in the Games the budget is more like a fictitious minimum that is consistently overspent.
–Flyvbjerg & Stewart
There’s one question to ask when it comes to hosting the Olympics in 2024: are they worth it? To address this question, we need to consider three factors: costs, benefits, and risks. The benefits don’t have to be monetary. There is nothing wrong with saying the Olympics at such-and- such-a-cost are worth it, even if some or all of the benefits are intangible. The costs, however, are almost all related to money. The risks, though necessarily hypothetical, have been what we’ve been talking about in other threads. As an opponent of the hosting the Olympics, I’ll let someone else make an argument for them. Instead, I’ll focus on the costs and risks, and some empirical research that suggests the Olympics are not worth hosting.
Bent Flyvbjerg and Allison Stewart of the Saïd Business School at Oxford University published a working paper called Olympic Proportions: Cost and Cost Overrun at the Olympics 1960-2012. Flyvbjerg and Stewart characterize the Olympics fall as a megaproject, a huge, complex, costly project such as the Big Dig. And due to the cost and complexity of the Olympics, it’s often difficult to account for the costs of the project. Data isn’t always collected or accurately reported. The authors have developed what they consider an improved method for counting the costs. They also confirm that the IOC requires bid documents to contain a guarantee that cost overruns will be backed by the city and government that hosts the games. Ironically, these documents ALWAYS UNDERSTATE THE COSTS.
As the authors state, “The Games overrun with 100 per cent consistency.” One reason for this seems to be the practice of ignoring the budgeting in the bid book (formally known as the Candidature File):
The Candidature File is a legally binding agreement, and as such represents the baseline from which future costs and cost overruns should be measured. However, this is rarely done; new budgets are developed after the bid has been awarded to the city, which are often substantially different to those presented at the bidding stages (Jennings, 2012). These new budgets are often used as new baselines, rendering measurement of cost overrun inconsistent and misleading.
In short, bid documents ALWAYS UNDERSTATE the costs of hosting the Olympics. Flyverg and Stewart omit indirect costs of hosting the Olympics such as infrastructure improvements, making their cost estimates conservative. Still the percentages of cost overruns are startling: “an average cost overrun in real terms of 179 per cent–and 324 per cent in nominal terms.” (It’s worth looking at the actual percentages for overruns since they vary quite a bit). An average cost overrun of 179%.
Boston 2024 sets the cost of hosting the Olympics at $4.7 billion. Thus the average (179%) overrun would be $8.4 billion. A 100% overrun would be $4.7 billion, hardly a radical estimate. A conservative 50% overrun would be $2.3 billion. The authors estimated a !00% overrun for the London Olympics.
We know the cost of the Olympics is high. We don’t know just how high they will be. No one knows. They will cost significantly more than the bid documents state. Because we don’t know the exact costs, we are in the area of risk. For how much would the Commonwealth be on the hook? We don’t know. We have $1.248 billion in our rainy day fund. Should we risk incurring this much debt? How much debt should we be willing to incur? We shouldn’t have a problem coming up with a number. Should we be willing to pay $1 billion for the Olympics? $2 billion? As far as I’m concerned, the risks outweigh the benefits. We have a $38 billion state budget, but as big as that sounds, it isn’t keeping up with our costs.
All megaprojects are risky. Most come in overbudget. The Olympics is a megaproject that always come in overbudget. As Flyverg and Stewart state, “The data thus show that for a city and nation to decide to host the Olympic Games is to take on one of the most financially risky type of megaproject that exists, something that many cities and nations have learned to their peril.”
… that these are good questions to ask and the study, though flawed, is important, so I’m not going to spend anytime picking it apart.
But the purpose of the questions and the studies, I think, should be to improve delivery of the games, not to provide a handy excuse to say no.
be an option? I get that you don’t agree. It’s a difference of opinion. No solving that. But what’s wrong with saying no? Personally, I’ve know my reasons. They are rational and empirical. What’s wrong with that?
One use of the research is to improve the delivery of the Olympic games:
… should always be ‘an option’ I don’t know that it should be the default or that the studies should provide an excuse to say no. That’s all I’m saying.
Why do you characterize the using the studies as a reason to oppose hosting the Games as an excuse? What do you mean by that?
Why should we automatically assume that it is a good idea to deliver the games at all?
I am sorry, but just because a very, very small group of people decided that we should have Olympics doesn’t mean that we have any obligation whatsoever to try to “improve” the bid.
