Twin upstarts from Fortazela – A sign of the times to come?

“International governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness”

– Official statement signed by the BRICS leaders

On July 15, 2014, the BRIC countries announced the formation of twin financial institutions at the Fortaleza summit – the New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA). The announcement has been variously received with gushing optimism about the changing world order to cautious questioning of the feasibility of the bank. Considering the wide disparity in reactions, it is instructive to understand the structure, the motivation for setting up and the implications of this newly minted multilateral institution which is being hailed by many as the sign of the times to come.

The “What”

The New Development Bank adds on to the burgeoning list of development banks internationally – a 2009 study from the Association of Development Financing Institutions in Asia and the Pacific estimated that there were 550 development banks in the world.  The NDB (having a $50Bn paid-in capital) aims to fund infrastructure and sustainable development projects while the CRA is $100bn swap line that gives each country an access to emergency supply of paid-in capital. While the initial capital for NDB is being contributed equally by each of founder member countries ($10Bn each), the CRA will have a different set of contributions from each country.

Figure 1

Fig: Initial contributions, Source: Reuters, Government of Brazil

Though the NDB in a section of commentary has been hailed as a possible alternative to the Bretton Woods institutions (World Bank and IMF), its initial capital base is lower than many of the existing multilateral banks.

Figure 2

Source: Market Realist

The bank has been structured to be open to new membership with a caveat that the founding members will hold a minimum of 55% of the voting power all the time. After much last wrangling, the BRICS decided that the bank be based out of Shanghai and while India will preside over the operations for the first five years, followed by Brazil and then Russia.

Why was it set up?

The setting up of NDB has been read as a first step towards the assertion of greater power by the developing countries and towards the breaking of dollar dominance. The NDB is the result of dissatisfaction with the current west-dominated international financial system which has not reflected the rise of the developing countries. For instance, the voting rights in the IMF for the BRICS countries are completely incongruent to the economic heft and the population of these countries.

Figure 3

Source: Financial Times

There also has been particular frustration in the style of operation of the global multilateral institutions such as the World Bank and IMF which attach sometimes unsuited and unreasonable requirements to the loans and assistance they offer. More often than not, privatization of resources is insisted which results in lucrative contracts for private companies, which are mostly based out of the west. Additionally, the perceived hypocrisy of these institutions while imposing harsh austerity measures on Asian countries after the Asian currency crisis and the acceptance of the lax stance of the European countries after the global financial crisis, served to heighten the antagonism among the developing countries towards these institutions. A more immediate trigger came in the form of rapid exodus of capital from emerging markets triggered in 2013 due to scaling back of the expansionary monetary policy in the US which highlighted the perils of over-dependence on the dollar and monetary policy of the US Fed.

Why does it matter?

The coming together of the BRICS countries to negotiate as significant multilateral institution points to the growing maturity of the bloc. This can be heralded as the v2.0 of the BRICS grouping – a shift from the being a convenient grouping of countries for investors towards tangible institution development. The impact of such a bank can be analysed with respect to 2 dimensions:

  • Global power shifts – The development of a NDB and CRA signals the viability of cooperation among the BRICS countries to come up alternatives if their demands for greater share of authority are not met. As an example, the draft IMF reforms for increasing the vote share of the BRICS countries agreed upon in 2010 is stuck in the US congressional process with no signs of any breakthrough. Furthermore, the CRA mechanism is designed to help the BRICS countries to lessen their dependence on the US Fed and the dollar.
  • Funding for developing countries – According to the World Bank, there exists a $1 Trillion funding gap for infrastructure in developing countries. In this context the NDB will provide an attractive alternative for other developing countries to acquire funds from other than western dominated multilateral institutions. The fact that a BRICS bank aims to make electricity, transport, telecommunications, and water/sewage a priority is important; the demand for infrastructure is expected to grow sharply as more countries transition out of low-income status. In terms of scale, after a couple of decades, if the membership expands along with mobilization of government financing and private funds—the BRICS Bank loans could dwarf World Bank loans. This type of success has been seen with the CAF, which now funds more infrastructure in Latin America than the World Bank and the Inter-American Development Bank combined. Over the long run, this might result in a reduced loan portfolio and consequently lower policy influence of current dominant institutions such as the World Bank. However, for the foreseeable future, given the huge demand-supply gap for financing, NDB will play a complementary role rather than supplementary one. This realization is reflected even in the official responses of the World Bank and IMF, which have welcomed the creation of NDB and CRA.

