Posted by: olymponomics | July 25, 2012

Olympic planning and moral hazard

Later today (at 2pm) I have an article published on the LSE Politics & Policy blog about why Olympic costs overrun — reprising themes from my book and various articles that I have written about risk and mega-events over the years (some with Martin Lodge), and is something I have been thinking about in the context of the Olympics and mega-events for some time. One of the features of cost overruns as a topic (or ‘optimism bias’ in planning as some call it, while Peter Hall’s famous work talks about ‘great planning disasters‘) is that it has a timeless quality that means that it probably was an issue that exercised the minds of the builders of the Pyramids and no doubt will continue to surprise and upset decision-makers well into the future despite the development of complex methodologies of project management, risk analysis and budgeting.

As an addendum, I wrote the article a couple of weeks ago, just before the great brouhaha about the failure of security contractor G4S to supply the expected number of guards for London 2012. What is interesting are the clear parallels with the problem of moral hazard experienced in financing of the Olympic Village (as private developers withdrew from the project at the time of the credit crunch and new investors were only found following the subsequent stabilisation of the global economy). This is a ‘principal-agent’ problem that arises from a failure to formulate or enforce binding contracts, with the situation worsened by the host government’s role as backer of last resort for the Games.

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