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The Economic Impact of the Winter Olympic
& Paralympic Games
Appendix A:
The Economic Model
In order to assess the potential economic impact of the 2010
Games, the sensitivity model endeavours to capture the capital and
operating costs of the Games, and the tourism expenditures over a
20-year period spanning the Games. The potential impact period
begins in 2001 and includes the bid process, selection as host city,
the construction phase, the Games phase and up to 10 years of
post-Games tourism activity ending in 2020. In all but the Best
Effort/Best Response scenario tourism impacts are assumed to
fade out by the sixth year following the Games.
This model cannot predict costs or revenues. It does provide a
measure of the gross and incremental economic impacts that can be
expected for any given set of cost and visitor profiles. These
impacts are recorded for Gross Domestic Product (GDP), employment,
and federal, provincial and municipal tax revenues. As with any
model the quality of the outputs is highly dependent on the quality
of cost and visitor estimates that are used as inputs. All data is
adjusted to year-2001 Canadian dollars.
Real Versus Nominal Dollars
All dollar calculations are made in constant year 2001 Canadian
dollars to provide a consistent basis for comparison over the
20-year observation window. To summarise the 20 years of data as a
single, year-2001 total for each variable, the data has been
discounted into a Net Present Value at year 2001. The Province of
British Columbia real 30-year bond rate is used as the discount
rate.
Accounting for Risks
There are two primary methods to accommodate risk in an economic
evaluation. The first is to reduce the economic benefit number by an
amount deemed sufficient to off-set the perceived impact of a worst
case scenario - the visitors do not come, costs are overrun, etc.
This is accomplished by discounting future benefits to a present
value using a discount rate set sufficiently high to off-set the
presumed risk. The choice of discount rate is inherently subjective
and largely arbitrary.
The alternative method and the method used in this paper is to
construct a model of the economic impacts where the results can be
tested under a virtually unlimited range of risk scenarios for the
key variables. Having dealt with the risks through the sensitivity
analysis, we then apply a discount rate that simply reflects the
Province's long-term cost of debt. Six tourism impact profiles were
developed, (described in the body of this paper), based on the
experiences at other Olympic sites and with Expo 86. These six
scenarios generated tourism impacts that were captured within the
range defined by the following four scenarios, representing the
perceived likely worst case outcome (Low Effort/Low Response),
a low moderate outcome (Average Effort/Average Response), a
high moderate outcome (Better Effort/Better Response), and
the likely best case outcome (Best Effort/Best Response).
Present Values
The costs and the revenue benefits are incurred or received over
extended and different time frames. Most of the cost will be
incurred between 2003 and 2009 while much of the revenue will occur
after 2008. In order to compare the costs and the revenues on an
equal footing we have to adjust for the fact that a dollar received
in 2008, for example, is worth less than a dollar received, or a
dollar spent in any year before 2008, and is worth more than a
dollar spent or earned in any year after 2008, due to the cost of
money. This adjustment is handled by a standard net present
value, or NPV formula which reduces the stream of costs to be
incurred over successive years to a single value which represents
the total costs if they were paid in a single lump sum now.
Similarly, the stream of revenue flows are converted to a single sum
representing the total revenue if it was all received now. These two
sums can then be compared to determine if the projected revenues
will exceed the projected costs.
Costs
Costs include both capital and operating and are accumulated in
the model under three categories - Gross Costs, Gross in-British
Columbia Costs and Net Incremental In-British Columbia Costs.
Gross Costs includes all costs, whether incurred in British
Columbia or elsewhere, and represent the whole cost of the Games. Gross
In-BC Costs is a sub-set of Gross Costs and captures only those
costs that have an economic impact in British Columbia. Net
Incremental In-BC Costs is a sub-set of Gross In-BC Costs
and captures only those costs that have a incremental
economic impact in British Columbia. For the purposes of this
analysis, only that portion of total Games costs incurred in British
Columbia which are offset by Games revenues received from sources
outside the province have an incremental impact on the economy.
Costs in each category are aggregated over the 20-year
observation period to create a single summary cost statistic in each
category. These costs are built up from costs that are (a)
the responsibility of the VW2010 Organising Committee of the Olympic
Games (OCOG Costs) and (b) costs that are the responsibility
of others, such as supportive non-Games infrastructure improvements
by the Province, municipality or private individuals (Non-OCOG
Costs).
Visitors defined
The model categorizes Games-related visitors as External
Visitors, Resident Visitors or Resident Spectators. External
Visitors are further subdivided into Games participants, (media,
athletes, sponsors, delegates and officials), and tourists, the
unifying characteristic being that none are residents of British
Columbia. Resident Visitors are British Columbia residents
from outside Greater Vancouver and Whistler who attend the Games as
spectators and who will stay in rented accommodation. Resident
Spectators are those normally resident within the GVRD or
Whistler area who would live at home while attending the Games and
thus have a different spending pattern than visitors.
