Monday, August 1, 2016

The High Costs Of The Rio Olympic Games

For the Winter Olympics in Sochi, Russia, in 2014, President Vladimir Putin demanded vast spending to turn a ski resort perched in the Caucasus Mountains into a fitting stage for the “greatest show on earth”.
The largesse extended to the building of a 31-mile railway connecting the airport near the Black Sea coastal town of Adler to the ski resort of Krasnaya Polyana. At an estimated $8.7bn, the line was more expensive than the operational costs of most Olympics, including the 2016 summer edition, opening in Rio de Janeiro on Friday.
The train line is rarely used today, according to media reports, making it the latest example of an Olympics-fuelled white elephant, one that offers a stark warning to would-be hosts that the five-ringed circus does not come cheap. Associated expenditure for Sochi swelled the total spend to $51bn, making it the most costly games in history. The sport-related costs alone accounted for $21.9bn.
By contrast, the bill for Rio 2016, which the organisers say is $4.1bn, will be modest. But even that outlay is a problem, with Brazil plunging in to a deep recession that has sapped public enthusiasm for the megaproject.
The Olympic movement is no stranger to crisis. Corruption and terrorist attacks have overshadowed previous games and fears over both have dogged Rio. A bribery scandal has engulfed preparations for the 2020 Tokyo games, leading to the scrapping of plans for a space-age Olympic stadium and the resignations of organisers and political figures. The run-up to the Rio opening ceremony has been dominated by a doping scandal that has seen several Russian athletes banned from taking part.
However, for many on the International Olympic Committee, the organisation that governs the games, it is the spiralling cost of putting on the world’s largest sporting event that poses the greatest threat to its future. The bidding for the 2024 summer games has followed the pattern of the 2022 winter edition — with city after city ditching Olympic ambitions as residents balk at the price.
“Putin thought he was doing everyone a favour, by saying ‘Look how much I spent on the Olympics,’” says Michael Payne, a former head of communications and adviser to the IOC. “But he scared off all the other potential hosts. If you are a small city, where will you find $50bn?”

Boom to bust

In 2009 when Rio was named as the 2016 host, Brazil was going through one of its best periods. After launching a stimulus package to recover from the global financial crisis, the economy grew 7.5 per cent in 2010 — the fastest rate in decades.
Is Rio ready?
Today, it faces its deepest recession in more than a century, sparked by a collapse in the global commodities market but compounded by interventionist government policies and corruption scandals.
The near-bankrupt state of Rio de Janeiro had been warning of a “calamity” until the federal government buckled and gave it emergency funding for security in June. Fortunately for the games, the municipal government, which appears to be in a slightly better financial condition, is responsible for much of the infrastructure, including the arenas, and appears to have delivered on its promises. Authorities say that a crucial metro line extension connecting the downtown beach areas to the Olympic park will open this week.
“We won the right to hold the games in what was the best time for Brazil in 50 years and are delivering it in the most complicated during the past 50 years,” says Rodrigo Tostes, director of operations of the Rio 2016 organising committee. “But we never gave up and will deliver a fantastic games experience to everyone.”
Public support for the games has fallen, with a Datafolha poll showing that 50 per cent of Brazilians oppose its staging in their country, double the number recorded in a 2013 survey.
The city government calculates that the games have cost $4.1bn in direct expenses such as arenas and the athletes village, for which 80 per cent of funding has come from the private sector. That total does not include transport and other infrastructure costs. Some suggest it will be higher.
Simone Pereira, a resident of the Cantagalo Favela, that overlooks Ipanema, Gávea and Copacabana — Rio’s most affluent neighbourhoods — says the money for the games could have been better spent on services such as the state’s crumbling hospitals.
“For years they have done nothing. Certainly we have received no benefits up here,” she says looking towards Lagoa, Rio’s beautiful lagoon, where the rowing will be held. “But we should make the most of it and go and use those facilities when they are open to the public after the games.”

