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Tarnished Gold

Popping the Olympics Bubble

 

andrew zimbalist is an economist at Smith College in Massachusetts who writes frequently about the business of sports. He is the author of Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup.

Published January 22, 2018

 

What if no city were willing to host the Olympics? While the Games remain an extraordinarily popular sports event rivaled only by World Cup football in their global appeal, finding hosts willing to spend tens of billions and endure years of disruption in the name of prestige and the faint prospect of profit has become increasingly problematic. Here, I offer a capsule history of what has happened, what the organizers are doing about it and why far more radical changes are needed to sustain the Olympics on anything like the scale and spectacle we’ve come to expect.

The Looming Crisis

Not so long ago, cities lined up to bid the moon and stars to secure the Games. But daunted by the escalating demands of Olympic organizers and a recent history of huge budget deficits, environmental and social dislocation, and rampant corruption, bids to host both the summer and winter Olympics have sharply declined. The number of applicants fell from 12 in 1997 for the 2004 Summer Games to five in 2013 for the 2020 Summer Games, and from nine in 1995 for the 2002 Winter Games to three in 2011 for the 2018 Winter Games.

So, back in 2014, when five European cities withdrew bids to host the 2022 Winter Games, a somewhat chastened International Olympic Committee and its new president, Thomas Bach, adopted a batch of reforms called Agenda 2020 intended to right the ship.

Agenda 2020 certainly talks the talk, promising to pay more attention to the affordability and sustainability of the Games and to be more flexible in setting requirements for the host city. And this turn of a new leaf appeared to have some initial success in attracting would-be hosts for the 2024 Summer Games. But after an initial flurry of interest, Boston, Toronto, Rome, Hamburg and Budapest all ended their bids, leaving only Paris and Los Angeles at the table.

That shouldn’t have come as much of a surprise. While Agenda 2020 nudged the needle in the right direction, it only tweaked the basic business model of the Olympics. The costs of hosting, properly accounted, can be expected to top $15 billion for the Summer Games, while generating revenues in the $3 billion to $5 billion range for the host city. And the reforms don’t change the reality that, in recent Olympics, the touted long-term benefits — permanently increased tourism, trade, investment and improved resident fitness, thanks to all the spiffy facilities — have not materialized.

 
Reuters/David Gray
 
Weak Tea

Agenda 2020 lists 40 reforms, 33 of which deal with IOC issues, such as tightening controls on the use of performance-enhancing drugs and beefing up IOC income from television. Indeed, just seven are really germane to cities considering bids. And of the seven, some can hardly be seen as creating significant opportunities for cost savings. For example, Item 3 calls for applicants to submit their Olympic bids electronically, saving a few thousand dollars on FedEx charges in a multilayered bidding process that typically costs $60 million to $100 million to complete.

Item 1, the IOC’s pledge to “actively promote the maximum use of existing facilities and the use of temporary and demountable venues,” is more to the point. Trouble is, the IOC has made similar pledges before and not followed through. After flirting with bidders proposing to make extensive use of temporary structures, the IOC reverted when the opportunity arose. In a frenzied auction environment that included bids from Paris, New York, Madrid and Moscow, the IOC chose London for the 2012 Summer Games. That bid included construction of a brand-new stadium, velodrome, aquatics center, Olympic village and media/broadcast center.

London’s Olympics, by the way, ended up costing triple the initial estimate — an overrun of more than $10 billion. Two years after choosing London, the IOC embraced an ostentatious bid from Sochi for the 2014 Winter Olympics where almost none of the required venues or infrastructure were in place. It became the most expensive Olympics in history, with Russia ponying up between $50 billion and $67 billion — though how much of that actually went into construction and operations is unclear.

While the basic business model of the Olympics remains in place, the IOC has felt compelled to throw a life preserver to a host drowning in red ink. Thus, it has permitted Tokyo, the host of the 2020 Summer Games, to redesign its new Olympic Stadium and to move several venues to existing facilities outside the city. These alterations are likely to save Tokyo upward of $1 billion — but that’s still small change on a project now expected to run to $20 billion.

The story of Tokyo’s dealings with the IOC is enlightening in this regard. In the summer of 2016, the newly elected governor of Tokyo, Yuriko Koike, formed a task force to assess the expenses that would become the responsibility of the taxpayers and to make recommendations for cost containment. The task force reported that the Games were on track to cost upward of $27 billion if further changes were not made.

The IOC dispatched a vice president, John Coates, to Tokyo for an emergency meeting. Coates declared that such a figure was unacceptable and would damage the reputation of the Olympics, stating, “I don’t want to let the international media have the impression that the costs of running the Games in a city like Tokyo, where you have so many existing venues, is $20 billion.” He insisted that costs be driven below $15 billion.

