Posted by: olymponomics | April 29, 2008

The London 2012 budget and Olymponomics

 

I was interviewed on BBC World Business (BBC1 and News 24) on Tuesday (at the rather early time of 5.30am) about the recent Public Accounts Committee report and the cost and economic benefits of London 2012. There seem to be a number of recurring questions when I speak to journalists, so here is the basic Olympic cost/benefit primer:

1) Why has London 2012 gone over budget?

There are a number of reasons: an unrealistic initial bid that excluded the cost of VAT (which is reclaimable, so only a technical issue), security (which perhaps should have been better estimated at the time, though it’s easy to have hindsight bias in this respect) and the whopping £2.7 billion ‘contingency’, which the PAC Report reports is expected to be used in full. By definition, I would suggest, this sum can’t be a contingency (since it has ceased to cover potential over-spend and is now an integral part of the budget). This repeats the category mistake of the 2002 Arup Report which made a provision for ‘risk’ that was simply addition of a percentage uplift to cover cost inflation. At the same time, looking over the various bid/budget documents since the initial feasibility studies, it is clear that the scope and ambition of planning is quite different from that originally envisaged.

2) Does the Olympics always go over budget?

No. But very often. The main point worth noting is that even outwardly ‘successful’ Games, such as Sydney 2000 or Athens 2004 experienced significant inflation of either the Olympic budget (where costs increased) or public expenditure (where the contribution of local/regional or national government expanded beyond the original plans). That said, the Olympics that have been staged in the United States in the past thirty years (Los Angeles 1984 and Atlanta 1996) did tend to break even because these relied upon small capital outlays (and the federal government did not provide the kind of support that other national governments tend to for the Games). Still, Atlanta was widely criticised for over-commercialisation of the Olympics, so there’s always reason to complain!

3) Will the London 2012 budget increase again? What will London 2012 eventually cost?

The rather pedantic/academic answers are “it depends” and “we may never know”. Ultimately, any Olympic budget involves contested definitions and interpretations over what an ‘Olympic cost’ is. For instance, the £9.35 billion figure is not the only public expenditure associated with the Games. It relates to specific costs of some infrastructure, stadia (in particular the budget of the Olympic Delivery Authority), security and VAT. However, it doesn’t include the operating costs of the London Organizing Committee (LOCOG), which should be offset by ticketing, sponsorship and television revenue. Nor does it include other costs incurred by Local Authorities, TFL or other agencies that will, nonetheless, be incurred due to service provision during London 2012. This ‘additionality’ problem tends to afflict projects of this kind (see for instance my doctoral thesis on the Dome). Finally, the revenue stream from sale of Olympic assets, such as the athletes accommodation or stadia, will also be unclear (certainly in the short-run, and possibly in the longer-term too).

4) Are the economic benefits of staging the Olympics?

Yes, but it’s difficult to know how much. It is clear that there are national prestige and reputational benefits attached to staging the Olympics. However, these are (almost by definition) unquantifiable. It is plausible that the Olympics generates an economic ‘boost’ through some kind of multiplier effect. However, some economists argue (convincingly) that these tend to overstate the impact on GDP of the Games by a factor of up to ten (see Matheson and Baade, 2002, ‘Bidding for the Olympics: Fool’s Gold?’). The problem of post hoc models of economic impacts is that there is no counter-factual to test against. Whilst hosting the Olympics might be associated with an economic upturn, it is not possible to rule out this being a coincidence, or even the possibility that the IOC selects hosts that are on an ‘upward curve’ and therefore sound custodians of the Olympic brand.

5) What are the biggest risks ahead for London 2012?

Terrorism and transport are the factors that are of most concern. That said, the time horizon of Olympic planning is quite extended. This means that there are four years during which threats, contingencies, dangers, hazards and crises can surface. And whilst organizers might seek to manage the ‘known unknowns’, there are, unavoidably, ‘unknown unknowns’ out there that might yet cause problems. For example, consider that between Sydney 2000 and Athens 2004 that there was a global awakening of consciousness regarding two potentially catastrophic and destabilizing risks – i.e. Islamic terrorism (September 11) and pandemic outbreaks (SARS). The potentially most problematic risks might, therefore, be unanticipated by the organizers of London 2012 (and indeed by experts or the public). The solution to such uncertainty lies in maintaining organizational capacity for responsiveness to surprises and installation of secure and resilient technologies, infrastructures or management systems that can withstand shocks or attacks. Along with the presence of leadership that maintains public confidence and is prepared to address the challenges that are almost unavoidable for a mega-project of this kind.

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