There are however several potential pitfalls for the success of NDB and CRA. The fairly heterogeneous composition of the BRICS setup – varying from quasi-dictatorial style of functioning of raucous democracy – will impose challenges in reconciling the negotiations to a common set of outcomes acceptable to all. This was already exhibited in the way the first set of decisions on headquarter location and the presidency were taken – at the last moment. Furthermore the range of scale of economies – China’s economy is almost 24 times the size of South Africa’s economy will put strain on the “democratic” nature of the institutions with China naturally wanting to impose itself.  China needs to resist overwhelming the institutions for its own advantage, in order to secure support from players such as India and Brazil.

The institutions born at Fortazela, have the potential to be harbingers of the needed change in the western dominated world of international finance. However, it will take patience and extraordinary maturity on the part of the BRICS nations for these institutions to fulfil their potential.

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Should there be a “Right to Bank Account?”

Financial inclusion (FI) has become one of the top priorities of federal banks and governments across the globe. The issue demands an even greater importance here in India as the financial inclusion situation is grim. Despite being the Asia’s third largest economy, nearly 40% of the people don’t have a bank account. An RBI panel headed by Nachiket Mor, a member of the RBI’s central board, recently proposed a new class of banks, christened as “payment” banks, to be set up to enhance the coverage of financial services in India. This is a step in the right direction and this article argues as to why should the people demand for a “right to bank account”?

Financial inclusion, as defined by Zeti Akhtar Aziz, noted Malaysian economist, is “About providing an opportunity for the world’s 2.5 billion unbanked and financially underserved to participate in the formal financial system…” The global financial crisis of 2008 acted as an eye opener with regards to the importance of financial awareness.  Bringing the “financially untouched” population into the mainstream banking would not only improve their lives, but also bolster the economy.

blg1Source: Livemint

In the absence of financial inclusion, unregulated lending services sprout up. They usually ask for very high interest rates and repayment period is too short for any productive investment. They can get bullish in nature and leave customers to pay through the nose. Kate McKee, a behavioural economics expert, claims that a person caught in the claws of private moneylenders shows declining decision making and crisis management skills. This degrades performance in any profession.

Financial inclusion benefits the economy in multiple ways. It provides an easier way for the state to transfer benefits to people. It will eliminate leakages and curb corruption. Thus, the result would be a reduction in the government’s subsidy bill and putting the public money to more efficient use.

Another benefit is that having a bank account will encourage people to save money, and deposits could be used to extend capital to businesses. Growth in the formal banking sector is known to reduce reliance on “black” money for financing. Availability of affordable and adequate credit from the banking sector is known to boost the entrepreneurial spirits of people.

Achieving inclusion in the country of one billion seems a humongous task, and it indeed is, but as the old saying goes, “where there is a will, there is a way.” Several developing countries have taken innovative measure to address the issues, and the results are stellar. Kenya, for example, has leveraged the widespread presence of mobile phones to introduce a mobile-based financial services system called “M-PESA”. It is used by one-third of their population for cashless transfers, savings, financial transactions, etc. and could be replicated in India.

blg2

M-PESA Model: How it works

Even private lenders can be made a part of the financial inclusion system under strict regulatory control. Brazil has in place a network of 95000 banking agents who have helped pull around 13 million people into mainstream banking. Bangladesh has adapted its regulatory framework to suit the growth of women-led micro financing institutions.

