The Olympics is one of the largest events in the world, and with the most recent games in Rio having 308 events in 28 sports and over 11,000 competitors, hosting it is sure to be quite expensive. However, a new study, led by Bent Flyvbjerg of the University of Oxford’s SAΪD Business School, suggests that it’s not just that the Olympics itself is expensive, but that bidding countries always underestimate the final cost of the event. They looked at data relating to the direct sports- related costs for both Summer and Winter Olympics since 1960, and found that the average cost overrun, that is, how much more the event ended up costing than was originally budgeted, is 156%.
The importance of accounting for this cost overrun cannot be overstated, as once host cities are decided upon, they are then locked into an agreement that they will pay for any extra expenditure that they have to incur. This has led to countries raking up huge amounts of unexpected debt, which can often have severe consequences on the country’s economy. For example, the debt associated with the 2004 Olympics in Athens contributed to Greece’s economic crisis, and just earlier this summer, Rio de Janeiro’s governor was forced to declare a state of emergency to secure additional funding for the games.
Comparison to other megaprojects
While cost overrun is natural, especially when it comes to megaprojects such as roads, bridges, railways, and dams, the Olympics is almost unique in that it is the only such megaproject to always run over budget.Other megaprojects all also require a huge amount of capital investment, but while cost overrun is likely with these projects, it is by no means a certainty. Flyvbjerg’s study found that typically 10-20% of other megaprojects come in at or below their original forecast.Not so with the Olympics however, as for the past 60 years every single Olympics has cost more than originally planned.
The scale of the overrun is also much greater with the Olympics. The average cost overrun for the Olympics is 156%, which is much higher than the average overrun of 20% for roads, 34% for bridges and tunnels, 36% for energy projects, 45% for rail, 90% for dams, and 107% for major IT projects. Flyvbjerg’s team suggest that the reason for this is most likely down to the Olympics having a fixed deadline, so unlike with other major projects, there can be no trade-off between schedule and cost. Combined with the fact that host countries are legally bound to pay for all cost overruns, Flyvberg and his colleagues equate hosting the Olympics to writing a blank cheque for the event, as the only way to solve any problems that arise is to throw money at them in order to fix them on time.
A possible conclusion to be drawn from this is that Rio may have been better off foregoing the Olympics, and putting the money towards these kinds of infrastructural projects instead. It is likely both that the projects themselves could have been targeted better, through not having to focus on the Olympics when upgrading them, and that the associated cost overrun would have been much less, meaning they would have had a more accurate budget for the costs involved.
Comparison to previous games
With the total sports related costs for the games coming in at $4.6 billion, the Rio Olympics is roughly 50% over the budget they had drawn up when they bid to the host the games in 2009. However, this pales in comparison to the 289% cost overrun at the most recent Winter Olympics in Sochi, and the 789% overspend at the Montreal Games in 1976. While outliers like these do exist, the median cost overrun for the Olympics is 90%, which puts the Rio Olympics in a better position compared to the historical data.
Solving the problem
One of the main causes of this overrun, is that because the Olympics is held in a different city each year, there is an “eternal beginner” curse. This means that because the people running the project have never done anything of this scale before, and because the project is in a completely new location, any lessons learned from previous years have been forgotten. Combined with the fact that countries want to seem to have the best budget possible in the bidding process, this has led to significant underestimations of the costs associated with the problems, so decision makers and the public don’t fully know the ramifications of hosting the games.
In an effort to rectify this issue, the International Olympic Committee (IOC) established the Olympic Games Knowledge Management Program in 1999. The main aim of this program was to pass on information from previous Olympic committees, so that issues such as cost overrun wouldn’t continue to happen in the future. While this certainly hasn’t solved the issue completely, it has certainly gone some way towards fixing it. The average cost overrun before 1999 was 166 percent, and since 1999 it has been 51 percent, a fairly big improvement. In this case then, Rio is coming in at about the average since then.
The fact remains however, that when deciding to host something as large as the Olympic games, each party should be aware of what they’re getting into, so extra costs, especially ones in the region of a few billion dollars, shouldn’t really be on the cards. There is also a big emphasis on countries to cover up these extra costs, such as what happened with London 2012. Two years after they secured the bid in 2005, the organisers realised their cost estimates were completely inadequate. So they drew up a new budget which had a 100% increase in costs, and when the cost of the games came in slightly under what this new budget said, the organisers proclaimed the games as having come in under budget.
All of this, combined with the fact that countries must bid to host the Olympics 7 years beforehand, means that hosts are often completely unprepared for funding the games when the time comes.