensure there are sufficient train and bus services available to transport patrons to venues. Additionally, school holidays may be moved to ensure schools are closed during key phases of the event, which also increases the transport resources available. Such impacts were seen during the Sydney Olympics. However, because the World Cup is more geographically dispersed than the Olympics, these amenity costs are not likely to be as intensive for relevant cities.
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The total quantified costs of hosting the World Cup range from $3.7 billion under the full stadia scenario to $1.3 billion under the overlay cost scenario. This estimate is subject to a high degree of variability due to the assumptions adopted, continuing negotiations between the FFA and other sporting codes and the uncertainty surrounding estimates 12 years out from the World Cup tournament.
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This chapter focuses on the benefits of Australia hosting the World Cup in 2022. The key benefit components are summarised in Table 5.1 below. These reflect the welfare impact of expenditure in Australia (discussed further in Section 5.6) and are common to each of the three stadia development scenarios. Table 5.1: Benefits of the 2022 World Cup Benefit item
Tourism spending
$ real 2010
$ million 1,237.9
Comments
Bottom-up approach from ticket allocation number of games per person percentage of international spectators length of stay and the number of additional tourists during tournaments welfare impacts flowing from overseas tourism expenditures modelled in a CGE framework Based on FFA budget estimate welfare impacts flowing from overseas expenditure modelled in a CGE framework FFA estimate on cost of producing television broadcast to a worldwide audience welfare impacts flowing from overseas expenditure modelled in a CGE framework Based on the number of Australians that would have travelled overseas to attend the World Cup but now stay in Australia Based on the expected cost per ticket and the number of tickets that are sold to international spectators Based on 10% of LOC budget Not quantified
LOC expenditure
284.9
Television broadcasting
77.9
Consumer surplus
54.7
56.7
82.0 1,793.8
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5.1 Tourism
5.1.1 Visitors expected
Saleable capacity
60,085 48,240 88,048 82,480 40,402 41,022 42,138 49,150 40,021 40,068 40,150 43,584
Number of matches
6 6 6 6 5 5 5 5 5 5 5 5
On average, it is assumed that tourists will each attend 2.9 matches during the World Cup (during the 2006 World Cup in Germany Visitors on average had 2.9 tickets with no difference existing between German and foreign visitors3). Under the fixture allocation in Table 5.2, the number of international visitors who attend World Cup matches through the ticket allocation ballot is estimated at around 694,000.
3
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In developing a net tourism figure for Australia, the expected movements due to the World Cup of various groups of both international visitors and domestic residents have been included. In total, it is estimated that the net tourism inflow to Australia due to the World Cup is 677,100 international visitors (see Table 5.3). Further details on the tourism flow methodology are set out in Appendix C. Table 5.3: Net tourism effect Category
Event specific visitors (with tickets) plus plus less less plus plus Event specific visitors (without tickets) Visitors who would have come anyway (combine event in their itinerary) Visitors who postpone their visit due to the event Visitors who cancel visit due to the event Residents who would have travelled to a World Cup overseas but remain in Australia for the event Overall impact of residents who leave and those who cancel an overseas trip and remain home due to the event Total net tourism effect
Total
694,300 7,800 17,350
*
0 7,600 10,000
#
0 677,100
#
Note: * Adjustment made for these visitors to extend length of stay by 7 days. staying in Australia for the event captured in consumer surplus.
Residents
The Department of Resources, Energy and Tourism (DRET) provided projections of the airline capacity for 2022. On the basis of these projections and the estimated number of international visitors, it is unlikely that airline capacity will constrain the number of tourists able to travel to Australia for the World Cup. Given no final decision has yet been made on the tournament configuration or FIFA ticket allocations, the tourism estimate has a high degree of variability and its effects are considered in the sensitivity analysis (see Section 7.1.2).
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international visitors for the Confederations Cup, predominantly through media and team delegations.7 Assuming that tourists who attend the Confederations Cup will watch three matches, and that international visitors comprise 10% of spectators, it is estimated that around 20,000 tourists will attend the Confederations Cup in Australia in 2021.
5.1.2
In addition to the number of tourists expected to attend the World Cup in 2022, estimates are required for daily expenditure and length of stay for the various tourism categories general tourists, corporate, media, officials and competing teams. The amount of time spent in Australia for World Cup spectators was based on TRA estimates for the average time spent in Australia for holiday travelers for the year ending March 2009. The length of stay in Australia for other categories, including teams and officials, was estimated based on the number of teams and officials that qualify and are required at each stage of the competition, with all competitors arriving 10 days prior to the commencement of the tournament (a FIFA requirement). In 2009, international visitors are estimated to have spent $138 per day8 whilst in Australia. The estimate is based on the number of holiday travelers, excluding backpackers. The figures reported by the TRA reflect the spending patterns for the 12 months to March 2009. The March 2010 TRA report saw an average 10% fall in daily expenditure per international visitor. For the purposes of this study, the 2009 daily expenditure estimates have been adopted. This is based on a judgement that the most recent estimates are more reflective of the global economic downturn rather than a longer term pattern. The real increase in daily spending per person is forecast by the TRA to remain fairly stable to 2022. Access Economics has adopted an increase of 0.2% per annum based on the total inbound economic value and the number of international tourists visiting Australia annually to 2020, as forecast by the TRA. During a major event, visitor spending generally increases above that which is expected during other periods for example, an increase of around 20% in spending was seen during the 2003 Rugby World Cup in Australia when compared to normal periods. In addition, a study of the purchasing behavior of visitors to the 1996 Australian Formula One Grand Prix indicated that corporate visitors spent around 18% more per day than other types of visitor.9 These increases in spending during major events have been adopted in estimating the international visitor expenditure during the World Cup in 2022. A full list of tourism related assumptions is shown in Appendix A.
