Faster, higher, costlier

Even as a big fan of athletics I must confess to ambivalence ahead of the Olympic Games, being unsure of the wisdom of them taking place when the vast majority of Japanese did not believe they should go ahead this year. In the event they provided a welcome distraction with a number of great track performances to whet the appetite (world record performances in the men’s and women’s 400m hurdles being particular highlights). Technologically, broadcasters met the challenge of delivering the games superbly. The BBC, for example, which usually sends large teams of reporters out to the host city, managed to cover the games from its studio in Salford (5865 miles or 9466km from Tokyo) and if they had not told us, we may not have been any the wiser.

The Olympic legacy: A big bill

Now that the Games are behind us, many of us will miss waking up to our daily fix of Olympics news. But as the Olympic juggernaut moves on to Paris in three years’ time, spare a thought for the good people of Tokyo who will be left with the costs of dealing with an event which comes with a considerable bill attached. According to Bent Flyvbjerg and his co-authors who have looked at all Olympic Games (winter and summer) since 1960, “at 156 percent in real terms, the Olympics have the highest average cost overrun of any type of mega-project. Moreover, cost overrun is found in all Games, without exception; for no other type of mega-project is this the case” (see chart below). The 1976 Olympics, held in Montreal, resulted in a cost overrun of 720% relative to budget and saddled the city with huge debts for the next 30 years. Not for nothing was the Olympic Stadium nicknamed "the Big Owe".

Tokyo is living down to these expectations. According to Victor Matheson and Andrew Zimbalist, “Tokyo was awarded the hosting rights in 2013 with a bid of $7.3 billion. Yet a government audit has shown the total cost to approach $30 billion.” Even allowing for a $1.3 billion defrayment contribution from the International Olympic Committee (IOC), that is a serious cost overrun. Matheson and Zimbalist reckon that around $3 billion of the cost overrun can be attributed to Covid-related expenditure.

In order to estimate the net financial position we need to take account of revenue where the pandemic has had a significant impact. Not that the host city ever gets a fair slice of any revenue, even in the good times, since the IOC creams off most of the TV revenue and gives only a small proportion back to the host (chart below). Consequently, the host bears most of the financial risk associated with staging the Games whilst the IOC generally gets most of the benefits (the same is true of World Cups, where FIFA takes the largest slice of the revenue). This time around matters were complicated by the enforced absence of spectators which resulted in around $800 million of lost ticket sales whilst it is estimated that Tokyo lost out on $2 billion of associated tourist revenue.

Adding together the Covid-related costs and revenues implies a hit to the bottom line of around $6 billion (almost as much as the event was scheduled to cost when the bid was first submitted in 2013). But even stripping out these special factors, the underlying cost of the Games is almost $23 billion – a 215% increase over the original budget. Incidentally, it is reported that had the Games been cancelled, the IOC would have had to refund $4 billion to its broadcast partners. Unless there are other penalty clauses in the agreement between the organising committee and the IOC, it would have been cheaper for Tokyo to refuse to hold the games than incur the Covid-related hit.

Reform of the process is clearly needed

Questions have been raised over the years as to whether the current model, in which a new host city is chosen every four years, is sustainable. The Tokyo experience has raised these questions to a new level, particularly with regard to the fiscal costs of supporting the economy in the wake of the pandemic, not to mention environmental concerns. This is not to deny that hosting an Olympics is a fun event – the 2012 Games in London will live long in the memory of those who experienced them. But cities are increasingly unwilling to bear the financial costs of acting as host. Boston, Budapest, Hamburg and Rome all withdrew their bids for the 2024 Games, leaving the field clear for Paris, whilst in an unprecedented action the 2028 event was awarded to Los Angeles without even making a call for other bidders.

History records that the LA Games in 1984 were the only one in modern times to make a profit. This was achieved because the organisers were able to leverage off existing infrastructure rather than create all the facilities anew which is where the problems lie. The cost problem is exacerbated by the fact that, to quote Matheson and Zimbalist, “a winning bid not only needs to show how the host will successfully manage the competition … but also how it will generate more amenities, more prestige, and more revenue to the IOC than any other competing bid, leading to an arms race where proposals are increasingly lavish and increasingly expensive.” But despite the claims made by all organising committees that the Olympics will act as a useful economic regeneration exercise, the reality is rather different. As Stephen Billings and Scott Holladay argued in a 2011 paper, “proponents argue that this investment will pay off through increased economic growth, but research confirming these claims is lacking.”

One of the selling points of the 2012 Games in London were the legacy aspects. Whether or not these have been delivered remains a point of contention even to this day. Similarly, investment for the 2016 event in Rio was justified on the basis of its impact on regenerating the local community. This has clearly not been delivered. Organising committees also like to highlight the tourism benefits and here, too, the evidence is mixed. Following the 1992 Olympics, Barcelona did rise from eleventh to the sixth most popular destination in Europe but London in 2012 received fewer tourists than expected as security concerns and expectations of overcrowding dissuaded a lot of potential visitors.

The evidence thus suggests that the direct benefits of hosting the Olympics are dubious at best and possibly non-existent. So why do countries want to put themselves through the ordeal? The one-word answer is simply “prestige.” However, democratic countries facing budgetary constraints may be less willing in future to step up to the plate but those with a less robust democratic tradition may be more willing to do so since fewer questions will be asked about the finances. In recognition of the fact that the field of potential bidders may narrow in future, the IOC has proposed to evaluate bids based on economic and environmental sustainability, which is a good start. Given the difficulties in judging costs and benefits ex ante, a more sensible idea may be for the IOC to choose a permanent site, thus lowering the long-term costs of holding the Games. In the event that this proves too controversial, it may consider a small number of sites based in cities (or regions) which already have a substantial amount of infrastructure in place, opening up the prospect of a rerun of London 2012 or Tokyo 2021 in the not-too-distant future.

As a sports fan who appreciates the significance of the Olympics and its impact in bringing people together, I am much in favour of continuing in the present vein. But they cannot be allowed to continue at any price. At a time when the world is acutely aware of environmental considerations there is a strong case for reining in the costs. It may be too late for the residents of Tokyo, but Parisians take note. It’s your turn next.