… the popularity of the games suggests they are wanted by many orders of magnitude more people than “a very, very small group.” I don’t particularly care how you feel about sports, but I like some and would pay some of my hard earned money to see the Olympics. As I already do, occasionally, for Celtics and Red Sox games.
I think you are in the minority in opposition, not the other way around…
the numbers certainly don’t suggest that Bostonians want an Olympics at all, never mind by orders of magnitude more than the small group of people at the center of pushing it.
Why should Bostonians be forced to build something because it’s internationally popular, particularly when there are myriad other cities vying for it with populations that seem to be enthusiastic for it at a local level?
It’s true that watching the Olympics on TV is very popular. To assume that hosting the Olympics is therefore popular is disingenuous. People who like to watch war movies are very unlikely to favor hosting a war. I am not equating the Olympics to war; my point is that to enjoy watching video of a thing does not necessarily translate to wanting that thing to happen in your home. Obviously, for some people, it does. The poll numbers do not support the idea that it does for any large majority.
Among the most popular of TV shows are “reality” crime shows, mostly showing white cops arresting scary black men who are alleged to have committed various crimes such murder, burglary, rape, assault, and so on.
I submit that an important part of their popularity is that most viewers do NOT want these activities taking place in their neighborhoods.
Their popularity certainly does not mean that most people like crime.
Why does wanting to watch something on tv necessarily equate to wanting to spend massive amounts of tax payer money and disruption to host them? It clearly does not, as polling as very clearly indicated.
If I buy a stock that’s more expensive than I planned, and I still make money off it that I wouldn’t have with bonds, would I complain? Yes, Olympics come in over budget. So do almost all construction projects of any kind. So should we stop building schools?
I know this won’t be popular, but I offer an easy chart of the modern Olympic games:
Los Angeles – 1984 – $230 million profit
Seoul – 1988 – $479 million profit
Barcelona – 1992 – $5 million profit
Atlanta – 1996 – $10 million profit
Sydney – 2000 – Varying estimates. Consensus of slight loss
Athens – 2004 – Deep loss
Beijing – 2008 – Claim of profit. I don’t believe them.
London – 2012 – $80 million profit
So…either we’re a bunch of idiots in Boston who can’t do what every democratic country that is not a basket-case has managed in my lifetime, or all this worry is about as accurate as the announcements of doom that preceded the 2004 DNC.
What’s your source? Wikipedia? I looked at Wikipedia, but can’t figure out the methodology. With most numbers, it matters how you count them. Who’s profit? What was the cost to the cities/countries? The research I cited is clear about it’s methodology.
I think the difference between Boston 2024 and earlier years is, 1) the amount of negative publicity mega-sporting events have received 2) a significant increase in research on the economics of these events 3) the fact that our state budget is still extraordinarily tight 4) as far as BMG is concerned, opposition to the 1% and apparent lack of democracy.
Do I think Boston can handle the games as well as or better than any other locality? Probably. Boston 2024 was caught completely flat-footed by the negative response. I’m now trying to figure out for myself whether Boston 2024 did anything less competent than any other bid committee. My guess is, no. They didn’t. As I think more about it, I think the audience for this Olympic is highly unreceptive, not for the soporific reasons Shirley Leung provided, but those that I enumerated above.
The difference between a school, which is not a mega project, and the Olympics is one of cost and complexity.
In my limited experience, there are always cost overruns. The two new municipal buildings we have completed since I’ve been selectman both came in over budget. The first had some costly screwups that cost us money. The contractor likely screwed us on the other by budgeting for less rock/ledge than there was and thus winning the bid. Due to contractual language, we had to pay them more money, which was about the difference between theirs and the next lowest bid. The costs of the first building didn’t exceed the money we held onto as a contingency. The second building increased the cost of the project by 20%. Even so, the costs were low enough that we were able to afford them. The Olympics, like the Big Dig, is on a much larger scale. The dollar amounts for overruns is much higher. But so is the percentage costs. It’s not uncommon for other megaprojects to come in 30-40% overbudget on the average. The Olympics overruns’ average are 179% of cost.
I’m chairing our school building committee right now. Schools do not come in much overbudget. The reason is, there is an agency dedicated to financing and overseeing the construction of schools. We have a project manager and an architect. Every step of our process is checked by the MSBA, which signs off on the cost. The Olympics does not have an MSBA. It will not have a cadre of people who have managed the hosting process in Boston. It will not have a dedicated watchdog.
