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Rio 2016 | Study lifts the lid on the cost of hosting the Olympic Games

THE DIFFICULTIES faced by Rio de Janeiro in getting the 2016 Olympic Games across the starting line have been played out in media across the world, writes Kevin Roberts.

A Games which was to have portrayed the host positively as an exciting city in a vibrant nation at the vanguard of a new world economic order has, instead, served only to drain its reputation as well as its coffers.

The organising committee, city of Rio and Brazil’s national government will be desperately hoping that events during the Games themselves in the full glare of global publicity will be enough to change the balance of perception and contribute to a positive PR legacy.

It’s an issue which is important not only for the hosts, but also for the International Olympic Committee which needs a healthy pipeline of bidding cities to deliver its events in the style to which the world has become accustomed. In recent times there have been plenty of indications that the public has become increasingly cynical about the costs and benefits of hosting the Games.

The IOC does not want to re-visit the late 1970s and early 1980s, when it struggled to find hosts, but the withdrawal of Stockholm, Hamburg and Munich from summer and winter Games bids after referenda, allied to Boston’s decision not to proceed as the USA candidate for 2024 because of negative public sentiment, suggest that there is still work to be done to persuade the world that hosting the Games is unquestionably a good thing to do.

Original budget

According the Oxford Olympics Study 2016, produced by Bent Flyvbjerg, Alison Stewart and Alexander Budzier of the Said Business School, University of Oxford: “For a city and nation to decide to stage the Olympic Games is to decide to take on one of the most costly and financially most risky type of megaproject that exists, something that many cities and nations have learned to their peril.”

That’s a conclusion based on a history of massive cost overruns against original budget. The average Olympic cost overrun since 1960 is 157 per cent, far higher than for any other type of major civil project.

The report focuses only on what the researchers define as “sports costs” and ignores broader infrastructure development expenses. So a new basketball arena would be included, while a new airport terminal or the road from it would not.

It’s worth noting that these are not the same as “operational costs”, incurred by the local organising committee simply to operate the Games. In the case of London 2012, these were in the region of $3 billion of the overall spend. In fact, many of the arguments around the real cost of staging the Olympic Games centre on disagreements as to what can justifiably be included in the budget and what would, or should, have been built irrespective of the Games coming to town.

Even a small risk of a 50+ per cent cost overrun on a multi-billion-dollar project should concern government officials and taxpayers

The average cost of an Olympic Games in the last decade has been $8.9 billion, with London 2012, at $15 billion, and Sochi 2014 ($21.9 billion) topping the expense league. But Rio 2016 has reversed the upward trend, in part due to using some facilities which were a legacy of its hosting of the 2007 Pan American Games, reducing the need for new-builds.

The report draws this conclusion: “The high average cost overrun for the Games, combined with the existence of outliers, should be cause for caution for anyone considering hosting the Games, and especially small or fragile economies with little capacity to absorb escalating costs and related debts.

“Even a small risk of a 50+ per cent cost overrun on a multi-billion-dollar project should concern government officials and taxpayers when a guarantee to cover cost overrun is imposed. [That’s] because such overrun may have fiscal implications for decades to come, as happened with Montreal, where it took 30 years to pay off the debt incurred by the 720 per cent cost overrun on the 1976 summer Games, and Athens 2004, where Olympic cost overruns and related debt exacerbated the 2007-16 financial and economic crises.”

While that conclusion might be seen as representing a significant barrier to cities in democracies where financial decision-makers are responsible to the electorate and answerable for their failures, the picture is not all gloom and doom.

Financial achievements

Although there are examples of spectacular overruns, Rio 2016 appears to be reversing the trend in key areas. According to the Said report, not only is the overall cost of Rio lower than the average, its cost-per-event and cost-per-athlete number are also lower and, at 51 per cent, its cost overrun is also significantly lower than all but Beijing and Athens.

Those relative financial achievements may have been somewhat lost amid the brouhaha surrounding other aspects of the Games buildup, but do suggest a more realistic approach to finance and financial control.

The IOC’s concern to keep costs down without losing the essence of the Olympic Games was a key issue in the 2014 election of Thomas Bach to the IOC presidency.

The first recommendation of Agenda 2020, the ‘roadmap’ report produced after a wideranging consultation process, was for a: “new philosophy to invite potential candidate cities to present a project that fits their sporting, economic, social and environmental long-term planning needs. Shaping it more as an invitation and introducing an ‘invitation phase’ – during which cities considering a bid will be advised about the opportunities this new procedure offers, in particular in regard to legacy and sustainability. The organisation of sports and events outside the host city and even, in exceptional cases, outside the host country could also be allowed, always respecting the integrity of the Olympic Village.”