The tourist component of both the External Visitor and Resident
Visitor categories require special attention to correct for
displacement of "normal" tourism that occurs around
mega-events. Some British Columbia residents who would normally take
a vacation skiing in British Columbia in February may vacation
outside British Columbia instead to avoid the Olympic crowds. Some
regular visitors to British Columbia will stay away to avoid
anticipated congestion. Both of those groups represent negative
incremental economic impacts for British Columbia.
Conversely, some residents who might normally vacation in Hawaii,
for example, in February will forego that trip to stay in British
Columbia to be part of the Olympic experience. Some foreign visitors
not otherwise destined for British Columbia will be drawn to the
province by the Games' publicity, before, during or after the event
. Both of those groups represent a positive incremental economic
impact for British Columbia.
Finally, Resident Visitors and Resident Spectators
who would have stayed in the province with or without the Games
represent a gross economic impact but not an incremental impact.
Jobs Defined
The jobs data in this paper are calculated using the industry
employment multipliers generated by the provincial Input Output
Model. The Input Output Model is maintained by BC Stats, Ministry of
Finance and is based on data collected by Statistics Canada. These
employment multipliers are determined from actual historical data on
industry income and employment provided by Statistics Canada. As
such, the multipliers present an historically accurate picture of
the job creation associated with a particular level of income, or
conversely expenditure, in an industry sector. Because an industry's
structural characteristics change relatively slowly over time, these
multipliers provide a fairly reliable basis to forecast the typical
or average employment impacts of future expenditures.
For practical purposes the job count should be considered as the
aggregate person-year equivalents created over the life of
the project, not simply new full time jobs. Hence, if 5,000 full
time, 5,000 half time and 10,000 quarter time jobs were created in
the first year of a three year spending/investment program, and the
same level of spending occurred in the next two years, the same
pattern of employment would be maintained in the second and third
year for an aggregate person-year equivalent for the project of
30,000 jobs. If more of the spending occurred in the first year and
less in the second and third year, the same 30,000 person-years of
employment would be created but more of it would occur in the first
year and less in the subsequent years.
While many jobs associated with the 2010 Games project or the
VCEC expansion would be new full time jobs there would also be many
jobs represented by some existing part time jobs that become full
time, some casual jobs that become full time, some casual jobs that
become part time and some new casual jobs. The aggregate of all of
these additional hours of employment is equivalent to the number of
jobs projected by the employment multiplier.
As new spending funds these hours of employment, the pace of spending and the
duration of spending determine the pace of job creation. In a vibrant economy, as one spending stream
shrinks it is off-set by increase elsewhere and total employment
rises.
Calculating impacts
Similar to the cost statistics described previously, the annual
visitor spending data from the 20-year observation window (20 years
in the Best Effort scenario) is rolled into single Net
Present Value totals for Gross Visitor Spending in British
Columbia and Net Incremental Visitor Spending in British
Columbia to create summary visitor expenditure statistics. Both
the summary cost statistics and the summary visitor expenditure
statistics are then individually distributed across the major
industrial sectors categories according to how the direct
expenditure is perceived to occur. For example, for each dollar an
external tourist spends in British Columbia at the Games, historical
analysis may suggest 39 cents or 39% will go toward accommodation,
10% to transportation, 25% to food and beverages, 15% to retail
purchases (Games souvenirs, etc.) and the balance for entertainment
(event tickets). Similarly, the construction of a bob/luge run will
involve expenditures for physical construction, business services
(architects, engineers etc.), furniture fixtures and equipment,
transportation and insurance, among others. These distributed
amounts are then multiplied by the appropriate sector Input/Output
multipliers from the British Columbia Input Output Model tables and
accumulated to create an aggregate economic impact number.
In calculating the impacts, money that is removed, or leaks,
from the economy has to be identified and excluded from the
calculations. Leakage occurs through a variety of transactions, the
most obvious being the payment to foreign suppliers for goods we
import. The economic multipliers used in the provincial Input/Output
model capture normal leakages based on historical economic
performance, the typical import content in construction of an
apartment building for example, but the multipliers do not capture
what this model calls Extraordinary Leakage. Construction of
a bob/luge track for the Games will be a unique economic event in
the province. If that facility requires, for example, the
importation of a $5 million freezer plant, that leakage will not be
reflected in the multipliers and must be manually deleted to avoid
over-stating the impacts.
