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Few Profits, Many Cost Overruns Expected for Olympic Hosts

Hopeful cities Chicago, Rio de Janeiro, Tokyo, and Madrid have already spent tens of millions of dollars each during the bidding process alone – on consultants, staff, and beautification projects. That spending is just the pregame in Games budgets that range from $4.8 billion for Chicago to $14.4 billion for Rio de Janeiro.

But, if earlier Games are any indication, the final cost of hosting will likely far exceed current estimates. Since Vancouver was awarded the 2010 Winter Games six years ago, its Olympic budget has grown from just over $400 million to around $1.6 billion. London’s 2012 budget for the Summer Games has quadrupled to $15 billion since the bid was won, and the costs continue to rise.

“If [cities] came out at the beginning with a true estimate of what the costs would be, they would never get anyone to support them,” says Brad Humphreys, chair in the economics of gaming at the University of Alberta in Canada.

With frequent overruns, few cities end up recouping any profits after the athletes have gone home. Even cities that cite surpluses, such as 1984 host Los Angeles and 1998 host Calgary, often don’t include total expenditures in security and indirect costs in the final tally. And other cities find themselves far in the red. Montreal, host of the 1976 Summer Games, only finished paying off its Olympic debt in 2006. Officials in Nagano, Japan, spent so much on the 1998 Winter Games that they destroyed their financial records.

“It’s fair to say that the bulk of the serious studies on the costs and benefits of the Olympics suggest that, in terms of direct benefits, they are unambiguous money losers,” says Mark Spiegel, vice president for economic research at the Federal Reserve Bank of San Francisco. (His comments here are his own, and do not reflect the position of the Federal Reserve Bank of San Francisco.)

Despite best estimates on infrastructure costs and security, overruns are often unavoidable, say experts. “The infrastructure costs are the big ticket items and there are just overruns there, not just with the Olympics, and they are substantial all the time,” says Humphreys.

“A lot of funds that are expended on stadia are expended on areas that are not optimal for the long run,” says Spiegel. Part of the well-known Bird’s Nest stadium in Beijing, for example, is now being converted into a shopping mall. The huge stadium has come with an equally whopping maintenance bill – $15 million annually – and managers hope rents from retailers will make up the current shortfall.

Still, there are some indirect benefits that are associated with being host to the Games. In a study Spiegel recently co-authored called “The Olympic Effect,” evidence from past Games indicates that host countries receive a substantial and permanent boost in their international trade. On average, international trade for host countries increased 30 percent after the Games.

Interestingly, even countries that simply bid for the Games receive a similar boost. “It’s not the velodromes and the construction expenditures [that benefit countries],” says Spiegel. “It’s the signaling effect — that when countries try to host the Olympics, they say ‘we are a country ready for the prime time.’

“Each city is different,” making it difficult to compare costs and benefits, says Holger Preuss, a professor at the Institute of Sport Science at Johannes Gutenberg University in Mainz, Germany. But “if you are looking to use the Olympics to promote your city as a destination for tourism or international investment, [hosting] is good.”

The publicity boost from the Games is also often cited by organizers who claim that tourism receipts will increase for hosts not just during the Games, but after — Barcelona being an oft-cited post-Olympics success story. Chicago 2016, the official organization for the city’s bid, commissioned a study that predicts the Olympics will produce a $19.2 billion economic impact on Cook County, where Chicago is located, largely in tourism and job creation.

But a Michigan-based economic research organization recently released a report indicating that the Games would have a far smaller local effect – $4.4 billion – and suggested that the Chicago2016 study improperly counted normal summer tourism that would occur regardless of whether Chicago got the Games. It also suggested that if revenues or donations fall short of projections, Chicago could be left sitting on a substantial bill.

That prospect has left many Chicagoans to root for rival Rio. ChicagoansForRio.com, run by a Chicago-based advertising executive, is the most overt display of local citizens who don’t want such large expenditures and the possibility of overruns hampering development in a city already hurting from the economic crisis. A poll released this month by the Chicago Tribune showed residents almost evenly divided, with 47 percent in favor of the bid and 45 percent against.

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