The biggest obstacle to relaxing the norms for banking growth is the fear of banking services being exploited for money laundering or even worse, funding terrorist activities. Financial Action Task Force, an intergovernmental body, was established in 1989 to counter these issues. Mexico has tried to address the issue by having “tiered” regulatory framework. Low-value accounts relax on the background checks but are subjected to more stringent transaction restrictions.

In 2008, more than 80 developing countries came together to form the “Alliance for financial inclusion,” an international knowledge sharing network to discuss and design policies on financial inclusion. Seeing the momentum in world economies towards financial inclusion, RBI acknowledged that it is the need of the hour. Based on the proposals of panels and think tanks, it has taken several steps for the expansion of financial institutions in rural India:

  • No frills accounts: These are the most basic accounts which offer only the basic services. These accounts have zero balance requirements and have helped attract more than 12 million Indians into formal banking.
  • Relaxation of Know Your Customer (KYC) requirements: No frill accounts can be opened up by showing up any one of a variety of photo IDs. For low-risk individuals, full KYC data updating exercise has to be carried out only after every ten years as compared to the norm of five years.
  • Banks at the doorstep: The introduction of information and communication technology, e-commerce, financial inclusion fund and online updates on markets, etc. have brought banks to the doorsteps.

The statistics presented below shows that these measures have achieved partial success in increasing the penetration of financial institutions in rural areas. “Crisil Inclusix Index” is used as a measure of FI. It collates three crucial parameters of bank penetration: branch penetration, deposit penetration and credit penetration. The Index has increased from 40 to 35 in the last five years, but it is mostly high for the states with high literacy. This implies that the poor, uneducated people who truly need an account are still excluded.

blg3Source: Livemint

 Under the recent proposal of RBI, existing banks are going to be allowed to open subsidiaries serving as payment banks. The Panel further proposes to have a universal electronic bank account (UEBA) for every person on the lines of the Unique Identification card scheme of central government.  Experts welcome the Mor’s proposals and believe that the concept of “payment banks” could prove to be a game changer. As Shinjini Kumar, head of banking at PWC India commented in financial express “I definitely think the proposed payment banks are better suited to achieve the objective of increasing penetration compared to the universal banks,”

Financial inclusion of the bottom half of the financial pyramid is an arduous, but crucial task that requires government will, support from leadership across political parties and careful policy crafting by RBI. We have this opportunity of leveraging the dormant potential of the financially secluded section of our economy. Who knows, it may herald a new era of growth and prosperity for all. So yes, it is time for government to give some serious thought to “Right to bank Account.”

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Vaibhav Kumar Singh is a PGP-2 student at IIM Ahmedabad and a member of Consult Club. He did his internship with The Boston Consulting Group. Prior to joining IIMA, he worked as a Software Development Engineer at Microsoft and as a research scholar at INRIA, France. He is a graduate in Computer Science & Engg. from IIT Jodhpur.

Mobile Number Portability: The Hype and the Impact

Mobile Number Portability (MNP) equips customers to switch over to an alternative network service provider without having to change their numbers. MNP was tipped to be the game changer and turn around the competitive landscape of the Indian Telecom Sector. It was launched with much enthusiasm in January, 2011 by TRAI (Telecom Regulatory Authority of India), after a successful model test in Haryana . However the actual customer switch-over rate has remained far below 1% per month compared to  a monthly average of 3-5% in more developed nations notching up only around 109 million MNP applications in the past 3 years. This is a little over 10% of total customer accounts switched in 36 months and is far below the expected pre-launch predictions.

