Risk and the Mega-Event Industry
Dr Will Jennings,
27 May 2013
Major sports and entertainment events, often interlinked with large scale construction projects of venues and infrastructure, are an increasingly common feature of modern societies and economies.
The explosion of the mega-event industry
The risk of mega events: from the prosaic to the extreme
The changing world of mega-events and emerging risks
Risk managment for mega-events
These ‘mega-events’ pose significant opportunities, challenges and liabilities for governments and businesses. The risk environment of such events is constantly shifting, reflecting a wide range of contemporary trends, stresses and dangers; such as threats of terrorism and cyber-attacks, environmental hazards, natural disasters, technological accidents, shifts in the balance of global power, systemic economic risks and pandemic outbreaks, to name a few. Rising costs and revenues mean that the financial stakes associated with mega-events continue to grow, while the event logistics become ever more complex and embedded within the global network of stakeholders, experts, corporate firms and supranational authorities that make up the mega-event industry. The major risks facing mega-events today range from the quite prosaic to the extreme, but several important dynamics suggest that governance of these events may become more problematic, rather than less, in future. It is no coincidence that risk and its management has become an increasingly influential dimension of mega-event planning and organisation.
The explosion of the mega-event industry
Since something of a low point in the 1970s, the mega-event industry has exploded, and its main product – the major sports or entertainment event – is getting bigger, measured across a wide range of metrics. The world’s leading sports events and brands, the Olympics and the Football World Cup, are the best-known examples of this trend, having overcome the precarious financial circumstances of their governing authorities, the International Olympic Committee (IOC) and the Fédéreation Internationale de Football Association (FIFA), in the 1960s and 1970s, before commercialisation (in particular television rights) brought money flooding into sport. The live music industry has undergone a similar transformation in recent times, as costs, revenues and logistical operations have grown in scale – as a function of its success. Even over just the past decade, the marketing revenues of the Olympic movement and World Cup have grown substantially, as illustrated in Figure 1.
Across the mega-event industry, there has been an upward trend in the size of television audiences, and in revenues from the sale of television rights, corporate sponsorships and other marketing activities. In parallel, the costs of hosting major events such as the Olympics, Football World Cups, F1 Grand Prix, Eurovision, and expos, have risen – linked to the construction of large scale stadia, facilities and infrastructure – while event operations have become increasingly complex and professionalised. For example see the rising cost of recent summer Olympics in Figure 2.
These trends put a strain on mega-event management. In 2002, the IOC’s Olympic Games Study Commission reported “...the growth and size of the Olympic Games have reached the point where they present significant operational and organisational risks”. This reflected concern that the event’s continued growth might threaten its long-term viability, such that cities might be discouraged from bidding to host the Olympics if the risks were viewed as too great – just as the Swiss city of Berne withdrew its bid to host the 2010 Winter Olympics after voters rejected a proposal of public funding. Concern about the sustainability of mega-events has grown further since the global financial crisis, and influence of austerity policies.
Because mega-events involve sizable financial investments and projected revenue streams, they represent major financial risks for multiple parties – ie national or metropolitan governments, event organising committees, sporting federations, contractors, suppliers, sponsors and all other organisations with a financial interest (eg television networks, which generate large incomes through advertising). The growth of the mega-event industry is, therefore, linked to both opportunities and liabilities for a range of stakeholders.
The risks of mega-events: from the prosaic to the extreme
What are the specific risks associated with mega-events? Events on this scale give rise to numerous hazards and threats across a range of areas related to their preparation and staging, producing externalities in the process. For example, land remediation and the construction of new buildings and infrastructure can have adverse ecological impacts or produce hazards for workers and local populations. Further, the events can create congestion (eg road traffic, over-crowding on public transport, in public spaces and retail areas) and exert a strain on existing infrastructure and services (eg air traffic, border controls, health care, emergency services). As part of the actual event there are risks to the safety and security of spectators, competitors and officials.
To understand the array of risks that is faced in governance of mega-events, it is possible to distinguish between those hazards and threats that arise directly out of organisation and staging of the event, which are ‘man-made’ in one way or another, and those beyond the immediate control of organisers (ie risks which cannot be directly managed or prevented) – but which, nevertheless, can determine the ultimate success or failure of an event.