This was a major step. Instead of the IOC simply overlaying its blueprint on a potential host, it would work with the cities to create a more empathetic relationship between rights-owner and licensee, a move which could be expected to keep costs down by making better use of facilities and features already in place.

But on any balance sheet spending has to be seen against income and Olympic host cities get to keep ticket and merchandise revenue, sell local sponsorships and receive a contribution from IOC broadcast rights sales. In the case of the London 2012 Games, the operating budget of £2 billion was balanced by approximately £1 billion from the IOC, £500 million in ticket sales, £700 million in sponsorship and £100 million from the sale of licensed products.

Bidding is now being carried out against backdrop of a crisis in perceptions of the integrity of sport

So while those revenues effectively cancelled out one key tier of directly related costs, the argument over whether hosting the Olympic Games is worth it has to focus on broader issues. Which brings us on to the ‘L’ word, Legacy.

In theory, a well-planned and executed Olympic Games will deliver legacy benefits which far outweigh the total costs. The most obvious of these are new sporting facilities and new or upgraded infrastructure, ranging from roads to railways, airports and housing.

There are also business benefits to be gained. In the aftermath of London 2012, the UK Trade & Investment organisation produced a report claiming that the Games had produced a £9.9 billion boost for the British economy. Of this, £2.5 billion was accounted for by new overseas investment triggered by the Games, £5.9 billion was down to sales driven by Olympic-related promotions, while £1.5 billion was high-value overseas sales by companies responsible for delivering the Games, such as venue architects whose work had been showcased.

Health and well-being

On the face of it, that £9.9 billion together with the £2 billion of direct revenue to LOCOG (the London Organising Committee) suggest that the books were well and truly balanced, even before the social and economic legacy of the redevelopment of a previously derelict area of

East London, and any impact on Britain’s sporting culture and the health and well-being of the nation are taken into consideration.

But those figures were roundly criticised as optimistic by financial experts and, as recently as July, David Goldstone, chief executive of the London Legacy Development Corporation, said that while London 2012 had been a successful event, some of its legacy benefits may have been exaggerated.

What is for sure is that the area around the Olympic Park has 24,000 new homes – many of them tagged ‘affordable’. Five permanent sports venues are in use and the Olympic Park has attracted 10 million visitors since the Games.

The closest London 2012 had to a ‘white elephant’ was the Olympic Stadium itself. While still a multi-use facility which will hold the 2017 World Athletics Championship among other events, it has now become the home of a Premier League football club. The move was controversial, with some £230 million being spent to retrofit the stadium for football use, and West Ham, which plays in the world’s richest league, paying an annual rent equivalent to half the salary of one of their star players.

But while London 2012 delivered on its legacy promise in many ways, its aspiration to ‘Inspire a Generation’ to play sport has yet to be proved. In fact, some figures from Sport England suggest that participation has fallen across the board since the Games, although certain sports have seen spikes.

The London example underscores the complexity of the Olympic hosting equation. Costs can be high and prone to extreme variation, while benefits can be difficult to measure.

So what does that mean for the future of Olympic bidding?

The strong field of world-class cities lining up for the 2024 summer Games suggests that all is well, although Jon Tibbs, CEO of the JTA consultancy which has run strategy development and international relations for a number of bids and was key to the successful Sochi 2014 campaign, believes that economic and legacy issues are just the start of the issue for potential bidding cities.

Integrity of sport

“Bidding is now being carried out against backdrop of a crisis in perceptions of the integrity of sport,” he says. “It’s an issue for the cities, the IOC and other stakeholders, and the IOC knows that the bidding process has to be absolutely transparent, particularly at a time when, after the issues at Fifa and the IAAF, there is such a focus on good governance in sport.

“That the bidding environment itself is more heavily regulated is perhaps inevitable and everybody has to work hard to avoid anything which could possibly be misconstrued. That’s because of a crisis of confidence and as a result, bidding cities are having to adapt a little. But they are flexible enough to do that. Thomas Bach’s Agenda 2020 vision is providing the drumbeat for the bidding process and, so far as 2028 is concerned, I think the field will be strong. I expect some of the cities which are not successful for 2024 to come back, while there will be a continued interest among cities in developing markets.

“I am sure the Middle East will be active and that there may be a bid from South Africa after the Commonwealth Games.

“The outlook is definitely healthy for the summer Games and it is promising for the winter Games. The IOC is working hard behind the scenes to promote the benefits of bidding and hosting.” 

 

To read more about Brazil and its hosting of the Olympic Games click the links below:

Rio 2016 | Has cost cutting compromised security at the Games?

Country focus | Sports marketing in Brazil

Country focus | The TV rights and media market in Brazil

Country focus | The event hosting landscape in Brazil

 

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