The opening celebration for the 2016 Olympic Games is one day away and, of course, all we are hearing about is pollution, crime, unfinished facilities, Zika and cheating Russian athletes. Chances are the games will go off without a hitch and be highly-entertaining despite some of the challenges the athletes will face in their housing and competition venues. But once the Games are over, the nation of Brazil is likely to experience a familiar dose of economic trauma.
Why? A recent study by the Council on Foreign Relations looked at the economics of different Olympic Games, and found that the costs inevitably outweigh the benefits. Part of the problem is enormous cost overruns. When nations bid for the games, they typically underestimate the cost of constructing stadiums, fields, athlete housing, safe transportation and security. The accompanying chart shows just how much these cost estimates fell short of the actual price tag; note the Beijing and Sochi games, which cost $45 billion and $51 billion respectively. Building appropriate venues for the games in Athens, Greece actually led to a government bankruptcy.
If those facilities could be recycled into popular tourist destinations, the expense might be justified, but the report found that the more typical situation is a lot of expensive facilities that have limited post-Olympics use. Beijing’s famous “Bird’s Nest” stadium cost $460 million to build and now sits unused. The entire city of Sochi, Russia, which was planned to become a resort town, stands idle.
The Rio Olympics are estimated to cost $20 billion for infrastructure alone, even after plans to overhaul the city’s sewage system were cancelled due to cost overruns. Estimates suggest that the city will attract only a fraction of the anticipated 480,000 (International Olympic Committee estimate) to 600,000 (Brazilian Ministry of Tourism estimate) visitors, which means that the already-compromised fiscal situation in Brazil will get worse at some point following the Games.
Meanwhile, it is getting more expensive simply to bid on hosting the Games. When you add up the cost of drawing up construction plans, hiring consultants, organizing the way the event will be run and the necessary travel expenses, a bid can cost as much as $150 million—as it did when Tokyo made its 2016 bid. The city of Toronto recently backed out of bidding on the 2022 games, due to an estimated $60 million in bidding expenses, and, of course, that doesn’t count the rumored under-the-table payments to IOC executives.
Two countries remain in the running for the 2022 Winter Games: Kazakhstan and China. It may not be a coincidence that neither country has to worry about pesky voters and citizens claiming that the costs are not justified by the benefits.
Kendall Capital is a wealth management firm providing financial planning in Rockville to individuals and families with assets of more than $500,000.