Posted by: olymponomics | March 9, 2012

Creeping costs

There is a long history of cost over-runs in organization of the Olympic Games (as is detailed in one of the chapters of my forthcoming book). Despite the venues and infrastructure being on track to be completed on time and on budget, there is continued pressure on the cost of London 2012  — in particular linked to growing security costs. These highlight common problems in mega-event budgeting.

Firstly, LOCOG’s initial estimate of the requirement of 10,000 security guards was described as a “finger in the air estimate” that was “…based largely on information from the 2002 Commonwealth Games in Manchester with some information from the 2006 Winter Olympic Games in Turin“, events that were of a different scale than the Summer Olympics due to be held in London. It is evident that this sort of judgement displays what is called ‘representativeness bias’: treating information from other events as comparable, despite fundamental differences in their characteristics. The high security costs for the Athens 2004 Olympics would, however, have been a much better reference point and even then there are quite specific differences between these contexts. Secondly, the Public Accounts Committee also reports that there was no price advantage to organizers despite the tripling of the the £284 million contract with the contractor GS4. This price disadvantage with a private contractor has some parallels with the loss of ‘competitive tension‘ that the National Audit Office observed in the procurement process for venues. It follows, then, that recourse to the market is not a guaranteed way to minimise costs, due to the risks of rent-seeking by private actors or moral hazard problems in the transfer of risk to private firms.

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