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Hosting the Olympics – a winning strategy?


Tom Xia

By

October 24th, 2013


Following the announcement of the 2020 Tokyo Games, Tom Xia analyses the intricacies of hosting the Olympic Games and whether it brings prosperity to the host nation.


On September 7th 2013, the International Olympic Committee (IOC) announced to the world that Tokyo would be the host for the 2020 Olympic Games, much to the sorrow of Madrid and Istanbul. It certainly wasn’t the most competitive candidate pool in recent years; Spain was in severe economic recession and boasted a 27% unemployment rate, while Istanbul’s reputation was tarnished somewhat due to a mixture of anti-government protests back in June, the bloody Syrian civil war, as well as a string of doping scandals among Turkish athletes.

If nothing else, the contest has demonstrated the lengths that countries will go to for the privilege of hosting the world’s biggest sporting party, with hundred-strong delegations from each of the candidate countries flying to Buenos Aires, Argentina, to give their final pitch. Still fighting to become the first predominantly Muslim country to host the Olympic Games, Istanbul has now been rejected a total of five times, while Madrid, having also lost consecutive bids in 2012 and 2016, is down three-in-a-row. Why are countries so persistent and keen to host the Olympics?

Economics definitely plays a major factor; indeed, Madrid’s bid rested on the premise that their hosting of the Olympic Games makes economic sense as a project that can help restore Spain’s economy. Crown Prince Felipe, former Olympic sailor and Spain’s flag-bearer at the 1992 Barcelona Games, said the bid was “both affordable and a responsible model for the future”, and that it presented an “opportunity” for Spain during the difficult economic times.

But is this really the case?

Certainly, the event is capable of generating an enormous stream of revenue and of spurring business in its host city – building infrastructure and creating employment opportunities across a variety of sectors, all culminating in a gigantic two-week burst of tourism. However, are the benefits, and they are plentiful, sufficient to outweigh the costs of bidding and hosting this international celebration?

Costs

Firstly, let’s consider the costs associated with a city’s long and arduous bidding process.

Cities first form local organising committees typically ten years before the start of the games, which compete nationally to become the country’s candidate, before competing on the international stage to be selected as the host. The committees must be able to convince the selection boards at each stage that their city will not only deliver an elaborate Games, but also demonstrate their city’s capability of hosting the spectacle.

Unfortunately, these local committees are driven and run by private business parties which individually stand to benefit from investment in the city’s infrastructure. These parties include construction companies, architectural firms, investment bankers, and lawyers, to name a few. They form an alliance and bring politicians in to bring their vision in to fruition.

The result is a classic example of the economical principal/agent problem, where the local organizing committee (agent) does not act in the best interests of the city (principal), but rather in their own self-interests. In this instance, the agent is in essence bidding according to their own sense of private gain (for its members) versus their private cost, rather than the city’s public benefit versus public cost. As it is ultimately the city that pays most of the expenses, usually through methods such as increased tax or cuts to public services, the agent’s private cost is miniscule compared to the amount they stand to gain. Consequently, it is very common to for local organizing committees, representing cities, to overbid and thus eliminate any potential economic benefit. Chicago reportedly spent a staggering $100 million in its losing campaign to host the 2016 summer games.

Secondly, let’s consider the costs for the ‘winning city’ in throwing the world’s biggest party.

London’s 1948 Olympics cost a grand total of $30 million in today’s money. The 2008 Beijing games, the most expensive to date, cost in excess of $40 billion. Tourism helps to offset the expense, but a spike in arrivals is certainly not guaranteed; Beijing witnessed a drop in hotel bookings during its 2008 summer games. It should also be noted that there is insubstantial evidence that tourism increases for the host city during the games. What has been offered as a possible explanation is that tourists arriving specifically for the Olympics replace tourists who would otherwise visit during the same period but would rather avoid the congestion and greater expense whilst the Olympics is running.

Additionally, looking from a purely monetary standpoint, there are too many variables to predict whether a country will make an overall profit from the games. London 2012 and Vancouver 2010 both only managed to break even, and while Beijing 2008 reported a profit of approximately US $146 million, both Torino 2006 and Athens 2004 reported a loss, down $3.2 million and $15 billion respectively. Indeed, the cost for the 2004 Athens Games has been cited as a contributor to the current debt crisis plaguing Greece.

Benefits

There is no question that the Olympic Games is popular with the general populace – the Games itself appeal to our sense of patriotism and love for sports, but the Olympics represent something far greater; a symbol for peace and prosperity, a sign of friendship and unity. Following the conclusion of the London 2012 Games, eight out of ten London citizens said it was worth the astounding cost, even though the effects of the cuts to public services began to surface. The IOC had previously discovered that public support for hosting the 2020 games was approximately 70% in Tokyo, 76% in Madrid and 83% in Istanbul. For a government in power, you can never go wrong with having happy citizens.

Popularity aside, there are often more subtle agendas behind a country’s reason to bid. The Beijing Games were intended to show off China’s industrial revolution. Istanbul wanted to make history by being the first predominantly Muslim country to ever host the Olympics. Both Madrid and Tokyo hoped hosting the 2020 games would help their respective economies recover from a slump.

Furthermore, there is also the notion that the hundreds upon hundreds of hours of television exposure to millions of viewers around the world will result in increased tourism and business opportunities for the city in the long-run. The success story of Barcelona is often cited by Olympic promoters as an example; while it sunk deep into a $6 billion debt for hosting the 1992 Games, the publicity and exposure garnered for the city has since seen it flourish and Barcelona’s tourism industry is now thriving. The Olympics put Barcelona on the map as an attractive destination for travel and investment worldwide.

Conclusion

In an ideal world where every candidate city behaved rationally, the winning bid would go to the city that would benefit the most financially from hosting the games; their operating budget equals their projected revenue and hence they  receive zero net (accounting) benefit.

Unfortunately we don’t live in an ideal world.

Is hosting the Olympics a winning strategy? The short answer is that it depends. There have been ‘winners’ like Barcelona that have experienced long-term economic benefit, and there have been ‘losers’ such as Greece that have fallen into a major debt crisis since. Ultimately, it is the private business parties which benefit the most – the invisible men pulling the strings behind the local organising committees which stand to lose nothing, but gain everything.

References

http://news.yahoo.com/tokyo-madrid-istanbul-await-2020-olympics-vote-165218736–spt.htmlhttp://www.economist.com/blogs/banyan/2013/09/tokyos-2020-olympics

http://en.wikipedia.org/wiki/Cost_of_the_Olympic_Games

http://ca.sports.yahoo.com/news/3-bid-cities-final-pitches-ahead-final-ioc-131116922–oly.html

http://teacher.scholastic.com/activities/athens_games/backyard.htm

http://www.economist.com/blogs/economist-explains/2013/09/economist-explains-0?zid=319&ah=17af09b0281b01505c226b1e574f5cc1

http://www.theatlantic.com/business/archive/2012/07/3-reasons-why-hosting-the-olympics-is-a-losers-game/260111/

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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