The Strategist

Are Olympics worth the expense?

08/19/2016 - 14:40

In September last year, the International Olympic Committee announced five applicants to host Olympics 2024. These were European Rome, Hamburg, Paris and Budapest, as well as the American Los Angeles.

Great deal of choice, wasn’t it? Especially given the fact that even less expensive Winter Games 2022 had only two bidders – Kazakh Alma-Ata and Beijing, which eventually become the winner.

Later, however, some of applicants for the Olympics 2024 (for example, Hamburg) have withdrawn their proposals. Rome is also about scrap its plans for the future Olympic Games. Newly elected Mayor of Rome Virginia Raggi has repeatedly spoken out against the Olympics 2024 in the Italian capital during her election campaign. According to her, organization of this sporting event would be beneficial primarily for construction companies, yet would eventually lead to a huge debt in the capital's pocket. In her first interview at Mayor of Rome, she confirmed her position: "The Olympic Games now is not among priorities of Rome’s economic, and historical data strongly suggest that all host cities ended up with a huge debt". 

Is she right, or it is just a loud statement? 

The main item of the Olympics expenditure is urban infrastructure. A city should be capable to accept, settle, feed and transfer a lot of people at once. Above that, there must be sports facilities to hold the lengthy competitions. Amount of costs depends on original touristic and sports infrastructure of a future Olympic city.

For example, total budget for London 2012, according to official figures, amounted to $ 14.3 billion. Of these, sports facilities took away only 1/9 part (about $ 1.6 billion). The city built only 8 Olympic arenas (some were temporary) since other 23 buildings were already onsite. The Olympic Stadium with its 80 000 seats became the most expensive new building. Total cost of its construction amounted to about $ 750 million.

On the other hand, the transport infrastructure made a hole in London’s budget. The city spend about $ 3 billion, which was two times more than planned. It turned out that the subway system of the British capital was obsolete. For the sake of the Games, the authorities expanded and remodeled East and Northern London lines, Docklands Light Railway and the heavy rail routes incorporated as Overground in 2007 that run over Network Rail infrastructure in the process of major improvements. Above that, the city introduced bike rental system throughout the city. The city didn’t need to heavily invest in the local touristic infrastructure since the British capital was visited by 17 million people annually even without Olympics.

Rio seemed a good candidate for the Olympics 2016. The city had already hosted the 2014 FIFA World Cup and the 2007 Pan-American Games, so Olympic arenas were not a problem. However, scale of the forthcoming events compelled the authorities to open the wallet wide. Improvement of the city's infrastructure, including construction of the 4th metro line to connected touristic areas and the Olympic venues, took away about $ 10 billion. Other $ 4 billion were spent on construction of nine new sports arenas and reparation of old facilities. These costs did not scared Brazil in 2009, when the economy showed a steady growth of 7.5%. Yet, with onset of the crisis, the country found itself in dire need for money. The State of Rio even had to ask for financial assistance from the federal government.

Structurally, the entire Olympic budget can be divided into external and internal. External sources include donations of patrons, sponsorship, income from government agencies. Internal sources include revenue from sale of television broadcasting rights, Olympic symbols licensing, ticket sales, granting of rights to place information on the Internet, sale of Olympic goods, as well as from lotteries, sale of stamps, coins and other Olympic souvenirs.

Funding for specific Olympic Games (organization and staging) fall on the local organizing committee’s shoulders. The committee allocates funds from the IOC and the 95% of proceeds from ticket sales (5% of revenue from tickets goes to the IOC). Sometimes, the revenue distribution becomes a stumbling rock for national Olympic committees and local organizing committees, acting under the auspices of the IOC. At the 2012 Games in London, the British Olympic Association (BOA) and the London Organizing Committee of the Olympic Games 2012 (is pretty simple) had a quarrel. Ultimately, the parties have agreed that 60% of the proceeds would go to development of sport in the UK, 20% - to the IOC, and other 20% - to the BOA (BOA originally claimed 40%).

Meanwhile, Japanese hosts of the Olympic Games 2020 in Tokyo decided to save money. They are planning to hold five rounds of a national lottery. The authorities hope to collect more than $ 100 million. The first round will take place in the near future. 
One ticket costs only 200 yen (about $ 2), its sale will last until 6 September. Similar drawings will take four more times, up to the Olympic Games. Total prize pool is 202 million yen ($ 2 million). The revenues will be used for construction of sports venues and other infrastructure for the Games.

In general, the Olympics are a dubious and unreliable source of income. It may be advantageous to the IOC, but not to the host itself, and Rio is an excellent example here.

Back in 2007, Rio’s application implied $ 7 billion of expenses. The Brazilian economy was booming then - GDP grew, poverty was slowly declining, and commodity exports increased, which allowed to pay the external debt. In 2016, when it became clear that the Games budget has grown by 42%, the situation changed dramatically. In recent years, the country has been in a severe crisis. There have been recession (GDP fell by 3.8% in 2015), the unemployment rate reached a 12 years-maximum (10.9% in 2016), and May 2016 brought the largest primary deficit of $ 4, 68 billion. An unstable political situation, environmental problems, safety and health problems, associated with high levels of crime and Zika virus, caused many athletes to refuse the Olympics, and reduced number of spectators. Usually, attendance at Olympic competitions is about 90%. Rio is holding this rate at 70%.

Even bonuses promised by the IOC do not inspire the organizing committee’s optimism: analysts predict a loss of $ 120 million.