Indeed, Coates has since made it his mission to drive down the budget:

It is important to us that when the costs of the Games and the final analysis become public, they are going to be a reason to attract candidate cities — to attract them rather than to scare them off. … So if we appear to be pushing very hard on saving money, it is for our own future that we do it.

The organizing committee obliged and put out a new budget: $12.6 billion. But it turns out that this figure looks like one of those apocryphal ads for a new car that requires the purchase of bumpers and door handles as options. The June 2017 budget does not include (a) expenditures on the Olympic Village, (b) other private sector spending on Olympic facilities, (c) land values on which the Olympic venues sit, (d) new transport infrastructure connected to Olympic venues or (e) public tax exemptions, low interest loans or subsidies to developers or to the IOC. The security budget, which had been $2.2 billion, was reduced to $1.3 billion. (So much for worries about ISIS.)

It also removes up to $2.8 billion in contingency costs from the earlier budget — a peculiar move since every Olympics is dogged by overruns. In fact, according to an Oxford University study, the average cost overrun in real terms of the Summer Games since 1976 has been 252 percent.

A similar pattern has emerged with the 2022 Winter Games to be held in Beijing. The Beijing organizing committee pitched its bid to the IOC by noting that it would use some venues left over from the 2008 summer Olympics. But China went along with the IOC’s penchant for creative accounting by excluding the cost of the high-speed railroad that will link Beijing to the downhill and cross-country ski areas (54 miles and 118 miles from the capital, respectively). That project will run to about $5 billion and have little value to the region after the Games are over.

Also excluded from the Beijing budget will be the substantial expense of new water diversion and desalination programs necessary for hosting Winter Games in China’s water- (and snow-) starved northern cities. North China has only 25 percent of the country’s water resources to supply nearly 50 percent of the population. Accordingly, China launched an $80 billion water-diversion program from the south before the 2008 summer Olympics.

But the north's water availability still remains below what the United Nations deems to be the critical level for health – let alone for an Olympics extravaganza. Zhangjiakou, the site of the Nordic skiing competition, gets fewer than eight inches of snow per year. Yanqing, the site of the Alpine skiing events, gets less than 15 inches of precipitation annually.

Both areas will thus require copious water for artificial snowmaking. But even if China manages to complete the necessary infrastructure for water diversion, it will amount to robbing Peter to pay Paul: Beijing, Zhangjiakou and Yanqing lie in one of China's most important agricultural regions, producing sorghum, corn, winter wheat, vegetables and cotton.

The government, moreover, is apparently counting on lasting value from the construction of the Winter Games, creating permanent ski resorts in the mountains bordering Inner Mongolia and the Gobi Desert. If the ski resorts survive, only China's richest residents will be able to afford them, while food supplies – and the incomes of the growers – will suffer.

Another strike against Beijing 2022 is that winter is one of the worst times for air pollution in this horribly polluted city. Deforestation of the northern mountains needed for Games infrastructure will only compound the problem.

One might wonder why, in light of the daunting complications of hosting the Winter Games in northern China, Beijing got the nod in the first place. The answer is simple: thanks to the prospect of big deficits, the only other city bidding was Almaty, capital of oildrenched Kazakhstan, which has been ruled with an iron fist by the kleptocrat Nursultan Nazarbayev since independence in 1991. Or as Thomas Bach put it (apparently without irony), "We have two excellent candidates."

In the end, faced with a choice between two poster children for human rights abuses, the IOC selected the devil it already knew and the one with more international political heft.

Actually, the pitfalls associated with escalating costs and excessive optimism on the part of cities or countries eager for the prestige of hosting the Games have been growing for some time. I documented the profound problems in my book, Rio 2016: Olympic Myths, Hard Realities (Brookings, 2017).

While the ever-enthusiastic Bach called the Rio Games "a miracle," the economic, environmental and political failures are apparent to anyone who cares to look. The golf course in the Barra da Tijuca district, for example, is
emblematic of the disdain for sound environFirst Quarter 2018 53 mental practices of Rio 2016. The decision to build a new course for the Olympics was made even though the president of Rio's Itanhangá Golf Club offered his well-regarded facility for the Games. The Barra course was built on wetlands in a wildlife conservation zone that shelters rare fauna and flora, some in danger of extinction. After the Olympics, the plan was to build a luxury condo community at the course's edge, requiring another easing of environmental protections.

 
Only comprehensive reform that balances the financial interests of host cities against the IOC’s visions of grandeur will assure the Games’ sustainability.
 

Now that the Games are over, though, the all-too-predictable is happening. In an effort to recoup costs, the greens fees were set sky high (at $74 to $82 for residents of Brazil) and the course is getting little play. Meanwhile, the course's builder, Fiori Empreendimentos, apparently never paid the required environmental impact fee (about $600,000). The course's condition has sharply deteriorated and rumors abound that it will close.

