Undercover Economist

How do you make the Olympics pay? Fudge the figures

‘Hosting the games is not unlike building a church for one single, glorious wedding celebration’

Rio de Janeiro is about to host the Olympic Games. Good luck to it. Brazil is burdened by a political struggle that has seen President Dilma Rousseff impeached, a sharp economic downturn and a public health crisis in the form of the Zika virus. On top of that, Rio has to stage the Olympics.

Don’t get me wrong: I loved the London 2012 Olympics. It was a superb spectacle in its own right and there’s an impressive legacy — some great sporting facilities, a lovely park and new housing in a city that desperately needs it. I just doubt that it was worth what it cost. Very few Olympic Games are.

This shouldn’t really be a surprise: hosting the games is not unlike building a church for one single, glorious wedding celebration. The expensive facilities will only be fully used for a short time. They will then either be underutilised or, at best, cleverly reworked at some expense. It’s possible to adjust and dye a wedding dress so that it can be worn again but this is a pricey way to get a posh frock.

A new survey by economists Robert Baade and Victor Matheson provides a good starting point to understand the problem. Every host of the summer Olympics from Seoul in 1988 to Rio in 2016 has spent many billions of dollars on the games. The cheapest by some margin was Atlanta in 1996, which cost the equivalent of $3.6bn in today’s money; the most expensive was Beijing in 2008, a national vanity project that cost an astonishing $45bn. A reasonable assumption is that today it costs at least $10bn to host a summer Olympics — the last to be cheaper was Sydney in 2000. (These numbers are collated by Baade and Matheson.)

Given likely costs of more than $10bn, an Olympic Games is all but guaranteed to lose money. A host city might expect roughly $4bn in revenue: $1bn from ticket sales, $1bn from sponsors, $1bn from local broadcast rights and $1bn as a share of the International Olympic Committee’s global broadcast deals.

How on earth to make the numbers stack up, then?

The answer is simple: fudge them. The London Olympics and Paralympics provide a shining example. Afterwards, the government reported that the final cost of £8.77bn (around $13bn) was more than £500m “under budget”, which is true after a fashion, since the budget had been revised to £9bn several years before. But the original estimate for the games, back in 2005, was £2.4bn. If you can say that an event that cost almost four times the original estimate was “under budget”, you can say anything you like. At least the London organising committee didn’t emulate its counterpart at Nagano, the host of the 1998 Winter Olympics, and burn its financial records after the event.

Organising committees are always sure to hire consultants to produce enormous estimates of the spillover benefits of hosting the games. These consultant reports generally ignore substitution effects — for example, that a dollar spent on an Olympic ticket might well be a dollar not spent on some other local attraction. They also gloss over the risk of “crowding out”, where, fearing crowds and high prices, some tourists avoid Olympic cities. The UK had fewer visitors during July and August in 2012 than in the same months in 2011; Beijing’s hotels suffered a fall in occupancy during the 2008 Olympics.

Faced with PR fluff, the rule of thumb among serious economists is to divide all such benefits by 10 to get a more realistic figure. Most rigorous studies have found very modest spillover benefits at best.

In the case of the Sydney Olympics, researchers concluded that the wider Australian economy had actually been damaged by hosting the games.

But what if it’s not enough just to claim that hosting the games makes sense? What if the host city actually hopes to turn a profit, rather than merely forecast one — or, at least, to produce broader benefits that justify the expense? That’s a tall order, but here are three suggestions.

First, make sure the games take place during a recession, so that the spending can boost aggregate demand. Rio did get this one right but, of course, nobody can forecast recessions eight months ahead of time, let alone eight years.

Second, be a hidden gem, so the games serve to spotlight your qualities and boost tourism for many years afterwards. Rio, London, Beijing, Athens and Sydney hardly qualify here but Barcelona did: in 1990 the city was half as popular as Madrid with tourists but, by 2010, it had outstripped its rival. The Olympics can perhaps take some credit. Utah, similarly, enjoyed greater success as a destination for skiers after the Salt Lake City winter games. (Candidates for the 2024 games include Paris and Rome, not exactly well-kept secrets — and Budapest, which is a more plausible candidate to earn a lasting boost from tourism.)

Third, and most importantly, launch a cut-price bid in the wake of a disastrous games. Los Angeles in 1984 achieved the near-impossible and turned a profit because, after the ruinously expensive Montreal event of 1976, LA was the sole bidder for the games. They were hosted in the Los Angeles Coliseum, an ageing stadium that had been second-hand even when it first hosted the Olympics in 1932.

The best way to host a profitable Olympics is to do it twice, both times on the cheap.

Written for and first published at ft.com.

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