7 8 9
http://www.bizcommunity.com/Article/196/82/36812.html Tourism Research Australia, International Visitors in Australia, March 2009 Leo Jago and Larry Dwyer, Economic Evaluation of special events: A Practitioners Guide, 2006, p. 9
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Sporting infrastructure
Construction of additional seating capacity at existing stadiums or developing entirely new stadiums, independent of the World Cup, would be made if there was sufficient intrinsic demand from the sporting community to warrant the expenditure. Over time it would be expected that new stadium facilities would be required and this lies at the heart of any stadium legacy benefit. However, defining an optimal infrastructure development path is very difficult. There are practical challenges in ascertaining whether sporting infrastructure developed for a special event like the World Cup would essentially bring forward future spending say by two years or by a decade, if at all. An important point is that the actual sporting infrastructure developed for an event may never be required in the future for example, its actual scale, configuration or location might well be suboptimal. The current speculation surrounding development of major greenfields stadiums (for example the new Perth stadium) underlines this uncertainty and is reflected in the three stadia scenarios analysed. Indeed, Stadium Australia which is proposed as a major venue for the World Cup, potentially hosting a semi final and/or final, is a direct legacy of the 2000 Sydney Olympics. However, at the time when that stadium development was being evaluated, it would have been impossible to gauge its potential future usage as a World Cup venue (which could be some 22 years after the Sydney Olympics). In many respects, such benefits should be considered intangible and qualitatively examined alongside other similar impacts.
10
URS Finance and Economics, Economic Impact of the Rugby World Cup 2003 on the Australian Economy Post Analysis, June 2004, Section 4-15. Figures sourced from Bureau of Tourism Research.
11
Tourism Forecasting Committee Forecast Executive Summary 2010 Issue 1 Tourism Research Australia
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A legacy benefit would be generated where sporting teams, who currently use stadiums that are proposed to have additional spectator capacity, could attract crowds to fill those extra seats. These legacy benefits are difficult to estimate as they are based on how often the new seating is actually used (for example, the number of matches played at relevant venues and the additional attendance per match). The additional seating would also incur costs through an increase in stadium maintenance expenses. For many sporting matches, the additional seating would not be required on a regular basis, but would be utilised more for major sporting events such as the State of Origin series at Stadium Australia and Suncorp Stadium. Given the lack of publicly announced stadium developments, with the recent exception of the Adelaide Oval redevelopment, any legacy benefit of additional seating in current stadiums is likely to be minimal or highly speculative at best. Even with a reduced seating capacity post World Cup, many stadiums will likely have excess capacity for the majority of sporting events and redeveloped stadiums are unlikely to significantly increase crowd numbers to fill additional seating. As such, any legacy impacts from stadium developments have not been quantified in the analysis. Stadiums including Gold Coast, Dairy Farmers and Canberra Stadium will be built to a capacity of around 40,000 and subsequently reduced to around 25,000, depending on the needs of each individual stadium. This additional temporary seating could provide further benefits to local community sporting facilities as it is slated be used for spectator seating where required. That said, the requirements for such facilities are not clear cut and far better investments in community sport may well exist. In addition to the capacity upgrades, corporate facilities also require refurbishments to meet the high standards that FIFA has set for the World Cup. While these improved facilities may be able to generate additional income during future matches, there is insufficient data on the utilisation of corporate facilities, and it is unclear how much demand for these facilities would change post refurbishment. As such, the additional benefit that could be gained from corporate facilities has not been estimated.
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It is difficult to determine the number of matches that the FFA would be able to organise in the lead up to the World Cup, or the revenue that would be generated from such matches. Any revenue would be dependent on the nation which Australia would play, the stadium and the timing of the match. Access Economics has assumed that the revenue lost from not competing in the qualifying rounds of the World Cup would be broadly offset by the friendly matches Australia would play over the same period and in the lead up to the World Cup.
In South Africa 2010, Category 4 tickets were set aside exclusively for local residents and are around one third the price of Category 3 tickets. It has been assumed that this category of ticket was allocated due to local economic considerations and that it was a one-off occurrence. Therefore, the 11% of Category 4 tickets have been allocated to Category 3 to estimate ticket revenue for the World Cup in Australia.
12 13
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From Germany 2006 to South Africa 2010, the average ticket price has increased from around US$134 to US$154, a real increase of around 4.4%. Based on this price change, an increase of around 13% on 2010 ticket prices has been assumed to 2022. On the above assumptions, the estimated ticket revenue for the 2022 World Cup in Australia (based on sale of 3.3 million tickets) is $844 million.
Confederations Cup
Total ticket revenue from the Confederations Cup in Australia in 2021 is estimated at $82.6 million. The FFA has indicated that 600,000 tickets will be available for the 16 matches, giving an average attendance of 37,500 per match. Revenue estimates for the Confederations Cup are made using a similar method to the World Cup. The price of tickets is based on the Confederations Cup in South Africa 200914, increased by around 13% to 2021.