Despite 55% customers expressing satisfaction with their current network provider and 48% over the network quality, there were strong supporting reasons for introducing MNP in the first place.  A Nielsen survey done at the stroke of the launch of MNP in India had revealed high customer interest (~1 out of every 5 customers) in using this facility (refer Chart 1). There were evident customer advantages meant to be seen with this new introduction, namely :

  • Major reduction in switching barrier, especially for customers owning a particularly ‘good’ number which they did not want to change
  • Inducing fair competition among the Network Service Providers (NSPs)
  • Better tariff and promotional plans
  • Improved quality of service

These were supposed to be the new rules of the game for Service providers if they had to retain their customers and poach new ones from other competitors.

udit1

 Chart 1: Source – Nielsen Survey, 2010

Yet the actual impact was far less than originally predicted by TRAI. The reasons for the unexpected low impact are numerous. Researchers claim that higher %age of MNP is an indication of the level of maturity of the market and there is evidence to infer that Indian customers are not very ‘number’ conscious. Pre-paid account users, which form ~97% of all Indian wireless accounts, still exhibit a trend of buying fresh SIM cards (getting a new number) instead of necessarily using MNP. Even though post-paid account users show a better trend in this regard, the number of post-paid accounts is only 3% of the total. Also, data shows that for most of the experienced service providers, the parameters like tariff charges, network quality, value added services, etc. are more or less similar to each other, hence, there is no major value proposition for the customer to make use of MNP extensively. At times, even the network providers are not keen on poaching accounts which are historically low revenue generating.

Telecom Sector Impact Analysis:

Despite the Indian Telecom sector being a primarily pre-paid market, i.e., ~97% share in terms of user accounts, the remaining 3% of Post-paid accounts are extremely important for NSPs as they drive the overall profitability. The advent of MNP has meant that new entrants can capture adequate number of customers by poaching from the incumbent market leaders through offering higher value for price. Hence, customer service, quality of the network, value added services and customized tariff plans are the key to long-term leadership.

The Average revenue per user (ARPU) is much higher for Post-paid customers, hence, the profitability too (refer tables 1 & 2).

udit2

Table 1: TRAI official report, 2013

Table 3

Table 2: TRAI official report, 2013

The Telecom sector in terms of its user account base is declining post the advent of MNP (chart 2), yet the overall revenues and correspondingly ARPU are on the rise (chart 3). This has been a positive for the NSPs as now the cost of issuing more accounts and blocking more numbers has gone down, adding to their profits.

The Telecom sector in terms of its user account base is declining post the advent of MNP (chart 2), yet the overall revenues and correspondingly ARPU are on the rise (chart 3). This has been a positive for the NSPs as now the cost of issuing more accounts and blocking more numbers has gone down, adding to their profits.

Chart 1

Chart 2: TRAI official report, 2013

Chart 2

Chart 3: TRAI official report, 2013

 

 IDEA: a clear winner

The impact of MNP has been best tapped by Idea Cellular and Vodafone, amongst all private and public sector players. Idea Cellular had a net 3.32 million influx of customers while Vodafone registered 2.89 million, in over a year of the introduction of MNP. Customer feedback suggested that it was the network quality and clarity of voice which led them to choose Idea over other NSPs. During the past fiscal (2012-13), Idea has registered the highest growth in revenues, on a percentage year-on-year basis (Exhibit 1). The contribution of MNP can be estimated as (assuming constant trends over last 2 years) = 3.32 * 10^6 * 105 (ARPU) *12 = 418 Crores, in terms of Gross Revenues. This amounts to nearly 229.9 crores (55%), in terms of Adjusted revenues, which is huge.

Attributing to the same benefits, consumer surveys have shown that customers have rewarded NSPs for good customer service and high network quality with competitive tariff plans. The reasons for not switching over to a competitor were dominated by customer satisfaction and brand loyalty (Table 3).

Table 3

Table 3: Paper by Rajesh Yadav and Nishant Dabhade

Similarly, as expected the main reasons for customers who made use of MNP were led by better features offered by competitors and lack of up-gradation schemes for the current service provider. (Table 4)

Table 7

Table 4: Paper by Rajesh Yadav and Nishant Dabhade

Looking ahead:

The next step in this direction from the Government is to provide National level Mobile Number Portability. This will enable customers to retain their mobile numbers as they move from one circle to another when they change states. Thus, not having to be on roaming and yet be able to retain the old numbers could be highly advantageous for such clients. This is targeted for an April, 2014 launch. But the impact seems to be primarily restricted to those people who usually get frequently relocated, which constitutes less than 1% of User accounts per month. Thus, expecting a major overhaul by this next leg of development in the Telecom space is highly unlikely. Hence, despite minor positives for both- customers and NSPs, Indian telecom sector still waits for its real game changer.