The wider environmental degradation that would be caused by the Olympics was recognized in the plans of the Rio Organizing Committee, which included the commitment to plant 34 million tree seedlings to offset the Games' carbon footprint. As of the end of September 2016, though, only 5.5 million seedlings were reportedly in the ground.

By the same token, the opportunities for corruption in the often-mad scramble to remake host cities' infrastructure seem to be hard to resist. Odebrecht, Brazil's giant construction conglomerate, contributed almost $9 million to the campaign coffers of Rio's mayor, Eduardo Paes. As part of a plea bargain, a former top executive of Odebrecht explained that "the purpose … was to keep the company's privileged access to Paes's agenda, allowing us to deal directly with him, without any red tape or any difficulty, on payment delays or any problem in the execution of our contracts."

Meanwhile, efforts to put the best face on cost overruns in Rio led to the same sort of magical accounting as in Beijing and Tokyo. Public land grants, tax exemptions and subsidies to "private-public partnerships" were left out. Even though construction for the Games took place between 2009 and 2016, the reported dollar costs were based on local currency prices converted at the heavily depreciated 2016 exchange rate. Using the average exchange rate during 2009-16 would have increased the acknowledged costs in dollars by roughly $7 billion.

 
Greg Baker/AFP/Getty Images
 
Real Reform

The IOC implicitly acknowledged that the days of wine and eleven-figure cost overruns were nearly over by making host selections for 2024 and 2028 at the same time. After Boston, Rome, Hamburg and Budapest dropped out of the race for 2024, the IOC couldn’t afford to lose either Paris or Los Angeles for 2028. If Paris won 2024 and Los Angeles lost, then the IOC would face the very real possibility that it would later hold its auction for 2028 and no city would step forward.

Only comprehensive reform that balances the financial interests of host cities against the IOC’s visions of grandeur will assure the Games’ sustainability. With the exception of Los Angeles in 1984, the IOC has required host cities to guarantee that any overruns associated with the Games will be borne by the hosts, not by the IOC. And as long as the IOC bears no financial risk, it will be drawn to more extravagant bids that might attract more television viewers or perhaps leave behind a feel-good “legacy” of glistening new venues that glorify the Olympic movement.

 
As long as the IOC bears no financial risk, it will be drawn to more extravagant bids that might attract more television viewers or perhaps leave behind a feel-good “legacy” of glistening new venues that glorify the Olympic movement.
Stephen Pond – Empics/PA Images via Getty Images
 

Although imagining the political process that would lead the IOC toward meaningful reform is challenging, the only way to start is to think through the possibilities. In what follows, I suggest some alternatives that would promote a more rational, affordable and sustainable future.

One permanent host city. When the modern Games were begun in 1896 in Athens, many enthusiasts hoped to keep them in Greece as homage to the ancient Games held in Olympia. But Pierre de Coubertin, the French aristocrat who founded the modern Olympics, would hear nothing of the permanent host proposal. That wasn't as unreasonable as it might seem on its face. In the 1890s, there was no international telecommunications network and no jet travel, so to share the Games with the whole world, it was necessary to rotate the host cities. Today, of course, the whole world has easy access to the Games on television and the internet.

Los Angeles is slated to host the 2028 summer Olympics. Its total budget is below $6 billion (in 2017 dollars), a fraction of the outlays in Brazil or London or (soon) Tokyo. Moreover, the figure is credible. Since LA is home to many professional sports teams and several universities that invest heavily in athletics, Los Angeles already has a full complement of sports arenas and stadiums. At most, it will need to fill in the gaps with a few temporary venues.

By the same token, the organizers have access to the modern dormitories and sports, dining and medical facilities at UCLA (vacant during student summer vacation) to serve as the Olympic Village, along with dormitories at USC for the Media Village. The international broadcasting and media center is being built on the grounds of Universal Studios (largely with cash from Comcast, which owns Universal).

What's more, Los Angeles has a modern transportation, hospitality and communications infrastructure. Public transit is being extended, but this investment was planned before the hosting bid and is part of the city's long-term plan for managing growth. Finally, Los Angeles can count on Washington to finance the bulk of what is likely to be a $2 billion-plus security operation at the Games.

All this suggests that Los Angeles could serve as the permanent summer Olympics host with a minimum of disruption or locally borne cost. Indeed, the revenue from ticket sales, sponsorships and television and internet can be expected to comfortably cover the obligations of the host.

Los Angeles is unique; no other city would fit so smoothly into the role of permanent host for the Summer Games. There might be considerable pushback from countries or cities that imagine the putative benefits of hosting outweigh the costs. But one could hope that rationality would triumph. Every serious effort to measure the likely benefits of hosting are far outweighed by the costs of building an Olympic Shangri-La from the ground up every four years.

