Game-changing economic rescue plan needed
a week on, tokyo is learning that the costs of hosting Olympics far exceed the benefits.
AS weird as they may have been, the Tokyo Olympics turned out to be a sporting feast, with athletes managing to break 20 world records despite no live spectators to cheer them on, barring teammates and officials. Japan deserves accolades for putting on a spectacular show amid trying circumstances, bringing joy to billions of TV viewers around the world.
But there’s no getting away from the fact that the event was a financial disaster in the face of inflated costs and decimated revenues. Against an original budget for the Games of Us$7.3bil (Rm30.93bil), Japan officially ended up spending Us$15.4bil (Rm65.25bil). Unofficial estimates are much higher. Sports economist Andrew Zimbalist, author of the book Circus Maximus: The Economic Gamble Behind Hosting The Olympics And The World Cup, reckons that the actual cost was around Us$35bil (Rm148.3bil).
The postponement of the Games, the additional costs of Covid-19 prevention and public health measures had a price tag of at least Us$3bil (Rm12.7bil). On top of that were costs related to ticket refunds, loss of hospitality and restaurant revenues and reduced sponsorship income because of the lack of spectators. As for revenues from television rights – the biggest from any Olympic Games – about 70% of these are taken by the International Olympic Committee (IOC), the Games’ governing body.
Economists figure that Japan would be able to recoup, at best, around Us$5bil (Rm21.18bil) from the event, leaving a financial hole of Us$25bil to Us$30bil (Rm105.9bil to Rm127.12bil).
Economically unviable
Certainly, the Tokyo 2020 Olympics were an aberration because of Covid-19, although they would have lost money even in the absence of the pandemic and without postponement.
But what is concerning is that just about every cost-benefit study of past Olympics comes to the same conclusion: With very few exceptions, the Games, as currently conducted, are not economically viable for host cities. With more events, more athletes and more facilities having to be added every Olympics, the problem can only get worse.
It starts at the stage of bidding, which itself costs up to Us$100mil (Rm423.7mil) as cities try to outdo one another in presenting ambitious plans, paying huge fees to consultants, architects, designers and event organisers, as well as incurring travel expenses. The more the bidders, the greater the costs for each.
The costs of hosting the Games are, of course, orders of magnitude higher. And in almost every case going back to the Rome Olympics of 1960, there were cost overruns that ran as high as 700% over initial budgets, as in the case of the Montreal Olympics of 1976. It took Montreal 30 years to pay off the resulting debts. Rio de Janeiro and Athens also ran up huge debts, which added to their countries’ economic woes.
The cost overruns stem from a variety of causes. The biggest, in most cases, is artificially low initial cost estimates. This in turn is partly the result of politicians as well as vested interests in industries that most benefit from the Games, such as construction and hospitality, wanting to show that hosting the Games will not prove financially onerous to taxpayers and might even turn a profit.
Projected revenues are inflated for the same reasons. In a seminal article in the Journal of Economic Perspectives in 2016, the sports economists Rob Baade and Victor Matheson point out that economic impact studies commissioned by host cities frequently ignore many “substitution effects”, whereby consumers temporarily shift their spending to Olympics-related services away from other goods, with no net improvement in overall spending.
Projections of tourism revenues are also exaggerated. What often happens in reality is that regular tourists and business travellers stay away because of fears of crowds and congestion. London and Beijing, for example, reported declines in tourist arrivals during the month of the Games.
Even some residents choose to leave. A friend of mine in London decided to go on holiday out of the city during the 2012 Olympics. “I’m going to watch the Games on TV anyway,” he explained. “So why should I put up with big crowds and higher prices here in London?”
Then there are revenue leakages that are ignored. For example, a lot of additional revenues earned by big hotels accrue to their owners who may be overseas or in other cities, not to local establishments.