Table 4 (Source: TRAI report, 2013)

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Udit Kejriwal is a PGP-2 student at IIM Ahmedabad. An Aditya Birla Scholar and a runner-up at the ‘Dewang Mehta Best Student in Management’ competition nationally, Udit interned with McKinsey and Company for his summers. A former General Secretary Technology at IIT Kharagpur, Udit worked for 2 years as Quality Assurance Manager with Procter & Gamble on completion of his Bachelors in Mechanical Engineering. He is a passionate dancer, a long distance runner and a die-hard sports enthusiast.

Tablet computer: The new blue-eyed boy of India’s IT industry?

After a spectacular surge in the mobile phone segment, the Indian information technology (IT) sector is witnessing a new trend – the rise of the Tablet Computer. Tablet computers or simply, Tablets, are touch-screen operated mobile computing devices without a physical keyboard.

tablets_header_624x258

Tablet sales have recorded a robust growth ever since the introduction of the iPad in India, and if industry estimates are anything to go by, this is just the beginning. The Manufacturers Association of IT (MAIT) has estimated the segment to grow at a compounded annual growth rate of 40% from 2011 to 2015. In a country like India, where the penetration of the computer with internet in urban households is just 8 percent and as low as 1 percent in rural areas, this is nothing less than phenomenal.

The growth story

MAIT expects sales to grow from 0.95 million units in 2011-12 to 7.3 million units by 2015-16 [Exhibit 1]. A report by CyberMedia Research predicts an even stronger sales growth rate of 100% for the year 2013. While numbers may vary, there is a definite upward trend in the market. Global sales forecasts reveal a similar story, however the Indian market is expected to grow at a faster pace, occupying a bigger share of world Tablet sales by 2015 [Exhibit 1].

 

Exhibit 1: Growth Projections of Tablet sales and their share in global sales

Exhibit 1: Growth Projections of Tablet sales and their share in global sales

Usage Patterns

Due to their form, portability and weight, Tablets are primarily meant for internet consumption on the go. However, consumers now use Tablets for a variety of purposes ranging from the traditional uses like checking their e-mail and reading books to online social networking, accessing multimedia and gaming [Exhibit 2]. Due to the growing number of applications and other support features in the Tablet ecosystem, they have tremendous potential even in corporate houses, the industry and government offices. Various industries such as healthcare, public services and especially education, have already adopted the Tablet.

 

Exhibit 2: Popular activities on Tablet computers

Exhibit 2: Popular activities on Tablet computers

Consequently, companies have also altered their value propositions to suit this plethora of needs.  Reliance tabs, for instance, is focusing on the youth. On the other hand, Micromax is trying to penetrate the education segment through its FunBook. HCL Infosystems is trying to build applications for verticals like healthcare, pharmaceuticals, banking and financial services. By strengthening their marketplace, HCL aims to carve a niche for its Tablet computer. Similarly, Lenovo is providing content in vernacular languages, in an attempt to provide a local flavour to their Tablets.

 

Growth drivers

A major part of this initial demand has been fuelled by Government purchases. Kapil Sibal, the minister of communications and IT said, “This is our answer to M.I.T.’s $100 computer,” during the announcement of the Aakash project in 2010. Government efforts to subsidize the Tablet and also provide relevant training to teachers have gone a long way in boosting initial sales figures. However, the government does not plan to stop there. According to Suneet Tuli, the chief executive of Datawind – the company that supplies Aakash Tablets, the government ultimately aims to see an Aakash 2 in the hands of each one of India’s 220 million students. If this is true, Tablet sales will ride on the back of government purchases for a long time [Exhibit 3].

