Last month marked the end of the world’s biggest sporting event — the Olympic Games.
Paris, which last hosted 100 years ago, pulled out all the stops for the second run: embarking on a three-year renovation of the Grand Palais, commissioning medals designed by the LVMH-owned jeweller Chaumet, and holding the opening ceremony along the Seine.
But behind this global celebration is an interesting phenomenon.
Did you know? Olympic host cities almost always blow their budget.
A comprehensive study from Oxford researchers found that every Olympics from 1960 to 2016 exceeded their budget by an average of 172% in real terms.
This trend raises serious questions about the economic viability of hosting the Olympics. In this article, we examine:
- Why are the Olympics so expensive?
- Why are cities still bidding to host the Games?
- What is the future of the Olympics?
This article was written by a Financial Horse Contributor.
The Scale of Olympic Overspending
Just how expensive is it to host the Olympics? These days, you’d need at least $10 billion to start.
That’s because the costs of hosting the Olympics begin long before the Opening Ceremony. Cities typically spend $50-100 million just to submit a bid.
Once selected, host cities face enormous infrastructure demands. The Summer Games, being larger, require extensive facilities for over 10,000 athletes competing in about 300 events.
This involves constructing or renovating specialised sports facilities, a large ceremony venue, and an Olympic Village. The village is a complex venue that must accommodate athletes and provide essential services like polyclinics, entertainment, and dining options.
Beyond sports facilities, cities must also enhance general infrastructure. Transportation upgrades are also crucial, with some cities spending billions on new roads, rail lines, and airports.
The cost of hosting the Games has skyrocketed over the years. The Rio 2016 Olympics cost over $20 billion, and the state declared a state of financial emergency and required a $900 million federal bailout to fulfill public service obligations.
The cost and cost overrun for the Games follow a power-law distribution, making predictions difficult.
When a city bids for the Olympics, they’re taking a risk that it may go way, way over budget. It could be extreme case, like Montreal in 1976, where costs spiralled to 13 times the original budget (more on that later).
The Oxford study identified key factors contributing to consistent budget overruns:
- Hard Deadlines: Unlike other mega-projects that can be delayed if costs become too high, the Olympics have a fixed deadline — the Opening Ceremony. This inflexibility often leads to increased costs as host cities rush to complete preparations on time, regardless of expense.
- Inflexible Requirements: Olympic venues must meet specific international standards for each sport. There’s little room for cost-cutting by reducing specifications, as facilities must comply with strict requirements set by the International Olympic Committee (IOC) and various sports federations.
- Legally Binding Agreements: Host cities enter into stringent contracts with the IOC, guaranteeing the delivery of the Games. These agreements often misalign incentives, as the IOC isn’t directly responsible for cost overruns but benefits from the event’s success.
- Economic Cycles: Cities typically bid for the Olympics during periods of economic optimism. However, the actual event occurs 5-10 years later, during which time economic conditions can change dramatically, potentially straining city budgets. Prices also go up because of inflation, and one of the strongest areas of inflation is in construction costs.
- “Eternal Beginner” Syndrome: Each host city is essentially starting from scratch, with little to no experience in organising an event of this magnitude. This lack of expertise often leads to poor planning and financial mismanagement.
The Long-Term Impact on Host Cities
The financial burden of hosting the Olympics can have lasting effects on their host cities.
The 1976 Montreal Olympics was one of the biggest disasters. The organisers faced cost overruns, protests, corruption, and huge delays. In the final months leading to the Games, 3,000 labourers worked in shifts 24-hour shifts to meet the opening ceremony deadline.
“Two weeks later, when the last athlete had gone home, Montreal woke up to what remains the worst hangover in Olympic history: not just a bill that came in at 13 times the original estimate, a string of officials convicted of breach of trust and the greatest white elephant of a stadium ever built, but a creeping sense of economic and social decline. Forty years on, no other Olympics has so thoroughly broken a city.”
The 1976 Montreal Olympics’ final cost soared to C$1.6 billion, 13 times the initial C$120 million estimate. The “Big O” stadium alone consumed C$1.1 billion, only to become a white elephant. (Locals sardonically nicknamed the stadium the Big Owe.)
Montreal took 30 years to pay off the Olympic debt, forcing the city to cut back on essential urban services for years.
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Why Cities Still Bid for the Games
Given these cautionary tales and the near inevitability of budget overruns, why do cities even consider hosting the Olympics?
The answer lies in a mix of optimism (’this time it will be different”) and national aspirations.
The 1964 Tokyo Olympics was the rare success case.
The Games were a perfectly-timed symbol of Japan’s post-war recovery and urban transformation. It catalysed massive infrastructure investment to modernise the city to re-enter the global stage. They built new buildings, expressways, and bullet trains. The 1964 Tokyo Olympics served as a model for future host cities, demonstrating how the Games could drive urban development and economic growth.
With the 1988 Seoul Olympics, South Korea aimed to highlight its transition from authoritarianism.
The 2008 Beijing Games showcased China’s economic ascent and global reintegration.
Tokyo 2020 aimed to recreate the magic of their first Olympics to signal Japan’s recovery from Fukushima and break from three decades of economic stagnation. This also partially explains why Prime Minister Narendra Modi said India would “leave no stone unturned” to host the 2036 Olympics.
However, several decades of research has shown the economics of the Olympics don’t make sense. The billions invested to host do not generate any significant positive effect on income, employment, tourism or taxes.
Amid growing skepticism among potential host cities, what does the future hold for the Olympics?
The Future of Olympic Hosting
Paris 2024 is attempting to implement a “compact Olympic Games” model, focusing on using existing facilities to control costs. While the projected total of under $10 billion is significantly less than recent Games, it is still about 115% above Paris’s initial estimate.
Paris’s cost-cutting strategy was to repurpose existing facilities. While more sustainable, it hasn’t addressed the cost issue. Adapting old monuments for Olympic use has been equally costly and time-consuming.
The renovation of the 125-year-old Grand Palais to host fencing and taekwondo competitions, highlights the challenges involved. Some experts suggested that upgrading existing venues to meet Olympic standards, media requirements, and security needs may be more expensive than constructing temporary buildings.
Cities are becoming increasingly wary of bidding for the Olympics due to financial concerns. Several cities have withdrawn bids after public referendums rejected the idea.
This persistent overspending is one of the reasons why cities that have put their Olympic bids to a public vote have often ended up withdrawing them.
In 2017, only Paris and Los Angeles remained as potential hosts for the 2024 Games, after Boston, Hamburg and Budapest withdrew after strong objections from its citizens.
Paris did not hold a referendum on hosting the Olympics, with Mayor Anne Hidalgo candidly admitting that “the answer would have been negative”.
That response reflects the cooling sentiment of host cities around the Games. With fewer past bids, the IOC started having bids in private to avoid the embarrassment of open calls that barely draw bids. The 2032 games in Brisbane were the first to be awarded under this process. This new approach aims to reduce public scrutiny and potential opposition to Olympic bids. However, it also raises concerns about transparency and democratic participation in the decision-making process.
Did you enjoy the Olympics this year? Which sport is your favourite?