They don’t include government subsidies. Who cares if the corporation running the Olympic bid makes a profit except to the extent that a loss would inevitably be dumped in the public’s lap?
when taxpayers are paying for things that aren’t being reimbursed by those who benefit.
The UK paid for something like 7 billion pounds of the 9 billion pounds it cost. Do you seriously think the UK was reimbursed for those costs? Do we really want to call that Olympics a “profitable” games, then?
So, yes, after deep amounts of state sponsored corporate welfare, most Olympics are profitable.
The only Olympics to record that has actually turned a profit for the host city that you listed, though, is LA in 1984, because 1) no other country wanted it, 2) it stipulated by law a very low limit to the amount of public money that could be spent on the games, which 3) forced the IOC to be on the hook for cost overruns, and 4) was thus able to ensure no shenanigans that lead into cost overruns.
Additionally, 5) The TV deal was given entirely to the local committee, not the IOC or USOC, so it could be applied to venue and infrastructure costs, and 6) a deal was crafted that ensured if there were any profits, 40% of it went to Southern California and LA.
When it comes to Boston 2024,
1) Plenty of other countries want it, so the IOC is dictating terms, 2) the IOC now mandates that local governments provide guarantees that they’ll cover any cost overruns, which is 3) going to force Boston and Massachusetts and our state agencies to take the hit, a la the Big Dig, which means 4) there’s every incentive for the IOC to demand more and more, and for Boston 2024 to pretend this will cost less than it actually will in order to secure the games.
Additionally, 5) the huge NBC Olympic TV deal largely goes to the IOC and USOC, and there’s going to be precious little of it to help fund any Boston games, and 6), finally, to my knowledge, there’s been nothing written or said by Boston 2024, the USOC or the IOC that suggests Boston or Massachusetts would share any in any hypothetical Olympic profits.
So, literally every single important scenario that led to LA 1984 being a cheap, profitable-for-the-host-city games doesn’t exist with Boston.
There’s every possibility that the IOC or USOC will make a profit from an an Olympics in Boston. In fact, that’s pretty much inevitable.
But it’s also inevitable that the IOC’s profits will come at Boston’s and the Commonwealth’s expense. We would be funding their profits.
Gizmodo has a good rundown on LA 1984’s special sauce. Suffice it to say, there’s nothing in Boston 2024’s efforts thus far that suggest it’s taking any of what LA 1984 did to heart. If it did, they’d lose the bid, and they know that — because LA 1984 may be the kind of sustainable Olympics that the world could use, but it’s not the kind of ridiculously profitable Olympics that the greedy, corrupt hacks at the IOC want.
Nobody liked the numbers, because they contradicted the argument.
To be clear, I included the simple final result numbers, not these nebulous estimates of the long-term good of raising a city’s profile, or revitalizing neighborhoods. I didn’t include estimates of the value of ending Seoul’s totalitarian regime, which is directly traceable to the ’88 Olympics. I didn’t include estimates of the value of making over the horrible Barcelona waterfront into the Port Olimpico, a beautiful and popular spot today. I ignored Sydney numbers and Beijing numbers because I didn’t trust in them. Trying to be balanced about this — I ignored glowing estimates on purpose.
Many numbers come from this Emory survey, if you need one place to see many of them: http://www.globalhealth.emory.edu/resources/case_competition_resources/pdfs/2014_intramuralcc_case.pdf
The London number if from their final report referenced here http://www.insidethegames.biz/articles/1014451/2012-surplus-should-push-boa-back-into-profit and here http://www.olympic.org/Documents/Games_London_2012/London_Reports/LOCOG_FINAL_ANNUAL_REPORT_Mar2013.PDF (I did a rough currency conversion)
Here are my facts. Where are yours? Where are your reports indicated massive losses? Please link to them, produce your numbers.
I never expected to see you engage in mind-reading. Why aren’t people’s stated reasons sufficient as a motive for their views?
As I noted in another comment, a source that you linked to yourself (and then referred to from another thread) said that all but a very few Games had generated red ink, and that those few involved special circumstances. Those circumstances are not present in Boston. Now, you’ve provided other sources that apparently contradict the one you liked before, except for maybe Sydney, where you “didn’t trust in” the numbers. All you’ve demonstrated is that there is disagreement about what constitutes profitability, and have decided to use some criteria not in evidence to decide which data are trustworthy. Those criteria apparently lead you to trust the London OOC’s assessment of their own profitability. Then there’s your source that appears to be a .biz for-profit site dedicated to the Olympics. I can’t really judge their credibility, since they don’t have any overall statement of purpose, funding, or staff. The writer of the piece, which quotes one government official and a raft of Olympic spokespeople, is oddly not the person described in an “About the author” box on the page.
