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by David Sharp, Founding President of the Australian Adam Smith Club (Melbourne) and author of Economic Simplicities

The conclusion of the 2012 London XXX Olympic Games provides an opportunity to consider the economics of the Olympic Games, including the economic incentives involved in a city obtaining the right to hold the Games, the economics of the preparation for and the conducting of the Games, and ultimately the economic benefits, if any, to be gained from them, and to whom such benefits might accrue.

The inaugural modern Olympic Games were held in the Greek capital, Athens, in 1896. They were the brainchild of Frenchman, Baron Pierre de Coubertin (1863-1937), an educationalist and historian, and a strong believer in the benefits of athletics and physical education. In 1894 he founded the International Olympic Committee (IOC), which became and remains the Games’ governing body. With both private and public Greek funding the IOC successfully organized the 1896 Games. Greek government funding was justified on the basis of recoupment from ticket sales and a commemorative stamp issue. Two hundred and forty three athletes from 14 nations competed in 43 events.

The 1900 Games in Paris and the 1904 Games in St Louis were relatively speaking unsuccessful, being held in conjunction with, and overshadowed by the Paris Exposition and World Fair respectively. Thereafter however the games grew in popularity and flourished, being held quadrennially, interrupted only by world wars in 1916, 1940 and 1944. The IOC, based since 1914 in Lausanne in Switzerland, is in effect a major multinational in the sports industry, with National Olympic Committees (NOCs), in virtually every country. It negotiates with national and city governments worldwide. It has also expanded its franchise to include: since 1924, the Winter Olympics; since 1960, the Paralympics; and since 2010, the Youth Olympic Games.

During its first 80 odd years the IOC functioned with relatively modest means, insisting on amateur status for Games participants, and eschewing direct commercial involvement. Sponsorship and the financial utilization of the Olympic brand and symbols were left to the Organizing Committees for the Olympic Games, the individual ad hoc committees, one of which was formed in each of the successful cities chosen to host an Olympic Games, and which was, upon the Games’ conclusion, thereafter dissolved. When its long-term president Avery Brundage retired in 1972, IOC assets totaled a mere US$2 million. This minimalist financial approach changed significantly upon Brundage’s retirement, particularly after Juan Antonio Samaranch became president in 1980. Inter alia, Samaranch abolished the exclusion of professional sportsmen. Following the huge financial success of the 1984 Los Angeles Games, Samaranch organized for the IOC to take over direct control of Games’ sponsorship and advertising. Typically a 4 year IOC endorsement enabling exclusive global advertising rights for a particular product or service sells for US$50 million. The IOC also benefitted from the sale of the rapidly expanding TV and radio broadcasting rights. As an example, in 2000, the American network NBC paid US$3.5 billion for the American broadcasting rights for the Games from 2000 to 2012.

The IOC determines which city from among the applicants will host the Games. It also determines which particular sports and activities will be included in the agenda. The making of such decisions provides opportunities for corruption to occur. In recent decades there have been numerous allegations that such has been the case. Virtually every choice of a host city has been subject to such aspersions, including that of London, host of the recently concluded Games, where the Mayor of Paris accused British PM Tony Blair and the London Bid Committee of misconduct in the making of their bid.

Host Cities
It is cities that host the Games, although generally the relevant national, and even state or provincial governments will also be involved. Why do such cities put themselves forward? Almost invariably it is claimed by proponents that the city, and the nation, will incur a financial benefit, particularly from an increase in foreign visitors. Experience suggests that such financial profits are rarely realized. During the recent London Games tourism actually fell, and Games related businesses did poorly. Predictions of a “Gridlock Games” were replaced by the reality of “Ghost Town Olympics”. Whilst it is unlikely that a host city itself will obtain a pecuniary benefit from conducting the Games, it is possible for various interests within the city to do so. The time from the initiation of a bid, unto the successful conclusion of a Games is approximately 10 years; ample time for the organizers and planners, as well as those involved in infrastructure construction, financing, security and so forth to acquire a considerable income. The strongest supporters of any such bid are likely to come from such groups.

Claims are often made that a projected Games will make, or a concluded Games have made, a significant profit. British PM Cameron for instance in July 2012 claimed that the UK will earn 13 million pounds from the Games. Examination of such claims generally shows that the calculation has excluded costs other than operating costs ie such costs as construction, finance, and subsequent maintenance of facilities have not been taken into account. The Montreal Olympic Stadium, known by the locals as the Big Owe, was built in 1972 for $170 million but was not paid off for 30 years and cost billions. Sydney’s Olympic Stadium continues to incur maintenance costs of $30 million per year

Another factor which makes hosting an Olympic Games an extremely dubious economic proposition is that predicted costs are, from experience without exception, under-costed. Thus for example in 2005 when London was awarded the Games, the projected cost was 2.4 billion pounds. Official cost is now put at 9.3 billion pounds. Critics maintain 18 billion pounds is more likely. The story is similar for all post WW2 Games. Does the consequential acquisition of desired and useful capital assets, such as better transportation, sporting facilities, entertainment centres and so forth, as with the 2004 Athens Games (initial projected cost $1.6 billion, actual cost $15 billion) construction of a new airport and a metro system, constitute an economic benefit of the Games? Arguably yes, but unless the Games have been run at a profit, the money for such construction will have come from the nation’s taxpayers, and would have been so used regardless, or the money otherwise used for something more desired.