Want to Host the Olympics? Plan to Go Over Budget
By Leo Lewis and Murad Ahmed
The International Olympic Committee (IOC) and organizers of the Tokyo 2020 Olympics are wrestling with the logistics of holding a postponed games, which are already calculated to be the most expensive Summer Olympics ever.
The Tokyo bid originally foresaw a $7.3 billion price tag for the games, but Japan’s national auditor — which has highlighted how the government has folded certain costs into non-Olympic budgets — has said the final cost may be more than three times greater.
Although Japanese officials remain adamant the games can proceed despite ongoing concerns about the coronavirus, domestic support appears to be waning. A recent poll of 13,000 Japanese companies by Tokyo Shoko Research found more than half were opposed to the games being held next year. And while this year is extraordinary, the Olympics going way, way over budget is definitely not.
A new report from Oxford University suggests would-be Olympic host cities should assume their budgets for the games will rise threefold.
Cities considering hosting the Olympics should compare the financial risk with models applied to natural disasters, pandemics and war, the team of researchers warned in their report, accusing the IOC of playing down the unavoidable dangers of big cost overruns.
According to the researchers, the cost overrun for the Rio Summer Olympics in 2016 was 352 percent, while for London 2012 it was 76 percent. The average cost overrun for both Summer and Winter Games since 1960, they calculated, was 172 percent.
To explain Olympic cost blowouts, the researchers said overruns did not, over time, undergo a “regression to the mean” — the statistical phenomenon that looks at the impact of repeat events on outcomes.
Instead, they experience a “regression to the tail,” with overruns for individual games so variable that possible outcomes for host nations stretch into infinity. “Deep disasters such as earthquakes, tsunamis, pandemics and wars tend to follow this type of distribution,” said the authors.
“Such events are not just the unfortunate, happenstance incidents they appear to be, that are regrettable but will hopefully be avoided in the future, with more awareness and better luck. Instead, Olympic cost blowouts are systematic, ruled by a power law that will strike again and again, with more and more disastrous results,” the report stated.
Bent Flyvbjerg, an economist at Oxford’s Saïd Business School and leader of the research, accused the IOC of being “either deluded, or deliberately overlooking uncomfortable facts” when it sets contingency levels for the games.
He also argued that the Lausanne, Switzerland–based organization should be held accountable for misinforming hosts about the real risks.
Flyvjberg said the IOC was being unrealistic in the level it sets contingency provisions. The IOC’s understanding of risk, he maintained, was based on an assumption of “slow randomness” rather than the “extreme randomness” that the Oxford researchers believe governs the financial risks of hosting the games.
The underlying reasons that make overruns inevitable, Flyvjberg said, include the lack of ability of a host to reverse its decision, or any chance to save on cost by delaying the project.
Hosts are, by their nature, “eternal beginners” — each bidder effectively starts from scratch on a megaproject where there is, in that city, almost no relevant institutional memory for running one.
There is also the “blank check” syndrome whereby the host city is legally obliged to cover cost overruns, while the IOC takes on no such liability.
The Oxford report suggests a number of possible solutions, including granting two successive games to each host and larger cost contingencies.
The IOC attacked the findings, saying it had not been asked for data by the researchers for many years and arguing the study took a “fundamentally flawed approach,” mixing two different budgets: the budget for the organization of the games and the infrastructure budgets of the host city, region and country.
“This gives the completely wrong impression that these infrastructure budgets serve only the four weeks of Olympic Games competition and must be ‘written off’ immediately afterward,” the IOC said. “This is simply not true. It also seems like the legacy of the Olympic Games is completely left out of the picture.”
The IOC introduced so-called Agenda 2020 reforms in 2015 to cut the cost of bidding and staging the event, such as encouraging cities to use existing stadiums.
The future of the games is also secured for the next decade, after the 2024 Summer Olympics were handed to Paris and 2028 to Los Angeles.
But those awards came after the two cities were remaining bidders for the 2024 games, in a process that started with a crowded field.
After cost concerns ended prospective bids including from Hamburg, Budapest, Boston and Rome, the IOC was anxious to secure the future of the world’s biggest event for the next decade and persuaded Los Angeles to step aside for four years.
OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2020.