Consumer surplus
Consumer surplus is estimated at around $54.7 million for Australian supporters. The surplus is based on the number of Australians who would have travelled overseas to attend the World Cup but can now remain in Australia for the event. Access Economics estimated that around 10,000 Australians attended the World Cup in Germany 2006 and has used this as the expected figure in 2022. The consumer surplus is based on the expenditure assumptions used for international visitors (spending and length of stay) and includes the purchase of overseas travel totaling $2000.
14
http://www.capetownmagazine.com/articles/Sport-a-Fifa-2010~c9/Prices-and-Tickets-for-the-FIFAConfederations-Cup-2009~1027
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When assessing the economy-wide impacts, an estimate of the economic welfare effects of these different spending items is required. To make this assessment Access Economics has used a computable general equilibrium (CGE) modelling approach (see Box 4). A key advantage of the CGE framework is the ability to determine the direct and indirect impacts of additional demand generated by the World Cup. These represent both positive and negative influences on the economy. On the positive side, additional spending on, say, tourism services increases economic activity in this sector. The model also accounts for linkages between the tourism sector and other sectors of the economy it uses as intermediate inputs. As such, any increase in demand for tourism also increases economic activity in those sectors that supply relevant impacts to the tourism sector. Increased economic activity raises the demand for factors of production (labour and capital) which, depending on their availability, increases their use and price which, in turn, increases national income and welfare. On the negative side, the model accounts for indirect linkages across the economy though mechanisms such as the collective competition for available resources, for example, labour, that operates in an economy-wide or global context. As such, the model accounts for what is known as crowding out. In other words, as the tourism sector expands as a result of the World Cup, other sectors find it difficult to attract or retain key factor inputs such as workers. As a result, tourism expands at the expense of other activities, thereby crowding them out.
Box 4:
AE-RGEM is a large scale, dynamic, multi-region, multi-commodity computable general equilibrium model of the world economy. The model allows policy analysis in a single, robust, integrated economic framework. This model projects changes in macroeconomic aggregates such as GDP, employment, export volumes, investment and private consumption. At the sectoral level, detailed results such as output, exports, imports and employment are also produced. The base data of AE-RGEM is derived from the Global Trade Analysis Project (GTAP). GTAP produces a global database for GE modelling used by over 700 researchers worldwide. AE-RGEM is based on Version 6.0 of the GTAP database. This version has a 2001 base year with 87 countries and 57 industry sectors. AE-RGEM solves year-on-year over a specified timeframe. The model is then used to project the relationship between variables under different scenarios over a predefined period. A typical scenario is comprised of a reference case projection that forms the basis of the analysis, in this case an estimate of economic activity in the absence of the World Cup. This is then compared with a scenario that assesses the economic impacts of increased spending associated with the World Cup. The impacts of the World Cup spending are measured by differences between the reference case and scenario levels at given points in time.
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Of course, any economic model is highly dependent on its assumptions, parameters and data. Some of the key assumptions are described in Appendix E. Two key assumptions underpinning the analysis are that:
full employment conditions apply, meaning the World Cup does not increase employment; and the government budget position remains unchanged and government expenditures for the World Cup do not require additional taxes to be levied.
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Legacy effects
Proponents often advocate the potential for a major event to make winning other events more likely. While this can represent a legitimate positive spillover effect, the magnitude of any impact can be overstated and the effects are extremely difficult to verify after the event. There is also considerable uncertainty regarding the precise nature and timing of any potentially benefiting future event. This makes the inclusion of such impacts into the evaluation highly speculative and, as such, they have not been adopted into the analytical framework.
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Table 5.5: Economic welfare benefits of staging the 2022 World Cup Benefit
Tourist expenditure LOC expenditure in Australia Television broadcasting Total Benefits
Revenue ($million)
3,250.0 819.6 200.0 4,269.6
Note: Revenue represents the value of expenditure (2010 dollars) before adjusting for welfare effects.
One of the key determinants of this spending-to-welfare ratio is the assumption of full employment. This assumption means that, in response to an increase in aggregate demand brought about by the World Cup, the Australian economy is not able to increase its productive base in order to increase economic activity and, ultimately, welfare. This is particularly relevant for the World Cup as it is primarily a tourism related activity, the provision of which is labour intensive. A representation of the effects of an increase in aggregate demand under different supply conditions is shown in Figure 5.1, with the demand movement from AD1 to AD1 being broadly representative of the core labour supply assumptions used in the analysis. Figure 5.1: Macroeconomic expansionary effects
Aggregate supply
Price
Aggregate demand
Towards fullemployment
AD1
Excess capacity
AD1
AD0
AD0
Expansionary effects
Output
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Revenue ($ million)
3,250.0 819.6 200.0 4,269.6
Note: Revenue represents the value of expenditure (2010 dollars) before adjusting for welfare effects.
The ability of the Australian economy to expand production in the World Cup year by employing more labour is a key uncertainty. The full employment assumption is conservative, and is consistent with the principles established for this analysis and Department of Finance and Deregulation guidelines. On the other hand, the assumption can be questioned given the standard practice for long term analysis such as this is to assume an elastic supply response. These labour market sensitivities are considered alongside other key parameter assumptions in Section 7.1.2.
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Scenarios 1 to 3
$ million $1,237.9 $284.9 $77.9 $54.7 $56.7 $82.0 $1,793.8
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Given the significant share of costs represented by stadium infrastructure, transport and security, these are examined further in the sensitivity analysis in Section 7.1.2.
