The economics of the Olympics – A golden opportunity or a bronze bust?

Welcome to Finance and Fury. As you might have seen, Brisbane has won the bid for the 2032 Olympics – but is this a good thing for the SEQ economy and the people living in it? in this episode we will have a look at the economics of the Olympics – we will Look at the costs and benefits of hosting the games – to see if firstly Brisbane/QLD is going to benefit – and if there is economic gain for being the host –– Lots to unpack here – lets get into it

Introduction – The Olympics have evolved dramatically over time –

1. From going all the way back to the Ancient Greek times – to the first modern games which were held in 1896
   1. Over time – like many things – Olympics became more commercialised – as over the past 60 years, both the costs of hosting the games and the revenue potentials have grown rapidly – but it seems like the costs have growth at a greater rate than the revenues – sparking controversy over hosting the games – as to whether it is of any benefit to the host city
   2. A growing number of economists argue that both the short- and long-term benefits of hosting the games are at best exaggerated and at worst non-existent, leaving many host countries with large debts and maintenance liabilities – so is this true? And if so, what does this mean for QLD and Australia at large
2. I’ve got the data from a few studies – but the main one we will be looking at is – “Going for the Gold: The Economics of the Olympics” – link in the show notes at www.financeandfury.com.au 

Costs Incurred When Hosting the Olympics

1. On the cost side – there are three major categories – 1) general infrastructure such as transportation and housing to accommodate athletes and fans – 2) specific sports infrastructure required for competition venues – 3) and operational costs, including general administration as well as the opening and closing ceremony and security.
   1. General Infrastructure – One of the major expenses is the general infrastructure to accommodate the anticipated wave of tourists and athletes that descend upon the chosen city – cities commonly need to add roads, build or enhance airports, and construct rail lines to accommodate the large influx of people as well as build an Olympic Village to host the athletes
      1. The International Olympic Committee (IOC) requires that the host city for the Summer Games have a minimum of 40,000 hotel rooms available for spectators and an Olympic Village capable of housing 15,000 athletes and officials.
   2. Event Infrastructure – The Olympics also require spending on specialized sports infrastructure. Because of the somewhat obscure nature of many of the events, most cities do not have the facilities in place to host all of the competitions – Think about some of the events, from cycling, needing a velodrome to skateboarding which has been recently added – there are now 41 different sports, of which there are about 340 events all needing different facilities – all of these events and sports need tailored spaces to facilitate the events
   3. Additional Expenses – Once the facilities are in place, the Games require spending for operations including event management, transporting and accommodating the athletes, as well as the opening and closing ceremonies, and security
2. So, what does this all cost? An accurate financial accounting of Olympic expenditures in various cities is very hard to find
   1. Firstly – It can be difficult to disentangle spending on Olympic building projects from planned infrastructure improvements that might not be attributable directly to the games – such as the Brisbane Airport getting a second runway
   2. Secondly – many of the costs are incurred behind closed doors and never fully disclosed – As an example – Submitting a bid to the IOC to host the Olympics can costs millions of dollars. Cities typically spend $50 million to $100 million in fees for consultants, event organizers, and travel related to hosting duties – as an example – Tokyo lost approximately $150 million on its bid for the 2016 Olympics and spent approximately $75 million on its successful 2020 bid
      1. But these costs are private due to reforms taken by the IOC – The people of a city don’t get a say as much anymore as to whether they wish to host the Olympics – the public used to in plebiscites but in many cases, people voted to not host the games – so what the IOC has done in response is to introduce a reform, one of which is putting all the bidding behind closed doors. They’re sick and tired of being embarrassed by cities dropping out. So, the process is now secretive.

What are the Benefits of Hosting the Olympics –

1. There are some major categories of benefits that exist in the short term and long term: the infrastructure and employment in the lead up, benefits of tourist spending during the Games; the long-run benefits or the “Olympic legacy” which might include improvements in infrastructure, foreign investment, or tourism after the Games – but also intangible benefits such as the “feel-good effect” or civic pride
2. Short run benefits – Employment, Infrastructure and revenues and the intangibles
   1. Employment and spending in pre-Olympics phase – Any large public works project such as the Olympics can lead to a short-run increase in economic activity in the run-up to the opening – but these are dependent on the level of slack in a region’s labour and capital markets (i.e. if there is higher levels of unemployment) – and the GDP figures can be inflated by expansionary fiscal policy (i.e. through government expenditure)
      1. Many Government forecasts show that the short-term benefits in revenues are higher than the costs of the games – However – these before-the-Games predictions are rarely matched by reality when economists look back at the data
      2. the studies show actual economic impacts that are either near-zero or a fraction of that predicted prior to the event. Nearly all of the analyses follow the same pattern. Researchers collect any type of regional economic data that is readily available such as employment, personal income, GDP, tax collections, or tourism figures, and then analyze the data before, during, and after the Olympics in search of any changes that occur either during the event or in the preparation stages – their findings are that there is no real changes