This is all very squishy argumentation, and not what I’ve come to expect from you.
No one wanted to take your unsourced numbers at face value?
Thanks for providing the sources. Now we can have an informed discussion rather than a debate about how many angels can dance on the head of a TIF.
it’s what they can tell us. The Emory text isn’t even research, it’s a brief for some sort of competition, and there is no source for the numbers in the bibliography. The source may be Bach, President of the IOC, but there’s no source for the numbers or what exactly profit means.
The London numbers refer to the surplus of the local olympic committee, not London. This report doesn’t seem to reflect how much the government spent. These numbers appear to reflect “the profit” made by the local olympic committees.
If you are constantly going overbudget it seems to me that the smart move would be to revise your budget. Then again, I’ve never figured out why TV stations don’t give more time to NFL games, which always seems to run past the allotted time.
Oh, I don’t know — maybe because it would make it more obvious that the host city would be spending huge amounts of money that its citizens would prefer be spent on things that actually benefit them. Might reduce popular support for the proposal, wouldn’t you think?
…they may actually be more open to supporting something.
as the saying goes, “it’s better to beg for forgiveness than ask for permission,” and all the greedy hacks at the IOC that profit in the billions from these games know that. They’ve done this many, many times now.
budget.
The Olympics are very big, very complicated, and the experience to run them is typically lacking. I strongly suspect that Olympics are also site specific, so even the experienced people that hosting cities can hire will deal with novel political and infrastructural situations.
around the world, and my understanding is that he believes the underestimates of the ultimate cost of these projects are deliberate. In a 2005 policy paper for the World Bank, he concludes:
It’s simple. Projects with underestimated costs are more likely to get approved than those in which the costs are estimated honestly.
…that a rule to live by in life is to underpromise and overdeliver – kind of a corollary to the maxim that honesty is the best policy.
The law says that publicly traded corporations must maximize their profits and returns to their shareholders.
Underpromising and overdelivering is, from a corporate perspective, literally giving away money. It’s illegal to pursue as an explicit policy.
A more common approach was developed by the defense industry during the 50s and 60s, and as far as I know is still done.
The game is to ensure that contracts have provisions addressing “unexpected” or “unforeseen” work. Defense contracts often have pre-negotiated provisions for handling for schedule overruns (yes, the government pays).
The result is that the contractor puts forth contracts that pretty much everybody knows won’t work, deferring as much work as possible to the “unexpected”, or “unforeseen” stages. The marginal profits of those provisions, as well as schedule overrun agreements, are higher than the marginal profits from the “main” contract.
The result is significantly improved profits — good for price-per-share and welcomed by shareholders.
The results of Flyvbjerg and Stewart seem consistent with this second business model.
in bidding low on projects lies in recouping those charges later via contract provisions for such things as site conditions that can’t reasonably be foreseen. Some of this can be prevented if the public agency does due diligence in investigating site conditions beforehand and later thoroughly reviews any claims or change orders put forward by contractors.
There are other safeguards that can be used against cost overruns, most notably fixed-price contracts that attempt to put the risk of those overruns on the contractors themselves. One of the key things to watch out for if the Olympics do go forward here is whether fixed-price contracts for large building projects will be used, or whether the developers will be awarded cost-reimbursement contracts, which contain little or no incentives to control costs.
In some ways, all of this is separate from the question whether the likely costs of public projects are deliberately underestimated by planners and politicians and others who are trying to get approval for those projects. That deliberate underestimation happens well before the contractors are even selected.
This is really about the fact that these projects are likely to cost more than the initial projections, not because of opportunistic behavior by contractors, but because the boosters of the projects are not being honest with their projections. Even without running into unforeseen conditions etc., these projects are likely to be more expensive than we’re often led to believe.
…but if I were a shareholder and was led to believe I would get a better return than I ultimately did I would be pretty upset.