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Chart 6.1: Costs and benefits of hosting the World Cup Scenario 1: All stadia
2,000 1,500 1,000
$ Millions (Real)
500
-500 -1,000 -1,500
2010
2014
2015
2016
2017
2018
2019
2020
2021
2025
Net revenue
Chart 6.2: Costs of hosting the World Cup Scenario 1: Full stadia
Transport 2% Security 15%
Bidding 1%
Infrastructure accounts for around 75% of total costs under Scenario 1, with the majority of construction works expected to take place from 2016 to 2021. Security and transport are the two other major expenditure components. Security is estimated at $560 million, or 15% of total expenditure, for both the World Cup and Confederations Cup tournaments, with transport costs contributing a further $82.9 million.
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2011
2012
2013
2022
2023
2024
1,500
1,000
$ Millions (Real)
500
-500
-1,000
-1,500
2010 2011 2016 2017 2018 2019 2023 2024 2025 2026
2012 2013 2014 2015 2020 2021 2022
Other 5%
Net revenue
Chart 6.4 shows a breakdown of tournament expenditure under Scenario 2. Chart 6.4: Costs of hosting the World Cup Scenario 2: Partial stadia
Security 27% Transport 4%
Cost to Government 7%
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1,500
1,000
$ Millions (Real)
500
-500
-1,000
-1,500
2010
2011
2016
2017
2018
2019
2023
2024
2025
Net revenue
Chart 6.6 below shows a breakdown of event expenditures under Scenario 3. Chart 6.6: Costs of hosting the World Cup Scenario 3: Overlay costs
Other 8%
Security 43%
Bidding 4%
Transport 6%
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2012
2013
2014
2015
2020
2021
2022
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Scenario 1 to 3 inclusive
($m, 2010) 1,237.9 284.9 77.9 193.1 1,793.8 ($m, NPV) 726.1 172.7 45.9 113.9 1,058.7
Based on the expected number of tourists, teams and officials that would travel to Australia for the event, tourism welfare gains are estimated at 69% of total benefits. The LOC is expected to spend around $820 million in organising the event which contributes to significant welfare gains for Australia, and accounts for 16% of total benefits. The benefit generated assumes that the LOC budget will be negotiated with FIFA and funded through the FIFA financial platform model (see Chapter 3). Chart 6.7 below shows a breakdown of benefits accrued from hosting the 2022 World Cup in Australia. Benefits from hosting the tournament are consistent across all scenarios. Chart 6.7: Benefits of hosting the World Cup
LOC expenditure 16%
Tourism 69%
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The benefits accrue almost entirely during the year of the World Cup with welfare gains of approximately $1.0 billion in 2022 (see benefit profile in Chart 6.1, Chart 6.3 and Chart 6.5). Following the event, the benefits taper off considerably, with the post-event tourism impact in the two years following the tournament the major driver of benefits.
Scenario 1
Scenario 2
Scenario 3
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Note: Impacts are in real dollars (2010 prices). Per capita estimates based on a population of 22.38 million as at July 2010, Australian Bureau of Statistics.
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Risk analysis
A general framework for considering risks that may influence the magnitude, timing and distribution of costs and benefits of hosting the World Cup is provided in Figure 7.1. Figure 7.1: Risk analysis framework
High
Medium
High
Critical
Impact
Medium
Low
Medium
High
Low
Low
Low
Medium
Low
Medium
High
Likelihood
Most of the cost and revenue components of the World Cup occur well into the future and are thus uncertain. The following assessment aims to systematically examine the attendant risks, identify the main risk factors and subsequently inform the most appropriate way of addressing risk in the cost benefit analysis. The risks that typically require the most attention are those that have a large effect on the dominant benefit and cost elements and thus the potential for significant economic gains or losses. In addition to an evaluation of specific risks and uncertainties, sensitivity analysis on more general modelling parameters is also undertaken. A key aspect is to highlight the extent to which outcomes are sensitive to changes in the assumptions and to address any inherent biases in developing the analysis. A summary of the main risks and consequences is provided in Table 7.1. A more detailed sensitivity assessment is provided in Section 7.1.2.
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Key issues
Bearer
Scale
Construction
Scope creep
Need for further infrastructure to accommodate the movement in tourists or an increase in security concerns. This may have an implication on the design of transport links and security. Stadiums, training venues or transport links not completed in time for the tournament.
Tournament Stage Team participation Tournament qualification uncertainty. A country with residents that have a higher propensity to travel to Australia, such as England or the USA, does not qualify, or that a country like China does qualify. The qualification, or failure to qualify, of a team from a larger country is likely to affect the number of tourists. Commonwealth and State Governments
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Risk
Catastrophes Global travel risks
Key issues
Events that affect World Cup tourists willingness to travel such as terrorist activity, SARS or economic conditions (global financial crisis). Disruption to the itinerary of travellers to the World Cup, from an extreme weather event. This would primarily be a localised event affecting one or two venues.