Gross impacts versus incremental impacts
The model produces both gross impact data and incremental
impact data. The gross economic impact measures generally conform to
what one would expect if the gross expenditures were run through the
British Columbia Input/Output model. Gross economic impacts on GDP,
employment and tax revenues are valid and useful measures of the
impact of expenditures but they do not distinguish between the
impact of a dollar spent on the Games in British Columbia by a
British Columbia resident who would otherwise have spent that dollar
in the province anyway, versus a dollar spent in British Columbia by
a non-resident. Similarly, for Canada, the gross impact does not
distinguish between the impact of a dollar spent in Canada by a
Canadian resident versus a foreign resident. This distinction is
important to the respective provincial and federal treasuries and to
the taxpayer because the dollar spent in British Columbia (or
Canada) by a resident simply re-circulates within the economy
generating the same tax revenue, on average, whether it is spent on
a Games ticket or a theatre ticket. The dollar spent by the
non-resident visitor for a ticket is an additional or incremental
dollar of spending introduced into the economy, which, among other
things, generates incremental tax revenue the respective
federal and provincial treasuries could not otherwise capture if the
non-resident did not spend the dollar in British Columbia or Canada
respectively. For British Columbia, non-resident means anyone
not normally resident in the province, including other Canadian
persons, organizations and governments plus all foreign-based
persons and organizations. At the federal level, non-resident means
only persons, organizations or governments not normally resident in
Canada. Hence, an Ontario visitor or sponsor spending in British
Columbia has an incremental impact at the provincial level but not
at the federal level.
While gross impact data is a useful description of the overall
economic impact of the Games, it is the incremental economic
impact of the Games that determines whether hosting the Games
really makes economic sense. In calculating impacts, the model
firsts adjusts the gross Games-related expenditures to eliminate
identifiable extraordinary leakages. The result is Gross In-BC
Costs.
Gross in-BC Costs are then multiplied by the percent of Gross
in-British Columbia costs that are known or are anticipated to be
offset, directly or indirectly, by Games revenues sourced outside
British Columbia. That is, the percentage of costs that are
anticipated to be covered by the share of broadcasting fees the IOC
provides, sponsorship revenue from non-British Columbia sources,
federal contributions, etc.- revenue that would not otherwise flow
to British Columbia. For the equivalent federal calculation, only
revenues originating outside Canada are counted. The product of this
calculation is labeled Net Incremental In-BC Costs in the
model. Multiplying these costs by the I/O multipliers provides a
measure of the incremental economic impact for British Columbia, or,
in other words, the economic impacts that would not otherwise occur
in British Columbia without the Games.
Sales tax in the Input/Output Model
The British Columbia Input/Output Model multipliers do not
capture federal and provincial consumer sales tax on the initial
tourist expenditure. Indirect and induced impacts of these taxes are
captured. Hence, the multipliers do not capture the PST and GST that a tourist pays on a taxable
purchase. This tax impact is
calculated separately and added to the tax calculations generated by
the multipliers. According to Statistics Canada, about 6% of visitor
GST is refunded under the federal rebate program for visitors.
Non-Games infrastructure enhancements
A singularly important aspect of a successful bid to host the
Games is a convincing, rational plan for the physical movement of
athletes and spectators between and amongst the various venues
efficiently and within the time standards set by the IOC. In the
Salt Lake City 2002 program, for example, significant upgrading or
expansion of highways and passenger rail systems was undertaken.
Such capital expenditures have been typically described in bid
documents of previous Games as "non-Games" expenditures.
While these expenditures may not build the Games infrastructure per
se, they are certainly fundamental to the smooth and efficient
delivery of the Games and to the impact of the Games exposure on
long-term tourism growth. While not hosting the Games would
certainly represent a tourism development opportunity foregone, the
media exposure from hosting a Games punctuated by traffic chaos
could be immensely destructive to the tourism industry.
Since creation of the Resort Municipality of Whistler, Highway 99
access to Whistler has been under virtually continual upgrade in
order to improve highway safety and access to the enormous tourism
development potential of Whistler and the Lillooet region beyond.
Tourism development will become an increasingly important economic
engine in the region whether or not the Games are held. Highway
upgrading will continue regardless, to improve safety and carrying
capacity. Winning the host city bid will necessitate a formal
commitment to an adequate upgrading program on an acceptable
timetable in order to ensure appropriate access during the Games. As
these improvements are funded from internal provincial resources,
they create a gross economic impact but not an incremental impact in
the context of this model. To the extent such Non-OCOG Costs are
part of the province's conventional highways upgrade capital plan
and schedule, their impact is not attributable to the Games.
As with OCOG Costs, there may be extraordinary leakages in
this category - an imported tunnel-boring machine, for example.
The Games Legacy
If the 1998 Bid Book cost and revenue estimates were achieved,
the Games revenues would exceed costs to leave a bank balance, or
funding legacy exceeding $200 million. The Games legacy fund
is assigned to a designated post-Games administrative vehicle to
fund on-going sport development. One of the principle activities of
the legacy administration is the care and feeding of the permanent
competition facilities built for the Games but also handed over as
part of the Games legacy. A Bob/Luge track, for example, has been
estimated to require an annual operating subsidy of perhaps $2
million.
A legacy fund created from net revenues received from sources
external to the province and the economic activity involved in the
post-Games use of the facilities might be treated as an incremental
benefit to the Province. For the purposes of this model, pending
reliable data on the post-Games capital maintenance and operating
costs of the legacy facilities, the Games legacy is assumed to equal
the post-Games costs of those facilities and, hence, has no net
incremental economic impact.
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