Softening the financial blow

The 1976 Montreal Olympics nearly bankrupted the Canadian city, which became a byword for how hosting a games can go wrong. The IOC responded by increasing commercialisation, pulling in billions of dollars from sponsorship and broadcast rights and splitting the proceeds with host cities to soften the financial blow.
But the global crisis has shifted the priorities of debt-laden governments and made cities more wary of bidding.
The IOC knew of the change in mood among potential host cities even before the excesses of Sochi, say people close to the governing body. Its fears crystallised in the bidding process for the 2022 winter games. Cities in Poland, Germany, Switzerland, Sweden and Ukraine considered being hosts but all shelved their bids. Each argued that they could not justify the expenditure.
The governing body’s hopes turned to Oslo, which had produced a stellar proposal, but Norway’s government struggled to convince its people that the games were worth the multibillion-dollar price tag. The death blow came in October 2013, when newspapers revealed some of the perks — including a cocktail reception with the King of Norway — demanded by IOC members should the city win.
“[The reports] helped the people, who had already turned negative, to say ‘Oh my goodness, the IOC demands that?’” says Gerhard Heiberg, a Norwegian member of the IOC who also led the organising committee for the 1994 Lillehammer Games. “It influenced the politicians’ thinking.”
With Oslo dropping out, it left just Almaty in Kazakhstan, and Beijing, the eventual winner, to vie for the crown.
The debacle triggered IOC reforms designed to cut costs and open up the possibility of taking the games to new territories, such as Africa and Southeast Asia. It also wanted to force cities to take more seriously the idea of a lasting legacy worthy of the huge outlay.

Arguing about the economics

Often promoted as a symbol of national vitality, governments have previously argued that the event creates a fiscal stimulus that outlasts the 17-day show but politicians are losing the argument over the games’ economic value.
“Governments say we’re going to have a big party and, as a result, we’re going to be rich,” says Stefan Szymanski, a sports industry academic at the University of Michigan who has researched the economic impact of the Olympics. “That is an absurd proposition.”
The IOC argues that many of the headline figures associated with past games, such as the $51bn sum linked to Sochi, are misleading. It says infrastructure projects and regeneration plans should be separated from the operational budget, which is largely paid for by sales of tickets, merchandise and the broadcasting rights. Economists challenge that, saying infrastructure spending would not occur but for the games and should therefore be included.
Researchers at the Saïd Business School, in Oxford, analysed 30 summer and winter games and released their findings last month. Though contested vigorously by the IOC, the study claims none of the games came in within their initial budget and nearly half exceeded targets by more than 100 per cent.
Andrew Zimbalist, an economics professor and author of Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup estimates that the summer Olympics can lead to deficits of up to $15bn.
“It is sometimes argued that the deficit will be made up in the long run through increased tourism, trade and investment,” he says “The data doesn’t suggest that happens.”

Changing the playing field

He points to studies showing that incoming tourism in London and Beijing fell in the months of their respective games, while outbound travel went up as locals tried to avoid the event. Other research suggests there is little or no effect on future trade or direct foreign investment, while many cities end up having to pay to maintain underused facilities.
Yet, he says, there are two editions of the games that avoided negative economic consequences. One was Los Angeles 1984, where organisers relied mainly on existing venues and corporate sponsorship to make a small profit.
The other was Barcelona 1992 when, after years of under-investment, the Catalan city launched a redevelopment plan to renovate its seafront.
“[Barcelona] fitted the Olympics into the plan it had already,” says Prof Zimbalist. “The Olympics was made to work for the city. In every other city [it] is the opposite [way round].”
Barcelona is seen as a success despite being the third most expensive games and having huge cost overruns, according to the Saïd research.
Both Los Angeles and Barcelona were in the IOC’s thinking in November 2015, when it introduced its Agenda 2020 reforms. The most important changes were to the bidding process; instead of encouraging a competition where rival cities offer ever-greater sums to win votes, interested parties will go through an “invitation” phase.
Host cities produce regeneration plans, while the IOC advises how the games could be designed to fit around those ambitions. Cities are encouraged to use existing stadiums. The preference for a “compact Games,” where most competitions and the Olympic Village are in a single location, has been abandoned.
Yet, the austere message is making little difference in the bidding to host the summer Olympics in 2024. Last year, Boston withdrew its bid following local opposition to plans that meant taxpayers would pay if the games went over budget. In November, Hamburg pulled out after losing a referendum on the issue. Rome’s bid is in serious trouble after the Italian city elected Virginia Raggi from the anti-establishment Five-Star Movement as its mayor.
“Already with €13bn in debt, Rome can’t permit taking on more debt to make cathedrals in the desert,” she said after her victory in June.
If Rome were to withdraw it would leave just Los Angeles, Paris and Budapest. Only the Hungarian capital has not held an Olympics, but is considered a “long shot”, according to IOC figures, despite the movement’s mission to seek new territories.
Even with these troubles, Mr Payne insists the Olympics will thrive as long as it is watched by hundreds of millions of people and considered the pinnacle of sporting success. Some believe the doping scandals have already cost the games its place at the pinnacle of sport yet Mr Payne remains optimistic.
“You have to be asleep at the wheel to not notice there are cities pulling out, and that there is a deep problem,” he says. “But I think Rio will surprise people. It will look stunning on television. And remember, the IOC controls the TV signal.”