Bearer
Commonwealth and State Governments
Scale
Likelihood: Low Impact: High Rating: Medium Likelihood: Low Impact: Low Rating: Low
Natural hazards
Other risk and third party risk Airline capacity The tourist arrival window is critical for measuring the benefits of the tourism activity. Tourism activity may be significantly affected where the normal airline operation capacity was disrupted during this time. For instance, one of the major airports could remain inoperable during this time or an airline may cease operations during the event window. Commonwealth Government risk State governments unable to meet host city agreement requirements post bidding. Commonwealth Government Commonwealth and State Governments Likelihood: Low Impact: High Rating: Medium
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7.1.2
Sensitivity analysis
Sensitivity analysis was conducted on key inputs to determine the variability of net costs and benefits. This includes an analysis of the discount rate, construction costs (including stadium and training venues), tourism revenue, transport, security costs and labour market constraint assumptions. As seen in Figure 7.2 below, stadium construction costs and tourism revenue are the key cost and benefit categories that drive the overall results. Figure 7.2: NPV of costs and benefits of the World Cup
2,250 2,000 1,750
$ Millions (NPV)
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Table 7.2 below details the sensitivity analysis for major cost and benefit categories. Under Scenario 1, a 10% increase in the costs of stadium construction would lead to a $198 million increase in overall net costs. Stadium cost increases for Scenarios 2 and 3 are significantly less than under Scenario 1 due to a higher proportion of costs allocated to the baseline. A 10% increase in stadium infrastructure costs under Scenarios 2 and 3 would result in a lower net benefit of around $81 million and $24 million respectively. In respect of benefits generated from the World Cup, the sensitivity results are consistent across all scenarios. Should tourism revenue be 10% less than projected, this would have a material impact on the outcomes, reducing the overall net result by $72.6 million. Table 7.2: Sensitivity analysis of key inputs
Expenditure / Benefit item
Base Case 3% real discount rate 6% real discount rate 10% real discount rate +10% construction costs +20% construction costs -10% construction costs -20% construction costs +10% tourism revenue +20% tourism revenue -10% tourism revenue -20% tourism revenue +10% transport & security +20% transport & security -10% transport & security -20% transport & security Long run labour supply
Note: NPV estimates use a real discount rate of 4.5%. The long run labour supply sensitivity test relaxes the full employment assumption and shows the economic impact in which spare capacity in the labour market can respond to increased demand generated by the tournament.
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conservative approach adopted in the analysis, ensures that any expansionary impacts are more constrained than if there was excess capacity in labour and other factor markets. Relaxing the long run labour supply assumption (see Table 7.3) improves the net result by around $680 million across all three scenarios. It results in a net tournament cost of $797 million under Scenario 1, and a net positive result of $374.7 million and $946.4 million for Scenarios 2 and 3 respectively. Table 7.3: Impact of additional labour market capacity
Expenditure / Benefit item
Benefits Tourism (incl legacy) LOC Expenditure Television Broadcasting Other World Cup related Total Benefits Costs Bidding Infrastructure Transport Security Other Cost to Government Total Costs Net Benefit
Note: Impacts are in real dollars (2010 prices).
1,260.5 281.3 83.0 113.9 1,738.7 45.6 1,947.8 49.8 333.2 62.5 97.1 2,535.9 -797.2
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Concluding comments
Hosting a tournament the scale of the FIFA World Cup requires a significant commitment from the Government to meet the requirements set out by the governing body. Given the World Cup will not be held for 12 years, there is considerable uncertainty surrounding not only the overall costs of the tournament but which costs will be borne by State or Commonwealth governments. Once a host nation for the World Cup is selected, government (and thus taxpayers) would bear significant risk of either tournament cost overruns or that benefits are lower than expectations. It should be noted that upside potential also exists from more international tourists attending the tournament than expected. But this is less likely and indeed has not been the general experience with staging mega sporting events. The fundamental conclusion drawn from this analysis is that, except under the most favourable cost conditions, the expected financial benefits from tourism, team and media spending are not sufficient to outweigh the significant financial cost of stadium construction and operational services required to host the event. These financial estimates would need to be considered in conjunction with the broader social and cultural benefits which the tournament is likely to yield. An important procedural aspect given high levels of uncertainty is to clearly establish responsibility for all costs of staging the event. This would include costs to be borne by the LOC and especially between States and the Commonwealth. Host city agreements are entered into by the States involved, but may present considerable risks for the Commonwealth for instance, to meet any funding shortfall from the States or LOC. Should Australias bid succeed, it is understood that a more inclusive process between FIFA and the host country will emerge in which there is likely to be some scope to modify or refine aspects of tournament commitments given the long lead time and changing circumstances. Where this occurs, there may well be material cost and risk implications for government and any such proposals should be carefully scrutinised. Further, cost benefit analysis of an event should ideally be commenced early in the process to allow careful analysis and consideration of methodological issues and data requirements. Preferably, this should occur before a decision to bid for the World Cup is made.