The former group of risks are often quite normal, or prosaic, in nature, despite the popular focus on catastrophic threats ahead of many mega-events. Some are routine hazards to the health and safety of workforces, spectators and competitors, or damage to property, such as the official vehicle fleet. Others involve minor technological breakdowns, such as power outages or transport accidents, or petty crime and fraud. Another set of prosaic risks are organisational in origin. Most notably the sorts of large scale construction and infrastructure project that mega-events tend to be attached to are prone to cost overruns, which are exacerbated by the competitive bidding process through which many mega-events are awarded. For example, a pattern of ‘optimism bias’ is observed in Olympic budgeting, as the final outturn cost tends to exceed the original projections of bid teams by around 200% on average since the 1970s.
Of the latter set of risks, a number of threats and hazards exist that are outside the immediate control of event organizers. In fact, cases of force majeure are not uncommon in the world of mega-events – taking a range of forms. Mega-events have been a direct target of terrorism such as the Munich 1972 and Atlanta 1996 Olympics, but can suffer collateral damage from external events. The Ryder Cup, between the U.S. and Europe, scheduled to be held at the Belfry in England in 2001 had to be postponed by a year due to the Al-Qaeda terror attacks on September 11th, weeks before. Natural disasters are a potential source of mega-event disruption as well. Ahead of the Rugby World Cup staged in New Zealand in 2011, a number of matches were relocated from the city of Christchurch as a result of earthquake damage to its stadium and infrastructure. More recently, the New York City Marathon in 2012 was cancelled due to storm damage from Hurricane Sandy. Pandemic outbreaks and civil unrest have hit preparations for mega-events in the past. For example, the 2003 Women’s Football World Cup was relocated from China to the US because of concerns over the SARS outbreak, while the 2011 Bahrain F1 Grand Prix was postponed due to civil unrest and then cancelled altogether later on in the year. Extreme risks may typically be viewed as low probability events but they are a recurring feature of the governance of mega-events, even if they remain rare.
The changing world of mega-events and emerging risks
A number of key trends, combined with unique organisational features of mega-events, expose them to complex and unstable forces, and suggest that their governance may be increasingly problematic in future.
Firstly, as I have described, growth of the mega-event industry has led to a linear increase in the financial liabilities at stake, for a diverse set of stakeholders, as well as increasing the economic incentives for deviant activities such as doping and ambush marketing. Secondly, and perhaps most significantly, a recent trend of mega-events moving into emerging economies gives rise to a new set of risks. These tend to suffer from higher levels of corruption, which are a potential issue in the management of construction costs, procurement and breaches of venue safety (such as allegations relating to EURO 2012 in Ukraine and the upcoming Sochi 2014 Winter Olympics in Russia). There is, more generally, much greater uncertainty and unpredictability surrounding events held in countries with limited experience in delivering international events to the expected standards, even in circumstances where vast sums of money are thrown at hosting the event. Construction standards of stadiums in Rio de Janeiro have been subject to concerns ahead of the 2016 Olympics. Just days before the Delhi 2010 Commonwealth Games, the collapse of a pedestrian footbridge leading to the main Jawaharlal Nehru stadium, combined with mounting concerns over safety against terrorist attacks and the condition of accommodation blocks in the athletes’ village prompted some competitors to postpone or withdraw altogether. The poor quality of transport infrastructure and public transport, combined with threats of theft and violent crime, pose further risks to the staging of mega-events in some emerging economies – and specifically to the safety and security of spectators and competitors. (Even in developed economies, transport can be a problem: the Atlanta 1996 Olympics suffered a PR debacle because of problems with its transport services for media, competitors and the public). Likewise, policing, defence and intelligence capacities of emerging countries can struggle to achieve the ‘absolute security’ increasingly demanded by mega-event authorities and other national governments. For example, in securing the Athens 2004 Olympics, the Greek government received security assistance from the North Atlantic Treaty Organisation (NATO), specifically in relation to chemical, biological, radiological and nuclear (CBRN) threats.