 

Exhibit 3: Share of Government purchases in overall Tablet Sales

Exhibit 3: Share of Government purchases in overall Tablet Sales

Affordability is yet another lever that has pushed Tablet sales upwards. Gartner analysts have identified three distinct price segments – the iPad, the sub Rs 25,000 Tablet and the Rs 10,000-Rs 15,000 Tablet. In addition, the prices of the low cost segment are expected to follow that of smart-phones which are currently expecting a downward trend in price. This availability at different price points has partly occurred due to tremendous fragmentation in the market. There are currently over 70 different models of Tablets launched by more than 10 companies and the number is only increasing.

Another important factor responsible for the growth potential of Tablets is enterprise adoption. Take the case of Bharti Airtel, India’s largest mobile telephony services provider. After presenting its directors with the Tablets, it has shifted from leather pads and files to a strict ‘iPads only’ policy in the boardroom. Other companies are also expected to realise their potential in the office and follow suit. In addition, the ‘bring your own device’ concept which is getting popular in companies, will also lead to greater acceptance of Tablets in these enterprises.

Availability of applications and multimedia consumption are other key elements that drive the growth in this industry.

Challenges

Despite portability, good processing speeds and a variety of applications at their disposal, the user experience is marred due to poor internet connectivity. Unlike in the west, 3G connectivity in India, is not robust and the Tablet has limited utility without a good internet connection. Scarcity of public wi-fi networks in the country also adds to the problems with connectivity. Tablet-makers like Samsung and Reliance have realised this issue and are taking steps to make internet access readily available. Reliance, for example, bundled their Tablet with 3G to observe an immediate impact on sales.

In addition, lack of consumer awareness about the potential of Tablets, as well as the inability of the existing application range to reach all segments within the country may pose as potential hurdles to the sales trajectory. To thrive in the market, producers will have to find solutions to these issues while not compromising on the overall value-proposition of the offering.

To sum it up, the same features of mobility, affordability of devices and low tariffs that have made mobile phones ubiquitous within the country, are expected to give rise to tremendous growth in the Tablet computer market too. Trends indicate that Tablets are here to stay. However, despite strong drivers like government procurement, corporate adoption and affordability, companies will have to find means to overcome the challenges caused by poor connectivity and lack of awareness. Only then will they be able to sustain the promising growth potential of Tablets in the country.

References:

  1. India tablet computer sales to double in 2013: research. (2013, January 7). Hindustan Times.
  2. India unveils tablet education initiative. Will the US follow suit? (2012, November 14). The Economist Group.
  3. Jayanth Kolla. (2011, August 8). Key Drivers for Evolution of Tablets in India. Convergence Catalyst Blog.
  4. Joji Thomas Philip & Gulveen Aulakh. (2011, August 27). The Economic Times.
  5. Pamposh Raina, Ian Austen & Heather Timmons. (2012, December 29). An Idea Promised the Sky, but India Is Still Waiting. The New York Times.
  6. Tablet market in India to grow 40%, to cross 1.6 million units in 2012-13: Study. (2012, October 19). The Economic Times.
  7. Tablet PCs have good growth prospects: Gartner. (2012, February 20). Business Standard.

 

– Sahil Patwa

Sahil is a PGP 1 student at IIM Ahmedabad and a member of the Consult Club. As an Associate Consultant at Ernst & Young, he was involved in the launch of India’s first domestic debit-card system and other projects in the electronic payments space. He is passionate about technology, new business development and Web 2.0. Sahil holds a B.Tech in Mechanical Engineering from IIT Bombay. 