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Assumption
4.5% p.a. 10 12
Basis
Commonly used discount rate Advice from DRET/FFA Advice from DRET/FFA
Expected net tourist numbers during World Cup Expected net tourist numbers during Confederations Cup
677,100
20,000
Visitor time spent in Australia Tourists Corporate Media Officials 20 days 10 days 42 days 31 days TRA International Visitors Survey, holiday travellers excluding backpackers Access Economics assumption Tournament window plus one week either side Based on number of officials required at each stage of the tournament, arriving 10 days prior to the tournament and leaving two days post competition Based on number of teams qualifying at each stage of the tournament, arriving 10 days prior to the tournament and leaving two days post competition or elimination
Teams
32 days
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Parameter
Average daily spend (real $ 2010) World Cup Tourists World Cup Corporate Confederations Cup tourist Confederations Cup corporate Team spend during tournament
Assumption
$172 $203 $172 $203 $7.6 million
Basis
TRA International Visitors Survey minimal forecast real increase in daily expenditure per tourist to 2022
Based on FFA estimates which include: flights, accommodation, incidentals, security, consultants, medical, sponsor tour and VIP functions Based on Germany 2006 Based on Sydney Olympics legacy benefit visitor rates
32,549 111,000
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Resident movements
Residents who cancel an overseas trip to stay in Australia due to the event
Residents who would have travelled to a world cup but remain in Australia for the event
Non-resident movements The event specific visitors with a ticket were estimated based on assumptions of stadia usage, matches per spectator and tickets allocated to international visitors. In total, international visitors are estimated at 694,300. Event specific visitors without a ticket are those who travel to the host nation to be part of the tournament, for example attend fan zones or travel with family members. Access Economics has assumed a total of around 7800 visitors fit this category, or 1.0% of those travelling with a ticket. There may be some visitors who would have travelled to Australia around the time of the World Cup, but who postpone or bring forward their visit due to the event (possibly to avoid crowds, high prices and accommodation shortages). These include business travellers who come regularly to Australia who may rearrange a pre-existing trip to avoid the tournament (i.e. to arrive either before or after the tournament window). The effect of this visitor category has been estimated by examining visitor arrivals before and after the event. An opposite effect may also occur in which individuals with pre-existing plans alter their itineraries to actually coincide with the event. If such an effect is present, lower than trend
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visitation would be recorded in the periods immediately before or after the event. When data from the Sydney Olympics period is considered, however, no such pattern is observed. Even when the data is disaggregated to consider visitors by main purpose of trip, there is no quantitative evidence to suggest business travellers or other visitor categories altered travel plans to coincide with the Olympics. Examining those visitors who would have come anyway is difficult, primarily because these individuals will tend to be embedded in other tourist data. These are visitors who were already planning to visit Australia, and simply add the World Cup to their activities. One way these visitors may be identified in the tourism data is by staying for a longer period of time. However, the length of stay data in Australia is broken into large chunks, such as 10 to 39 nights and 40 to 99 nights, and so an additional week stay for a major event may not be sufficient for any change in reported data. Indeed, no such pattern is seen for the Sydney Olympics and the period before and after the event. In Germany 2006, survey responses indicated that around 10% of World Cup tourists fell into this category. Based on the German experience and given Australias relative geographic isolation, Access Economics has assumed 2.5% of ticketholders belong to this category. When major events take place, many visitors are attracted to the region. However, the anticipated large influx of additional tourists is often associated with a temporary increase in prices for goods utilised by tourists, including accommodation, transport, food and beverages. Increased demand for some services, particularly accommodation, may mean hotels are fully booked. These price increases and capacity constraints, along with potential loss of amenity because of special event arrangements (i.e. large crowds), mean that some visitors cancel their visit due to the event. These visitors partially offset the benefits of those who come to Australia for the event. When visitors to Australia for the Sydney Olympics are considered by region of residence, there are considerable differences. Some regions, particularly the Americas, recorded large increases in visitors for September 2000, before these returned to trend levels in the following months and the following September. However three regions Oceania, South-East Asia and North-East Asia recorded noticeable drops in visitor numbers for September 2000. In total, an estimated 15,260 visitors below the September 1999-2001 average growth rate visited from these regions in September 2000. These may be considered individuals who were dissuaded from coming to Australia because of the Olympics. However, it would be overly simplistic to suggest that this number represents dissuaded visitors due to the Olympics. Visitor numbers from these regions rebounded to trend levels in October 2000, while for the Oceania and North-East Asian regions, a considerably above trend number of visitors arrived in Australia for November 2000. This suggests that some of these visitors did not cancel their trip, but rather deferred visiting Australia until after the Olympics. The November spike suggests that only around half of the September shortfall represents actual lost visitors rather than merely a delay, or around 7600 visitors.
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Resident movements Should Australia be successful in its bid to host a World Cup, residents who would have travelled to a World Cup now remain in Australia. In June 2006, Australian visitors to Germany totalled 17,300. This compares to 7,100 and 7,900 in that month in 2005 and 2007 the years before and after the World Cup. Based on seasonally adjusted numbers, Access Economics has assumed that additional Australians visiting Germany during the World Cup were around 10,000. Given the event would be held in Australia, these residents are now assumed to remain in Australia for the tournament. The additional expenditure from these residents is captured in the consumer surplus estimates. Although many residents will embrace a major event there are some residents who leave due to the event. This effect is supported by the fact that flights running counter to the flow of inbound World Cup traffic (i.e. backhaul flights) may be offered at unusually low prices, as was seen during the Sydney Olympics. The departure of these residents is tempered by those residents who cancel an overseas trip to remain in Australia for the event. It is difficult to disentangle these two factors, and so they are best considered jointly, for a net resident impact. When data on Australian residents departing the country during the Sydney Olympics is considered, there is a slight drop in Australian resident departures in the month of September 2000, however, it is not large enough to be considered any form of deviation from the trend. This suggests that the impacts of residents who departed the country because of the event and those who stayed because of the event are roughly offset. A summary of the net tourism impact for Australia is detailed in Table C.2. Table C.2: Net tourism effect Category
Event specific visitors (with tickets) plus plus less less plus plus Event specific visitors (without ticket) Visitors who would have come anyway, combine event in their itinerary Visitors who postpone their visit due to the event Visitors who cancel visit due to the event Residents who would have travelled to a World Cup overseas but remain in Australia for the event Overall impact of residents who leave and those who cancel an overseas trip and remain home due to the event Total net tourism effect
#
Total
694,300 7,800 17,350
*
0 7,600 10,000
#
0 677,100
#
Note: * Adjustment made for these visitors to extend length of stay by 7 days. Residents staying in Australia for the event captured in consumer surplus.