Thirdly, because preparations for hosting mega-events tend to span extended periods of time, and because plans are resistant to last minute changes, they are especially vulnerable to what are known as ‘emerging risks’; ie threats or hazards that have potentially large impacts but are not well understood. Trends in emerging risks are therefore an important factor in the changing parameters of event organisation. These take a range of forms. The events of September 11th, for example, prompted planners to reappraise security threats to major events in the immediate aftermath, and led to the inflation of security costs and tighter policing for the Salt Lake City 2002, Athens 2004, Vancouver 2010 and London 2012 Olympics. It also led the IOC to take out cancellation insurance for the first time. In hindsight, as the US 9/11 Commission concluded, the threat from Al-Qaeda was clear but not well understood at the time, despite the warning signs. Another example of an emerging risk is repercussions of the global financial crisis, as private developers of the Olympic villages for Vancouver 2010 and London 2012 experienced difficulties due to the contraction of credit markets, requiring financing arrangements to be rearranged. The emergence of new diseases, such as severe acute respiratory syndrome (SARS), can be significant too.
Fourthly, globalisation – in economic, social and technological forms – is a factor in many of the threats and hazards discussed to this point. It accelerates the transmission of infectious disease across borders (indeed, large events are frequently linked to outbreaks of disease), increases the interconnectedness of economic risks and provides a platform for breakdowns of technological systems or attacks upon them. The threat to international sport from illegal betting and match-fixing is a product of globalised forces, in the activities of criminal networks that operate across borders and exploit global audiences (and betting markets) for major events. Human trafficking and ticketing fraud are, similarly, facilitated through the trends underlying globalisation.
Fifthly, and not unrelated to globalisation, the staging of mega-events tends to involve the complex interaction of infrastructure (eg transport networks, energy supplies), event operations (eg policing, emergency services) and populations. Because of this, small disturbances can have amplified effects across the system. Digital wildfires and public health outbreaks, for example, have the potential to spread with devastating consequences if located at the right point in the network at the right time. Critical power failures likewise have the potential to cascade through energy, transport and infrastructure networks underpinning mega-events, with unforeseen consequences. Mega-events are, therefore, reliant on the resilience of such networks to breakdowns and external shocks – even if such risks have not materialised to date.
Several of the cases of event disruption noted earlier highlight the potential impact of extreme weather events on mega-events. Given the apparent frequency of such incidents – whether or not one subscribes to the view that events such as Hurricane Sandy are a direct consequence of climate change – it seems likely that weather-related risks will become more important, rather than less, in future. Together, these trends and organisational features expose mega-events to risks that are different from those faced in the past and suggest that risk is now an integral feature of the governance of mega-events.
Risk management for mega-events
Alongside these trends, risk has increasingly become a subject of management – transforming the way in which mega-events are organised. Insurance was the traditional mechanism through which organisers sought to manage risk, in particular obtaining cover against liabilities for personal injury and property. It came into increasing use, however, during the 1980s with the growth of television revenues associated with mega-events, such as the Olympics – given the almost complete financial dependence of organisers on this source of income.
Since the 1980s, event organisers have increasingly invested in systems dedicated to the management of risk through internal controls. Risk mitigation is now integrated into decision-making and operations, and no longer treated as just an input into the calculation of insurance premiums. Risk management teams have become functional units within mega-event organisations.
Further, mega-event authorities such as the IOC and FIFA have increasingly adopted the role of ‘risk manager’, conducting inspections and evaluations of (delegated) event organisation to protect their main asset – which generates the vast majority of income through the television rights and corporate sponsorship. The events of 9/11 seem to have provided a wake-up call to these authorities about their exposure to catastrophic risk; which also led the IOC to take out cover against event cancellation. The IOC has also formalised and standardised its process of the technical evaluation of applications to host the Olympics and its monitoring of the readiness of preparations of host cities.
