Wednesday, July 11, 2007

Olympic Gold? Escalating Costs of Hosting the Olympics

And so it begins:
President Vladimir Putin met with Prosecutor General Yury Chaika on Wednesday. Putin said he had signed a decree on preparations for the winter Olympic Games in Sochi, which "attaches serious importance to security matters." Putin also asked Chaika "to look at this issue in a wider context, not only from the point of view of personal security."

"The matter must also be looked at from the point of view of economic security. Control - sufficiently rigorous control - must be organized over the rational spending of the funds," Putin said.
You can expect to hear much talk over the coming years regarding the budget and money spent on the Sochi Olympics. Olympics are notorious for cost overages. The 2010 Olympics in Vancouver, Canada had a (so far) final budget of $1.7 billion Canadian, of which about $550 million were for sports facilities. That represents a cost increase of 23% from original estimates.

The news is even worse for the 2012 London Olympics, where costs have climbed from an initial estimate of £2.4 billion to £9.3 billion ... and counting!

The 2004 Athen's Olympics had an original budget of 1.14 billion euro, which climbed to 3 billion euro before construction began. The budget was twice raised, from 6 billion euro and finally to a total of nearly 8.6 billion euro.

The current projected budgets for the Sochi Olympics is approximately $12 billion, comprised of a current 60/40 split of public and private funding. This will make it, by far, the most expensive Winter Olympics ever. It isn't out of the realm of possibility that costs over-runs could easily see the final bill climb past the $20 billion dollar cost of the Beijing 2008 Summer Olympics.

One can hope that Russia might see the trend, and be prepared for the climbing costs. As VVP is rightly pointing out, only days after winning the 2012 games ... hold onto your wallets, Russia! The final bill for hosting an Olympic games is far from certain.


Peter Morgan, Editor said...

You wrote: "Olympics are notorious for cost overages. The 2010 Olympics in Vancouver, Canada had a (so far) final budget of $1.7 billion Canadian, of which about $550 million were for sports facilities. That represents a cost increase of 23% from original estimates."

Actually, people are notorious for comparing apples and oranges. The C$1.7 billion is the operations budget, and that money is raised from corporate interests (TV broadcasters, corporate sponsors, souvenier licensing, ticket sales...). It's for actually running the Games.

The C$580 million (correct) is in addition to that. It's the construction -- or capital -- budget for the 2010 Games, 50% of which comes from BC taxpayers, 50% from national taxpayers (because, after all, we taxpayers get to keep the facilites for decades after the Games are gone).

That budget is administered and spent by VANOC, the organizing committee, but its expenditure is supervised by the governments, audited by the governments, and it's accounted for separately from VANOC's operations budget.

Costs are up because after several years of downturn in Western Canada, we're currently undergoing a capital construction boom that began, right on time, with or without the Olympics coming to Vancouver.

There is something like $100 billion of major-project spending underway in BC at the moment, sucking every spare rebar, pound of concrete and labourer there is to be had. Basic laws of economics kicked in and prices went up. Construction inflation since 2002, when the VANOC bid was done, has risen in this area about 40%.

VANOC wasn't responsible for that -- it's captial expenditures were something like half of one percent of the construction boom, and that's not a sufficiently big tail to wag the dog. And it said at the time it presented its bid that the IOC rules prevented it from reporting predictions of inflation (for good reason), but that it expected its cost of cosntruction to rise by the time the facilities were actually built.

So it was able to keep its capital costs from increasing only half (or so) of what the industry was experiencing. That's pretty good management, I'd say.

I'm not affiliated with VANOC, so I can't speak for it, nor any other organizing committee, and I know you were trying to make a point, but generalities that give the wrong impression need somebody to say something, somtimes.

W. Shedd said...

While I understand your overall point, what was being discussed was less a question of what specific expenditures and cost increases were occurring in Vancouver, than the fact that Olympics tend to blow their initial budgets - sometimes by factors greater than 100%.

I actually think that Canada learned quite a good bit in Calgary about hosting an Olympics and how to manage costs. But as you point out, the laws of supply and demand require that construction prices will become inflationary for projects this large. So while a 23% increase is modest compared to industry wide construct cost increases, it still is a cost increase - something planners of future Olympics would do well to remember.

In fact, I would say that if the costs for Sochi only increase 23%, the Russians will have done very well. The bill for the Athens Olympics became almost 6x greater than the initial estimates.

Colleen said...

Russia could have a trillion dollars in reserves by then, so even 50 billion would be a drop in the bucket.

There are plenty of rich Europeans, Arabs, Indians, and of course Russians in Sochi's perimeter (say a short plane ride) that Sochi will explode as a tourist destination when all the development is completed IMO.

W. Shedd said...

Actually, the most recent budget projections for Russia show it running a budget deficit in about 2 years. They have recently been increasing government spending in various sectors by factors of 2, 3, 4, etc. Not 2% increases ... 200% ... 300% ... 400%.

Russia is doing well with revenues, but they are spending it even faster.

Colleen said...

The RF has the obligation to use its accumulated wealth for the betterment of the people and, sure, mass scale projects in housing, education, and healthcare are going to cost a lot.

But I also think that the growth we have seen in Russian economy for the past seven years will be nothing compared to what we will see in the next seven. Everyone has already figured out that it's now beyond oil and gas prices (although they will help too).

And just to add to my point above RE: why these foreign tourists will come to Russia. During the Turin Olympic Games all of the foreign athletes partied at the Russia House after winning a medal. Russian team apparel was the most popular. The bottom line is that the young people of the world (excluding Poland and Baltics) basically love Russia. Because it is so mysterious. Because it is so different in every way. Because it has such a virtuous history. So, they will come to Sochi.

W. Shedd said...

I'm sure many people will come to Sochi, before, during, and after the Olympics. It is a rather unique region well suited to tourism. It would have been developed decades ago in a free-market economy.

But Olympics historically LOSE money and historically have large cost overages. I am sure the Russians are looking at those Athens, London, and Beijing cost figures very closely. They are already proposing absolutely unprecedented spending for a Winter Olympics.

Let's remember, Winter games are much smaller than the Summer games, with correspondingly smaller budgets and attendance. And yet, Russia is already proposing infrastructure spending in Sochi on a scale with SUMMER games in the previously mentioned nations.

The Olympics are great for Russian pride and will pour unprecedented billions into the Sochi region. It instantly becomes one of the largest public works projects in the world.

But the vast majority of people who are going to benefit financially are those who are already wealthy. Those who are already planning large ski resorts in Krasnaya Polyana, those who already own and are developing hotels, etc. in the region. There will be some trickle-down, sure - but lets not pretend that some cronyism isn't at work here (hardly unique to Russia, by the way).

As I point out, Putin is already telling Chaika to control spending. There are numerous other news articles, in Russian and English, discussing the Sochi Olympics and the role of corruption, organized crime, and increasing construction costs in the region.

The topic of the future of the Russian economy is for another day. While Russia certainly has many assests, in terms of people and natural resources, it has many hinderances to growth as well (I was looking at a Levada poll last night, where Russians cite corruption and bureaucracy as the two biggest hinderances to economic growth, for example). Most recent analysts that I have read discuss a real estate bubble in areas of Russia. Inflation has been a continuing concern as well, despite rosy forecasts, recent inflation figures jumped considerably and the Russian government admitted they won't achieve their low inflation goals for this year.