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Cost benefit analysis should be developed with the Australian Government guidelines in mind Cost benefit assessments of major events should closely adhere to the Australian Governments guidelines. In many areas, however, these are not definitive, making sound judgements and analytical transparency paramount. Looking at the event from a society-wide point of view An important part of structuring a cost benefit study is to establish an appropriate analytical envelope. The CBA framework subsequently aims to measure welfare impacts within this envelope. In the case of a major sporting event which spans different states, has a national element, and can involve large transfers overseas and Australian Government support, a wholeof-economy analytical envelope should be adopted. Careful consideration of displacement effects Major events, indeed any activity, use economic resources that could be employed for alternative purposes, with only small scope to use unemployed resources or idle capital. In this regard, event-related activities have a range of displacement effects and come at an opportunity cost. Where government support for an event is intrinsic, the displacement of other economic activities should be factored into the cost benefit analysis. This should include the impacts of the event on other sports where possible. Where an event is large, such displacement and crowding out can be material from a macroeconomic perspective. These dynamic effects should be captured using appropriate analytical techniques.
Recognise the opportunity cost of government expenditures (including in-kind contributions) All government spending uses real resources which have competing uses and which must be funded by taxation. Where government facilitates a major event, whether through direct financial support or some other form of backing, there are explicit costs involved. Such costs should be recognised in undertaking a cost benefit analysis of an event. Cost benefit analysis of major events should be undertaken with an assumption of no additional government expenditure, unless there is clear policy advice to the contrary. Rather, any spending comes at the opportunity cost of other existing government activity. This avoids unnecessary complications such as speculation over government funding or alternative economic impacts of government spending.
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Be careful about claims that costs can generate benefits Many large events involve considerable capital expenditures such as for stadia and other facilities. There are good reasons to be highly sceptical of claims that such spending will provide incremental economy-wide benefits through supporting aggregate demand and employment. Such claims typically ignore the counterfactual effect that multiplier impacts could also be achieved by alternative uses of the project resources. Failing to recognise the forgone stimulus effect from other potential spending priorities can lead to overstating any expansionary benefit from any particular event or project. It may be the case that little or no additional impact is generated.
Careful consideration and treatment of guarantees Where major events, such as the Olympic Games or FIFA World Cup, involve a competitive bidding process, countries are often required to provide a range of guarantees to the relevant governing organisation. These guarantees are typically broad, covering various financial and operational matters such as the costs of staging the event and the rights to relevant event revenues. They can effectively lock sponsoring governments into expensive commitments and involve substantial risk. Accordingly, the potential impacts of guarantees should be carefully considered and accounted for within the analysis. Explicit treatment of risks and bidding costs Many of the costs and benefits of major events are uncertain and therefore involve an element of risk. Importantly, this should be explicitly accounted for in a cost benefit analysis, primarily through undertaking a sensitivity analysis of key risk elements. Where events require participation in a competitive bidding process, the certainty of incurring budgeted bidding costs needs to be recognised in the context of the event, including the expected value of future benefits and costs. In this regard, the amount willing to be spent on a bid would be expected to be commensurate with the likelihood of success (that is, broadly, the number of realistic competitors), as well as the scale of the event and the economic benefits likely to be generated.
Conservatism Uncertainty regarding the benefits and costs of a major event (as discussed above) necessarily involves a high degree of judgement in conducting an event analysis. A common analytical flaw is that inherent optimism bias systemically underestimates costs and overstates benefits. Taking a conservative approach to the analysis, and the myriad of judgements required along the way, is a good way to build a credible and dispassionate analysis. On the benefit side, potential overestimation of non-financial benefits is particularly problematic. Quantifying the social, environmental and cultural impacts from events is to be encouraged, but only where they can be done in a well-designed, transparent and credible fashion. The analysis may well be better served by addressing most, if not all, non-financial social impacts in a qualitative fashion and making policymakers aware of the attendant value judgements involved in pursuing a particular event given other quantifiable impacts.
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Transparency Cost benefit analyses of events, and indeed most projects, are heavily reliant on judgement. Because of this, it is crucial that the basis for analytical inputs, decisions and conclusions are properly explained and documented. A key benefit is it allows for more robust scrutiny of the analysis by other (independent) parties, thereby facilitating more informed debate and continual improvements over time. Post-event assessments Agencies should conduct post-event assessments of the benefits and costs from hosting major events in the context of government support. Crucially, this will also help build a better data and evidence base to support future event analyses. In particular, it can assist in more fully understanding the nature and magnitude of non-financial impacts from events. Ongoing review These principles, and other relevant analytical considerations, should be reviewed periodically. No two events are the same and other issues are sure to arise which will require variations to any general approach. Indeed, the ongoing review of how event analyses are conducted should be a core procedural feature which aims to ensure the assessment of major events is continuously strengthened.
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Representative household
Producers
International
Investors
AE-RGEM is based on a substantial body of accepted microeconomic theory. Key assumptions underpinning the model are:
The model contains a regional consumer that receives all income from factor payments (labour, capital, land and natural resources), taxes and net foreign income from borrowing (lending). Income is allocated across household consumption, government consumption and savings so as to maximise a Cobb-Douglas (C-D) utility function.