The impact on jobs also turns out to be limited. A study by the European Bank for Reconstruction and Development found that the jobs created by Olympics-related construction are not only temporary but are also mostly taken by workers who are already employed. The study found that of the 48,000 jobs created by the London Olympics, only around 10% were filled by the previously unemployed.
White elephants
Many Olympics have also resulted in specialised facilities such as stadiums, cycling velodromes, canoe and kayak courses and sailing marinas being underused and falling into disrepair after the event, or sometimes being vandalised. Many of these “white elephants” continue to have high maintenance costs for years on end. Brazil even had to bear the costs of replacing medals that had cracked or rusted after the Rio Games and were returned by their winners.
So pre-game predictions of rosy economic outcomes from hosting the Olympics rarely materialise. Based on their research, Prof Baade and Prof Matheson advise: “If one wants to know the true economic impact ... take whatever numbers the promoters are touting and move the decimal point one place to the left.”
There have, however, been a couple of successes. One of them was Los Angeles – the only city that made a profit after hosting the 1984 Games. It had the good fortune to be the sole bidder for the Games held that year, which meant it was
in a stronger bargaining position vis-a-vis the IOC, which evaluates bids.
Los Angeles was able to rely mainly on its existing facilities rather than having to lavish spending on new ones. Barcelona, which hosted the 1992 Games, also benefited from higher tourism revenues subsequently, because it invested more in tourist amenities that paid long-term dividends than in new sports facilities. But these were the exceptions.
Intangible benefits
A case can be made that hosting the Games has intangible benefits for host countries. They can showcase their economic and political power.
This was the explicitly the purpose of Adolf Hitler’s 1936 Games in Berlin. Some observers consider that the Games in Tokyo in 1964 (the first to be broadcast live), Seoul in 1988 and Beijing in 2008 were also intended as prestige events that boosted national pride. They had popular support and were admired around the world. Therefore, they might well have paid off, in reputational, if not dollar, terms.
But it would seem that increasingly, voters, taxpayers and even political leaders do care more about dollar costs than potential reputational gains.
Boston, Budapest, Hamburg and Rome withdrew their bids for the 2024 Games when they found that the eventual costs would be way more than initially estimated, with Boston’s Mayor Marty Walsh declaring: “I refuse to mortgage the future of the city away.”
Faced with opposition from voters, Krakow, Munich, Oslo and Stockholm also pulled out of bidding for the 2022 Winter Games, which were then awarded to Beijing. Its only competitor was Almaty in Kazakhstan.
Faced with these setbacks, the IOC decided, in an unprecedented move, to award the 2024 and 2028 Summer Games simultaneously to Paris and Los Angeles, respectively. And then, last month, well ahead of the usual seven-year advance period for choosing a host, it awarded the 2032 Games to Brisbane. There were no other bidders.
Olympic reforms
With interest in hosting the Games on the wane – especially with countries under new fiscal pressures after Covid-19 – the IOC is reforming the Olympic process. It has recommended reducing bidding costs by courting only a few cities that can be credible hosts rather than encouraging competition among many, allowing hosts to use more existing facilities and placing a premium on economic and environmental sustainability in its evaluation process.
While these are constructive reforms, some economists advocate more radical options to reduce costs and waste.
Prof Robert Baumann, a sports economist, and Prof Matheson suggest that developing countries – more of which have joined the ranks of bidders in recent years – be spared the burden of hosting, and that two successive Games be awarded to the same host city, so that facilities can be used twice.
Prof Zimbalist proposes that one city – he nominates Los Angeles – be made the permanent host so that facilities do not need to be rebuilt every four years. Others propose that the Games be split between multiple cities or countries as has been done for the football and cricket world cups.
Another suggestion could be for the Olympic Games to be treated as an international public good – which they are – and be multilaterally financed, with all participating countries contributing, so that the burden does not fall on a single host city or country.
All of the above are worth considering to save the Olympics from becoming the event in which every country wants to participate and the whole world wants to watch, but nobody wants to host. – The Straits Times/asia News Network