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Banking The cost of the Olympics

The cost of the Olympics

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The Summer Olympics in Rio de Janeiro ended with a closing ceremony full of flash and color (and a bit of rain). Overall, an average of 27.5 million viewers in the United States tuned in to watch the events each day, making the 2016 Games the second-most watched Olympics hosted outside the United States, behind London 2012.

However, there has been a lot of speculation over the perceived benefits of hosting an Olympic Games given the high costs involved. The original direct cost estimate for the Rio Games was just under $3 billion, but by the opening ceremony on Aug. 5, Brazil had already spent about $4.6 billion on direct costs, an amount that obviously increased throughout the roughly two weeks of competition. One estimate places the total costs, including direct and indirect costs, at $12 billion. And the spending for the Rio Games is considered to be frugal compared with previous Olympics.

The cost for recent Olympic Games has skyrocketed. The direct costs for London 2012 were close to $15 billion while the Sochi 2014 Winter Games cost a staggering $21.9 billion. And those amounts do not include the indirect costs such as additional hotels and upgrades to transportation and other infrastructure. Although the International Olympics Committee (IOC) purportedly tries to help potential host cities learn from previous Olympics with the goal of lowering costs, it can claim only limited, if any, success in practice; host cities typically overrun their original cost estimates by a significant amount. On average, the Olympic Games end up costing 156 percent more than the initial budget. Every Olympic Games for which data are available since 1960 spent more than the estimate from the bidding process. For example, London 2012 overspent by 76 percent and Sochi 2014 cost 289 percent more than the budgeted cost. The worst instance was Montreal 1976, which overran its cost estimate by 720 percent and only paid off the debt after 30 years.

While Rio is projected to overspend by only 51 percent, this amount could be even more damaging for the nation. These costs come after Brazil already spent billions hosting the World Cup in 2014. And although Brazil was thriving seven years ago when it won the bid for the 2016 Olympics, all of these expenses now fall in the middle of the country’s worst economic recession since the 1930s, leading to a legitimate concern about the amount being paid out for the Games to the detriment of other areas of society. Brazil’s GDP is projected to contract by 4.3 percent this year and by another 1.7 percent in 2017, after falling 3.9 percent in 2015. While the cost of hosting an Olympic Games has been rising, it is even more detrimental in nations such as Brazil that do not have the capacity to absorb the soaring expenses and have proven incapable of getting all of the venues and support systems to needed levels.

Host cities are willing to pay the high costs for hosting the Olympic Games in expectation of receiving a return in the form of more tourism and investment, as well as intangible benefits such as civic pride and the chance to showcase the area to the world. Certainly, there have been some notable success stories. Los Angeles actually profited by $100 million from the 1984 Summer Olympics, mostly by using existing stadiums and blending public funds with corporate sponsors. The Barcelona Games in 1992 spurred much-needed infrastructure improvements for the city and helped support its renaissance, which can be observed today.

Overall, however, there is little evidence that the host cities actually reap a tangible and lasting benefit. While some claim that the Olympic Games are great advertising for the host country or city before millions of TV viewers during the event, it is still uncertain whether tourism increases for host locations. Many host cities are already well known so the extra exposure is likely to be minimal. In addition, Olympic visitors often replace other tourists who want to avoid the congestion of the Games. For example, Britain had 5 percent fewer foreign tourists during the month of the 2012 Olympics than the same month the year before. Even the lingering benefits of the global exposure may be problematic for Brazil, as shortcomings in facilities and support systems were widely chronicled.

The trend of expensive Olympics is likely to continue in the short run. The costs for the next Summer Games in Tokyo are now projected to total $15 billion, six times the original estimate of $2.5 billion. However, the IOC is continuing to emphasize cost containment. This pattern could aid Los Angeles, which is one of the finalists for the 2024 Summer Games. Early budgeting estimates a total cost of about $5 billion and organizers are even projecting a surplus of $161 million. The area also has a recent example of success in producing a profitable event. Only time will tell if the Olympic Games will truly experience a reality check. In the meantime, how about Team USA!

M. Ray Perryman is president and CEO of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.

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