The Economic Impact of Mega Sporting Events

Bloomberg reported in 2008 that an estimated US$20 billion was spent on that year’s Olympic Games in Beijing. In fact, IMF estimates that about US$ 36 billion was spent on Olympic-related infrastructure in Beijing in the run up to the games. The spending by China on the Olympics was greater than the national GDPs of 83 countries in the world (IMF estimate). The last few decades have seen several billions of dollars being spent by nations across the world in hosting large international sporting events – the so-called ‘mega events’. One wonders if huge expenditures over world-level events like the Olympics, the World Championships and regional-level events like the Asian Games are justified. One of the most compelling arguments supporting cities bidding heavily for these events is the expected economic windfall brought by hostingthem.
World-level events, led by the Olympics, have become increasingly expensive over the years. Host cities see this not only as an opportunity to build new sports infrastructure but also improve urban infrastructure including housing facilities, communication networks and public transport. Such huge expenditures had led to 21 of the first 25 editions being hosted largely in Western Europe, North America and Australia. With growing concerns of potential terror attacks, security costs have also ballooned over the last decade. It is estimated that the security expenditures associated with the 2002 Salt Lake City Winter Games and the 2004 Athens Summer Olympics were over US$ 300 million and US$ 1 billion respectively. Security expenses largely come from the country’s Federal budget and arenot included in the games’ budgets. Further, there are annual maintenance costs of large stadia and associated sports infrastructure. Private sector companies might be hit by long term costs. Hotels might have seen a construction boom but the surplus capacity might create downward pressure on room rents in subsequent years. It is reported that within 5 years of the 1994 Lillehammer (Norway) Winter Games, 40% of the hotels in the region had gone bankrupt. Despite these shortcomings, estimating the cost associated with hosting a mega sporting event is far easier and reliable than estimating the revenues and economic benefits that a city derives from it.
The Sydney Olympic Games (2000) was expected to have a US$ 6.3 billion positive impact in addition to the creation of 100,000 new jobs. The Athens Olympics (2004) is estimated to have boosted economic activity by 1.3% of GDP every year between 1997 and 2005 and reduced unemployment by 1.9% per year. Prediction studies typically derive economic benefit studies from –direct impact (number of days spent by a visitor x number of visitors x average amount spent by a visitor) and indirect impact (effect of infrastructure spending). A key argument against the direct impact figure are that since leisure travellers’ budgets are inflexible, their spending on tickets simply leaves lesser money to spend on other substitute activities in the local economy. This suggests that the direct impact figure is likely to be overestimated. The effect of ‘crowding out’ local population spending is to be incorporated in addition to negative externalities such as congestion. Further, the issue of ‘time-switching’ is ignored: A visitor planning to visit Athens few months later might just have rescheduled his visit to coincide with the games. However, the latter effect is likely to be subdued for mega events like the Olympics.
The Indirect Impact is estimated by applying ‘multipliers’ to direct expenditures towards the event. These economic multipliers are derived from complex mathematical functions that model the relationships between different businesses in the region. However, when a world-level mega sporting event is happening in a region, some of these relationships do not hold. Another problem while estimating the Indirect Impact is the inability to separate the money flowing to international chains, in which case a foreign shareholder might derive greater benefit than the local population. Further, such leakages are aggravated by the entry of external firms that provide goods and services only during the games.  The benefits derived from the huge infrastructure investments presents yet another complication. Several secondary benefits accrue from heavy infrastructure spending surrounding a mega event. Improved connectivity, increased development of available real estate and even project management capability can derived. The property market in the region is buoyant following an event of this scale. Labour market impact and the socio-economic inclusion of a larger set of people is harder to quantify.
There are numerous intangible benefits that a city or nation derives from hosting a mega sporting event. Firstly, the city gets a ‘status-lift’ making its mark at the world level and rising into the echelons of ‘world cities’. Some studies show ‘a restoration of self-confidence’, ‘civic pride’ and ‘dynamism’ among the citizens following a mega event. The 2008 Beijing Olympics made an attempt of showcasing itselfas a democratic, civilized and harmonious country. In some countries, such events are used as a legitimate excuse to get legislative approval for infrastructure and other projects that might otherwise not be possible.
Despite the less-than-accurate estimates of cost and revenues associated with a mega sporting event, hosting the Olympics has remained an elixir of sorts used by governments across the world. Large caveats that come along with the prediction models have not tempered the gigantic bids cities make to host such world-level and inter-continental events. Do the economic, fiscal, political, social and cultural benefits outweigh the public expenditure of gargantuan proportions? Only time will tell.