• I won’t go through all the numbers for each of the games – but there can be an initial increase in employment for jobs whilst the construction is going on – but these drop off soon after these works have been completed – so it is a temporary boost at best
  1. But this is only really a benefit when employment conditions are considered ‘sack’ – the construction and infrastructure industry within Australia is not hurting for work – from clients I speak to in this sector, this is the busiest they have ever been – if things continue then these jobs won’t be new jobs – but a re-allocation of existing jobs – therefore little economic benefits will be created – this has been the case in many of the previous games as well – those working on the construction were already employed – the unemployment numbers didn’t reduce – due to desire and skills – if you are someone who is unemployed in the hospitality or business sector, are you going to all of a sudden go out and get qualified in contribution and apply for a role in this sector for a few years whilst things are being built for the games? The answer is likely – no!
  2. Also – the economic gains through realised profits are concentrated to the construction, hotels, and hospitality industries – many of these can be international companies – so the money flows out of the nation

1. The major potential benefits comes in the form that any basic infrastructure improvements have the greater potential to continue benefiting the cities into the future – such as transportation benefits –
   1. Plus – Whatever the bill in the end is – half of the costs are covered by the Federal government and the rest from the state – So if QLD upgrades roads and transportation, the Federal Government covers half the costs
2. initial revenues during the games – These are broadly classified into Broadcasting rights, tourism, sponsorship, ticketing and licensing
   1. sponsors, media, athletes, and spectators typically visit a host city for six months before and six months after the Olympics, which brings in additional revenue – plus the influx of people that come into the country for the games –
   2. But who gets this revenue? These are split between the IOC and the host city –
      1. television rights have represented nearly half of total revenues of the games, with the IOC sharing around 30% with 70% going to the local Organizing Committees. Revenues from international sponsors are split between the IOC and the Organizing Committees, while ticket revenues, domestic sponsorships, and licensing fees are kept by the host city.
      2. There is no doubt that money is made through hosting the games – but the question is whether these revenues make up the money spent on the games – because otherwise the state is left with larger debts to service as well as potentially unused facilities costing further maintenance costs, meaning more debt – and QLD already has pretty large debts
   3. Another form of economic boon that is advertised is tourism for the economy at large – but is this level of tourism an increase to the normal levels?
      1. Tourism – the “crowding out effect” occurs in relation to cities hosting the Olympics – this is when the crowds and congestion associated with a mega-event dissuades other regular tourists or business travellers from visiting the host region – Every host country has seen a significant drop in tourists in the year that the Olympics are being hosted, nullifying any effects that the influx of people that Olympics may have brought with it – regular tourists avoid the area
      2. This can bring up another major failing of standard before-the-fact economic impact analysis in regards to tourism – this is the assumption of the multiplier for expenditures – Someone going to the Olympics may have less of a multiplier than a regular tourist –
         1. Costs spent on tickets for travel, accommodation and the games are high – accommodation prices increase as well as travel tickets – leaving less to be spent elsewhere
      3. Intangibles – While spending directly associated with the Olympics is typically insufficient to cover the costs of staging the Games, short-run intangible benefits must also be considered. Host cities frequently experience a “feel-good effect” both in the run-up to and in the wake of mega-events
   4. Long run benefits – First, the Games might leave a legacy of sporting facilities that can be used by future generations. Second, investments in general infrastructure can provide long-run returns and improve the liveability of host cities.
      1. A positive legacy of sporting facilities is the least promising of these claims – due to the nature of the sporting events sponsored by the Olympics, host cities are often left with specialized sports infrastructure that has little use beyond the Games, so that in addition to the initial construction costs, cities may be faced with heavy long-term expenses for the maintenance of “white elephants.”
      2. Long run issues – Many of these sites are going to be white elephants – The reason why they didn’t exist before the Olympics is because there was no economically viable use for them – so once this Olympics ends, this factor doesn’t change – Many of the venues from the Athens Games in 2004 have fallen into disrepair. Beijing’s iconic “Bird’s Nest” Stadium has rarely been used since 2008 and has been partially converted into apartments.
      3. General infrastructure improvements clearly have the potential for better returns if they are implemented well – but there is always the issue of the athletes’ villages – in most cases these are converted into another use after the games – I have stayed at the Whistler Olympic Village accommodation as it was converted into a hostel – this has been the case with many Olympic villages, where they are converted into dormitories for universities, hostels or other accommodation sites.