Anyone with any experience in managing large projects knows that you can’t simply give one number to describe the cost. There is always going to be a range of numbers that depend on many, many different variables. So when someone gives you a single cost number for a mega-project, do you think they are giving the worst cast cost? No. Of course not, because no one would agree to spend that much. Instead they *always* give you an optimistic number that people may be willing to accept. Sometimes this is done with intentional deception in mind, but most of the time it is simply the managers lying to themselves because they really want the project to get done. This happens all of the time because once you lock in the client on the project, you know you are probably going to get paid even if there are cost overruns. There is simply no real incentive to be honest about these kinds of budgets.
I remember once giving an estimate for a medium sized software project. I estimated upper and lower bounds for the various parts of the project. When I gave it to my manager, he demanded that I just give him one number, not a range. I should just use the worst case estimate. When I gave him exactly that, he said: “that’s too long”. Duh.
…they shouldn’t complain too loudly when it turns out not to be true. Your manager has nobody but himself to blame for the answer you gave him when you started by trying to be honest.
The manager who accepts the honest worst case schedule and presents that to his superiors will get his ass handed back to him. It is a really weird reality but all too much the norm (and has been for a while) that everyone knows you are lying when you give an optimistic schedule, knows that it will run over, knows that there will be a little hell to pay for doing so, but nothing near the hell to pay of being honest up front.
I also wish it weren’t so but it isn’t going to be wished away anytime soon.
That is exactly my point. This is exactly why we are complaining about this obviously bogus Olympic bid.
It will give me little satisfaction if naive citizens are disappointed and surprised to find out the costs will be much more than Boston 2024 has projected and that the taxpayers will pick up the burden.
Alison Stewart wrote her dissertation on how ignorance serves as a “productive force” in such mega-events: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.581195. It sounds really interesting.
On a related note, Andrew Zimbalist will be speaking at the JP Forum on June 15th, and you should all go: http://jamaicaplainforum.org/event/andrew-zimbalist/.
says Flyvbjerg,
I’m not prepared to say that Boston 2024 lied on its bid. Having been involved in some largish municipal projects, I know that studies that produce cost estimates are themselves costly. A feasibility study to build a school costs several hundred thousand dollars. I don’t know how much the studies would cost for hosting the Olympics, but I doubt there is a financial incentive to do what it would take. That goes not just for Boston 2024, but any applicant. This study does not refer to the Olympics, but rather big projects involving infrastructure. It isn’t unreasonable to extrapolate from the findings, however.
You can’t. The study claims that deliberate misrepresentation occurs systematically for the purpose of securing public funding, often in the face of competition for those funds.
Boston 2024 has no competition for the funding, but that’s irrelevant, since they are not asking for funding to begin with.
I can write whatever I want. Moreover, I could extrapolate and speculate. I could delve more into the process. This would be called part of the research process.
I’m more concerned with being accurate and honest. My null hypothesis developed from long experience in local government is as follows: to blame someone for dishonesty or malfeasance you have to prove that their actions or results thereof were not the result of ignorance or incompetence. I’m not sure that Boston 2024 did anything but follow the directions and do what bidders typically do. That’s why I haven’t been jumping on the bandwagon of some who see malfeasance in the whole thing. I prefer more than suspicion.
With that said, Boston 2024 has to make a competitive bid. Would the IOC accept an “honest” bid? It also has to present a number that the public can live with. If they came out with the announcement that it would cost $12 billion to host the Olympics, it would be dead in the water in Massachusetts. People would not believe that they could raise 1/3 of the state budget. So there are likely to be factors affecting the accuracy of their bid.
Cost escalation and lying would come later in the process when contractors bid on projects, promise certain things at a certain price, and then fail to deliver. I’ve experienced this first hand on municipal projects. The devil is in the details of the contract and legally fighting the failure to deliver can cost as much or more than the financial loss. The stakes were relatively low for my town, but talk about annoying.
Events over the last few days has *proved* they are asking for funds to begin with, and they have very openly asked for infrastructure and security funds that will cost into the billions.
Rose and Speigel find,Using a variety of trade models, we show that hosting a mega-event like the Olympics has a positive impact on national exports. This effect is statistically robust, permanent, and large; trade is around 30% higher for countries that have hosted the Olympics. Interestingly however, we also find that unsuccessful bids to host the Olympics have a similar positive impact on exports. We conclude that the Olympic effect on trade is attributable to the signal a country sends when bidding to host the games, rather than the act of actually holding a mega-event. We develop a political economy model that formalizes this idea, and derives the conditions under which a signal like this is used by countries wishing to liberalize.