Expensive Olympics

Rio

The opening celebration for the 2016 Olympic games just happened, and of course all you’re hearing about is pollution, crime, unfinished facilities, Zika and cheating Russian athletes.  Chances are, the games will go off without a hitch and be highly-entertaining, despite some of the challenges that the athletes will face in their housing and venues.  But once the games are over, the nation of Brazil is likely to experience a familiar dose of economic trauma.

Why?  A recent study by the Council on Foreign Relations looked at the economics of different Olympic games, and found that the costs inevitably outweigh the benefits.  Part of the problem is enormous cost overruns; when nations bid for the games, they typically underestimate the cost of constructing stadiums, fields, apartments for the athletes, safe transportation and security.  The accompanying chart shows just how much these cost estimates fell short of the actual price tag; note the Beijing and Sochi games, which cost $45 billion and $51 billion respectively.  Building appropriate venues for the games in Athens, Greece actually led to a government bankruptcy.

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If those facilities could be recycled into popular tourist destinations, the expense might be justified.  But the report found that the more typical situation is a lot of so-called “white elephants”—expensive facilities that have limited post-Olympics use.  Beijing’s famous “Bird’s Nest” stadium cost $460 million to build and now sits unused.  The entire city of Sochi, Russia stands idle.

The Rio Olympics are estimated to cost $20 billion for infrastructure alone, even after plans to overhaul the city’s sewage system were cancelled due to cost overruns.  Estimates suggest that the city will attract only a fraction of the anticipated 480,000 (International Olympic Committee estimate) to 600,000 (Brazilian Ministry of Tourism estimate) visitors, which means that the already-compromised fiscal situation in Brazil will get worse at some point after the games have left town.  And don’t expect the sewage situation to be cleaned up once the visitors have departed.

Meanwhile, it is getting more expensive simply to bid on hosting the games.  When you add up the cost of drawing up construction plans, hiring consultants, organizing the way the event will be run and the necessary travel expenses, a bid can cost as much as $150 million—as it did when Tokyo made its 2016 bid.  The city of Toronto recently backed out of bidding on the 2022 games, due to an estimated $60 million in bidding expenses—and of course that doesn’t count the rumored under-the-table payments to IOC executives.

That leaves two countries still in the running for the 2022 Winter Games: Kazakhstan and China.  It may not be a coincidence that neither country has to worry about pesky voters and citizens claiming that the costs are not justified by the benefits.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Sources:

IOC Predicts 480,000 Tourists in Rio for 2016 Olympics: Daily

http://www.cfr.org/brazil/economics-hosting-olympic-games/p38148?cid=soc-twitter-in-economics_hosting_olympics-080216

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