Let’s look at the estimates for the Brisbane games and compare this to the previous games –

1. The Brisbane bid documents forecast most of the Games income – these are all in 2032 Dollars – the revenue will come from ticket sales of around $1.2 billion, domestic sponsorship of $1.5 billion, broadcasting rights of around $800m, and the IOC would contribute another $900 million – Including other Revenues the total is estimated to be $4.5bn AUD
   1. The bid predicts economic benefits of hosting of around $17 billion nationally, with about $8 billion of that for Queensland – This is a pretty staggering estimate – and is likely using some pretty generous assumptions – remember this is against an estimated cost budget of around $5bn
2. The real issue is the cost estimates – Past Games have shown that the final budget for staging the greatest show on earth is many times more than originally planned- The budget has ballooned to US$15.4 billion, twice its winning bid of US$7.5 billion in 2013. And it could be more – audits by the Japanese government are pinning the figure at more than US$25bn to $30bn – there were additional costs due to the delays, but these are estimated to be around $3bn – the major issue for them is the lack of ticket sales and tourism – leading to one of the biggest losses for hosting the Olympics
   
   
   7. Is Tokyo a stand out in overspending? Looking at past games – Athens 2004 – Cost estimate of $3bn, spent $16bn, Beijing 2008 Cost estimate of $20bn and spent $45bn (most ever), London 2012 – Cost estimate of $5bn and spent $18bn, Rio 2016 – Cost estimate of $14bn and cost $20bn (smallest blowout) – Tokyo – Cost estimate of $7.5bn then spent at least $25bn
      
      
      2. Minimum blowout of 42%, maximum of 433% – average of around 2.5 times for these games – Going back to Every Olympics since 1960 has run over budget, at an average of 172% in inflation-adjusted terms
      3. Why do we expect the QLD Government to be any different? May see a cost blowout from the original bid to be around the $13bn mark –
   8. The one saving grace is that Brisbane’s bid, similar to that of the upcoming Paris and Los Angeles Summer Olympics in 2024 and 2028 respectively, will focus on reusing existing venues, refurbishing existing sites and using temporary venues where possible (i.e. ones to be destroyed or removed after the games are done).
   9. For south-east Queensland, that means using a lot of the venues established for use hosting the Commonwealth Games in 2018 – also instead of the white elephants of Athens and Rio, the hope is that any venue built will also be used down the track – but this is still only a hope – any newly constructed venue is likely to be underutilised

The Bottom Line

1. Hosting the Olympics tends to result in severe economic deficiencies for cities – there are some exemptions however
   1. If a city already has all of the infrastructure to host a games and doesn’t need to outlay any capital – then the costs will be negligible compared to the revenues – however, as has been the trend, cities selected have all needed to increased their infrastructure and facilities to host an Olympics
   2. Therefore – The economic impact of hosting the Olympics tends to be less positive than anticipated – as most cities have ended up falling massively in debt after hosting the games – and many are left with needless facilities that unless they can be repurposed, end up costing the tax payer on an ongoing basis
2. This begs the question – If the Olympic Games tend to offer only a low chance of providing host cities with positive net benefits, why do cities keep lining up to host these events?
   1. First, even if the overall effect of holding the Games is typically negative, large projects will still create winners and losers – most bid to host the games are spearheaded by leaders in the heavy construction and hospitality industries – which are the two sectors of the economy that stood the most to gain from the city hosting the Olympics.
   2. Second, economic concerns may only play a small role in a country’s decision whether or not to stage the Olympics. The desire to host the Games may be driven by the egos of a country’s leaders or as a demonstration of a country’s political and economic power.
      1. As an example – is difficult to explain Russia’s $51 billion expenditure on the 2014 Sochi Winter Olympic Games or China’s $45 billion spend in the 2008 Beijing Summer Olympics
      2. Until you look at these are countries where the government is not accountable to voters or taxpayers, it is quite possible for the government to engage in wasteful spending that enriches a small group of private industrialists or government leaders without repercussions

• This can also be the case for democratic states that have an disengaged voting base

1. The best situation for a nation the benefit from hosting the games is that the city is a large developed area with a high demand for sports and already existing facilities and accommodation – therefore the costs can be kept to a minimum and the benefits can be in the form of new revenues –
2. If a city is relatively small – such as Brisbane – then the games in the long term can be a total waste

Going for the Gold: The Economics of the Olympics – https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.30.2.201

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