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Household consumption for composite goods is determined by minimising expenditure via a CDE (Constant Differences of Elasticities) expenditure function. For most regions, households can source consumption goods only from domestic and imported sources. In the Australian regions, households can also source goods from interstate. In all cases, the choice of commodities by source is determined by a CRESH (Constant Ratios of Elasticities Substitution, Homothetic) utility function. Government consumption for composite goods, and goods from different sources (domestic, imported and interstate), is determined by maximising utility via a C-D utility function. All savings generated in each region are used to purchase bonds whose price movements reflect movements in the price of creating capital. Producers supply goods by combining aggregate intermediate inputs and primary factors in fixed proportions (the Leontief assumption). Composite intermediate inputs are also combined in fixed proportions, whereas individual primary factors are combined using a CES production function. Producers are cost minimisers, and in doing so choose between domestic, imported and interstate intermediate inputs via a CRESH production function.
The model contains a more detailed treatment of the electricity sector that is based on the technology bundle approach for general equilibrium modelling developed by ABARE (1996).15
The supply of labour is positively influenced by movements in the real wage rate governed by an elasticity of supply. Investment takes place in a global market and allows for different regions to have different rates of return that reflect different risk profiles and policy impediments to investment. A global investor ranks countries as investment destinations based on two factors: global investment and rates of return in a given region compared with global rates of return. Once the aggregate investment has been determined for Australia, aggregate investment in each Australian sub-region is determined by an Australian investor based on: Australian investment and rates of return in a given sub-region compared with the national rate of return. Once aggregate investment is determined in each region, the regional investor constructs capital goods by combining composite investment goods in fixed proportions, and minimises costs by choosing between domestic, imported and interstate sources for these goods via a CRESH production function. Prices are determined via market-clearing conditions that require sectoral output (supply) to equal the amount sold (demand) to final users (households and government), intermediate users (firms and investors), foreigners (international exports), and other Australian regions (interstate exports). For internationally-traded goods (imports and exports), the Armington assumption is applied whereby the same goods produced in different countries are treated as imperfect substitutes. But in relative terms imported goods from different regions are treated as closer substitutes than domestically-produced goods and imported
15
Australian Bureau of Agricultural and Resource Economics (ABARE), 1996, MEGABARE: Interim Documentation, Canberra.
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composites. Goods traded interstate within the Australian regions are assumed to be closer substitutes again.
The model accounts for greenhouse gas emissions from fossil fuel combustion. Taxes can be applied to emissions, which are converted to good-specific sales taxes that impact on demand. Emission quotas can be set by region and these can be traded, at a value equal to the carbon tax avoided, where a regions emissions fall below or exceed their quota.
The representative household allocates income across three different expenditure areas private household consumption; government consumption; and savings to maximise a Cobb-Douglas utility function. Private household consumption on composite goods is determined by minimising a CDE (Constant Differences of Elasticities) expenditure function. Private household consumption on composite goods from different sources is determined is determined by a CRESH (Constant Ratios of Elasticities Substitution, Homothetic) utility function. Government consumption on composite goods, and composite goods from different sources, is determined by maximising a Cobb-Douglas utility function. All savings generated in each region is used to purchase bonds whose price movements reflect movements in the price of generating capital.
Producers
Apart from selling goods and services to households and government, producers sell products to each other (intermediate usage) and to investors. Intermediate usage is where one producer supplies inputs to anothers production. For example, coal producers supply inputs to the electricity sector.
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Capital is an input into production. Investors react to the conditions facing producers in a region to determine the amount of investment. Generally, increases in production are accompanied by increased investment. In addition, the production of machinery, construction of buildings and the like that forms the basis of a regions capital stock, is undertaken by producers. In other words, investment demand adds to household and government expenditure from the representative household, to determine the demand for goods and services in a region. Producers interact with international markets in two main ways. First they compete with producers in overseas regions for export markets, as well as in their own region. Second, they use inputs from overseas in their production. Some detail
Sectoral output equals the amount demanded by consumers (households and government) and intermediate users (firms and investors) as well as exports. Intermediate inputs are assumed to be combined in fixed proportions at the composite level. As mentioned above, the exception to this is the electricity sector that is able to substitute different technologies (brown coal, black coal, oil, gas, hydropower and other renewables) using the technology bundle approach developed by ABARE (1996). To minimise costs, producers substitute between domestic and imported intermediate inputs is governed by the Armington assumption as well as between primary factors of production (through a CES aggregator). Substitution between skilled and unskilled labour is also allowed (again via a CES function). The supply of labour is positively influenced by movements in the wage rate governed by an elasticity of supply (assumed to be 0.2). This implies that changes influencing the demand for labour, positively or negatively, will impact both the level of employment and the wage rate. This is a typical labour market specification for a dynamic model such as AE-RGEM. There are other labour market settings that can be used. First, the labour market could take on long-run characteristics with aggregate employment being fixed and any changes to labour demand changes being absorbed through movements in the wage rate. Second, the labour market could take on short-run characteristics with fixed wages and flexible employment levels.
Investors
Investment takes place in a global market and allows for different regions to have different rates of return that reflect different risk profiles and policy impediments to investment. The global investor ranks countries as investment destination based on two factors: current economic growth and rates of return in a given region compared with global rates of return. Some detail
Once aggregate investment is determined in each region, the regional investor constructs capital goods by combining composite investment goods in fixed proportions, and minimises costs by choosing between domestic, imported and interstate sources for these goods via a CRESH production function.
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International
Each of the components outlined above operate simultaneously, in each region of the model. That is, for any simulation the model forecasts changes to trade and investment flows within, and between, regions subject to optimising behaviour by producers, consumers and investors. Of course, this implies some global conditions must be met, such as global exports and global imports are the same and that global debt repayments equals global debt receipts each year.
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