The other crucial aspect in which mega-events have reshaped the way in which risk is understood and managed is through the promotion of cross-event learning and knowledge transfer, with the IOC creating the 'Olympic Games Knowledge Management' programme to facilitate this – through observer and secondment programmes, workshops, technical manuals, debriefings and the like. If you visited the offices of any organising committee, you would likely find visitors from past and future Olympic Games. Knowledge management is designed to mitigate organisational amnesia about risks associated with delivering and operating the event. It also reflects the emergence of a community of mega-event experts, consultants and contractor firms (in domains that range from security to construction) who move from event to event, transferring lessons and (perceived) best practice in event management.
While I have identified this trend of growing interest in risk management, another crucially important trend that can be observed in the governance of mega-events is an increasing preoccupation of organisers with questions of reputation and public image. This is understandable. In the context of major events, reputations capture the broad set of feelings about an organisation and/or an event that underpin public support and interest. Without a (good) reputation, events are at risk of losing their audience and their legitimacy – not to mention sponsors and revenues.
If anyone is in doubt about potential for reputational damage to a sport, one need only look as far as the recent Lance Armstrong case, and its implications for the image of the sport of cycling as well as its world governing body, the Union Cycliste Internationale (UCI). Reputation is pivotal to the credibility and legitimacy of organisations. In the world of international sport and mega-events the authority of governing bodies tends to be derived largely from their perceived political and social legitimacy. After all, there is no territorial basis for their claims to representation as observed in other forms of political or economic ownership (and in the past rival authorities have been established in various sports due to waning influence or credibility of an existing body).
Mega-events such as the Olympics and the Football World Cup are built upon the intangible asset of reputation which generates lucrative incomes through corporate sponsorship, broadcasting rights, licensing and merchandise. Undoubtedly this accounts for the growing attention to brand protection and the restrictive responses of mega-event authorities to ambush marketing. For organising committees and host governments, too, there are risks of reputational damage associated with things such as an unfinished stadium or a serious security breach. The pictures of unfinished facilities and a collapsed bridge that received global media attention ahead of the Commonwealth Games in Delhi in 2000 arguably did substantial reputational damage to the hosts.
There is a clear link, however, between risk management and reputation. An issue such as doping represents an actual risk (and a failure of risk management – if one is of the view that governing bodies are concerned with such matters), whereas reputational damage is a symptom of the problem. Likewise, damaging publicity over rising costs of mega-events is linked to failures in financial management – but with consequences to wider perceptions of it. Reputational risk can range from minor embarrassments to essential threats to the image and integrity of an organisation. Some of these are linked to events that are entirely predictable, whereas others are difficult to imagine preparing for.
The Salt Lake City corruption scandal provides an excellent case study in reputational risk management. Allegations about the competition to award the 2002 Winter Olympics led to the expulsion of several IOC members and the resignation of executives on the Salt Lake City board. These events had the potential to badly taint the image of the IOC, but it is notable how rapidly and robustly the organisation reacted to events – apologising and investigating events, sanction its members and overseeing a substantial programme of reforms in response. While the scandal had no immediate consequences for the Olympic movement – the threat to its ‘value-based’ brand was significant – and was arguably the reason for the response.
Reputational risks can also affect contractors or other event stakeholders. This became a major story ahead of London 2012 with the failure of the British security firm G4S to provide the contracted number of guards to secure the Games. This led to the army being called in to provide assistance and generated extremely damaging publicity for the firm – as well as financial losses on the contract and the loss of other potential contracts which had been under tender.
It should now be clear why the organisational terrain of today’s mega-event is characterised by an intersection of risk and its management and why we should care about the changing nature of mega-event governance. This is facing an array of new and often poorly understood dangers, at the same time as currently experiencing a transformation in the way that risks are managed and in the way organisations view them. Over the next ten years, the world’s largest events – the Olympic Games and the Football World Cup will be held in a number of emerging economies – in Brazil, Russia and Qatar (and in recent years major international events have also been staged in China, South Africa and India), against the backdrop of fast-changing global risks. Risk and its governance can only become more important in this context. While a focus on risk highlights the long list of things that can go wrong in event management, some of the solutions to risk management that have been implemented by organisers in the recent past give cause for some optimism about the continued viability of the mega-event as an enterprise.
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