It's not clear, though, that Los Angeles would want to host the Summer Games on a permanent basis. Even Games that run without a hitch disrupt everyday life and business. Traffic was actually lighter than usual during the 1984 Games — but only because fears of gridlock kept locals off the freeways. So, rather than risk losing Los Angelinos' support, it may be more realistic to spread the joy.

Rotate the hosting responsibility. There is precedent here: the British Open golf tournament rotates among six Scottish courses. The IOC could negotiate a similar approach with, say, three cities, each hosting the Games every 12 years. Preferably, these would be cities with a developed infrastructure and many pre-existing sports venues — though none are the equal of Los Angeles in this regard. Arrangements for an Olympic Village, among other issues, would still have to be worked out and might require giving the hosts a larger share of revenue than the IOC currently provides.

The multihost approach would be no panacea. Eleven years out of 12, facilities purpose-built for the Games would be unlikely to be used in an economically effective way. Thus, either the hosts or the IOC would have to reckon with millions of dollars annually in maintenance expenses — not to mention the permanent loss of alternative uses for valuable urban real estate.

A new permanent home. With all the investment and maintenance it would entail, Greece couldn't afford to be a permanent host. But the IOC could. The organization could raise tens of billions by issuing bonds to build a hosting complex that would be used (albeit inefficiently) in non-Olympic years as training grounds for international athletes and perhaps as a site for other large-scale events. Debt service on the bonds (roughly $1.5 billion annually on a $30 billion issue) and operating costs would be covered by IOC revenues from the Games.

Note a catch, however. Debt service would come out of funds the IOC currently distributes to the international federations of Olympic sports and the national Olympic committees to promote the development of sport. Hence, this plan, however attractive it might be, would surely be resisted by these stakeholders.

Adopt a FIFA-plus World Cup model. Under its evolving financing model, FIFA covers all the operating costs of the World Cup and receives all of the revenues, save 1 percent of the gross, which is shared with the host country. The FIFA model might be extended to also cover sports venues, leaving only infrastructural improvements to be covered by the host city.

Hosting the Olympics is more complicated than hosting the World Cup because it involves many more events, athletes and venues. Nonetheless, adopting a FIFA-plus model offers the major advantage of reducing the financial risk for host cities. One underlying problem would remain, though, since the Olympics would still leave behind a lot of infrastructure with few uses, encumbering land and requiring expensive annual maintenance. But it would serve as a check on the IOC's inclination to grandiosity and presumably make it much easier to find desirable host cities.

Downsize and update. Whatever alternative to business as usual is pursued (or even if none is attempted), there is a strong case for downsizing the Games and modernizing the content. As the Olympics has grown in the number of its competitions, the bill for transporting, lodging and feeding the athletes has grown in sync — as has the number of specialized venues needed. For the 2020 Games in Tokyo, the Olympic Village must house 18,000.

In 2016, the IOC sponsored 306 competitions for the Summer Games and, in 2014, 99 competitions for the Winter Games. Many of these might have commanded the attention of sports fans in the 1920s or 1950s, but hold little global interest today. Think weightlifting, karate, judo, track, cycling, equestrian, shooting, Greco-Roman wrestling, biathlon, bobsledding, curling, skeleton and luge. Most of these sports could be eliminated without losing much of the TV audience. At the same time, however, it would make economic sense to judiciously add new events — particularly in the arena of extreme sports — with the goal of attracting new generations of fans.

 
David Goldman/Associated Press
 
Who’s in Charge?

The basic business model of the IOC has been that of an unregulated monopolist extracting maximum financial commitments from cities seeking (elusive) prestige and (illusory) profit. The selection process — based on political, emotional and personal criteria that aren’t transparent to outside observers — presumably reflects the opinion of IOC members as to which city would best represent and honor the Olympic movement.

Over the decades, this auctionlike process yielded ever more elaborate bids, putting hosts at ever greater financial and environmental risk. Yet, even monopolists can price themselves out of the market. And the IOC has encountered this problem at least since the 2015 selection of the 2022 host for the Winter Games.

To his credit, the IOC president has taken steps to inject a dose of fiscal reality into the selection process. But they’re baby steps: Agenda 2020 has done little to solve the fundamental problem, which lies in the power dynamics of the IOC’s monopoly business model.

It doesn’t take a financial wizard to figure out what could be done to put the Olympics back on even keel. (See above.) But the politics of reform are more problematic than the economics. The timing of any serious change is likely to turn on the pressure created by a continuing dearth of applicant cities, or by commercial sponsors who no longer perceive it to be an advantage to be linked to the Olympic brand.

 
Milos Bicanski/Getty Images
 
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