Cost and Cost Overrun at the Olympics 1960-2012

19Apr16

 

Olympic Proportions: Cost and Cost Overrun at the Olympics 1960-2012

Abstract

Do different types of megaprojects have different cost overruns? This apparently simple question is at the heart of research at the University of Oxford aimed at understanding the characteristics of megaprojects, particularly in terms of how they are established, run and concluded.

In this study, we set out to investigate cost overruns in the Olympic Games. To do so, we examined the costs of the Games over half a century, including both summer and win- ter Olympics. We looked at the evolution of final reported costs and compared these to the costs established in the Games bids, submitted to the International Olympic Committee (IOC) up to seven years before the Games occurred. In so doing we established the largest dataset of its kind, and documented for the first time in a consistent fashion the costs and cost overruns for the Olympic Games, from 1960 to 2012.

We discovered that the Games stand out in two distinct ways compared to other megaprojects: (1) The Games overrun with 100 per cent consistency. No other type of megapro- ject is this consistent regarding cost overrun. Other project types are typically on budget from time to time, but not the Olympics. (2) With an average cost overrun in real terms of 179 per cent – and 324 per cent in nominal terms – overruns in the Games have historically been significantly larger than for other types of megaprojects, including infrastructure, construction, ICT, and dams. 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.

For the London 2012 Games, we find that: (1) With sports-related real costs currently estimated at USD14.8 billion, London is on track to become the most costly Olympics ever. (2) With a projected cost overrun of 101 per cent in real terms, overrun for London is below the historical average for the Games, but not significantly so. (3) The London cost overrun is, however, significantly higher than overruns for recent Games since 1999. London therefore is reversing a positive trend of falling cost overruns for the Games.

Cost Overruns

Interest in the costs of the Games has been high since the establishment of the modern Olympics in 1896. As long ago as 1911 Baron Pierre de Coubertin, the man responsible for establishing the modern Games, referred to ‘…the often exaggerated expenses incurred for the most recent Olympiads…’ (Coubertin, 1911), and in 1973 Jean Drapeau, the mayor of Montreal, famously stated ‘The Montreal Olympics can no more have a deficit, than a man can have a baby,’ (CBC, 2006). Unfortunately, Drapeau was wrong, and problems with costs and cost overruns are as prevalent today as they were in Drapeau’s time, and in Coubertin’s time before him.

Despite substantial interest in the costs of the Games, however, attempts to specifically and systematically evaluate the costs and cost overruns of the Games are few (see e.g. Preuss, 2004; Essex and Chalkley, 2004; Chappelet, 2002), while those that do attempt them are often focussed on a specific Games (e.g. Bondonio and Campaniello, 2006; Brunet, 1995). Previous research on the costs of the Olympic Games has instead focussed on whether the Games present a financially viable investment from a cost-benefit analysis perspective. However, what to measure when determining the costs and benefits of the Games to a host country is open to debate. In particular, legacy benefits described in the bid are often intangible, and as such pose a difficulty in ex-post evaluations. The benefits of increased tourism revenue, jobs created by Olympic needs, or national pride are hugely varied and similarly difficult to quantify. Costs are equally hard to determine; for example, one could argue that if hotels in the city have invested in renovations, and benefits of increased tourist revenues to those hotels are included in the analysis, then these costs should also be included in any accounting. Similarly, the percentage of work that an employee in an outly- ing city spends on Games-related work would be exceptionally difficult to estimate.

Preuss (2004) has developed the most comprehensive multi-Games economic analysis to date, looking at the final costs and revenues of the summer Olympics from 1972 to 2008. In his work, he finds that every OCOG since 1972 has produced a positive benefit as compared to costs, when investments are removed from OCOG budgets. Note that this, however, restricts the analysis to only OCOGs, which generally represent a fairly small por- tion of the overall Olympic cost. Further, other authors disagree with Preuss’ findings, and have suggested that the net economic benefits of the Games are negligible at best, and rare- ly offset by either revenue or increases in tourism and business (see e.g. Malfas, Theodoraki and Houlihan, 2004). Furthermore, none of these studies have compared the projected costs to the final costs, which is a problem, because experience from other types of mega- projects show that cost overruns may, and often do, singlehandedly cause positive projected net benefits to become negative (Ansar, Flyvbjerg, and Budzier, in progress). Finally, while it is important to note that increased revenues would potentially allow organisers to increase their costs for the Games, this in itself does not preclude an analysis based solely on costs; rather, we should consider that increased revenues could be returned to be used to reduce the funding required by the host city and country governments.

In research more broadly looking at megaprojects, a number of studies have examined cost overruns. Flyvbjerg, Holm and Buhl (2002), for example, provide an examination of rail, fixed-link and road megaprojects, which finds that cost overruns are both prevalent and predictable, with overruns of 44.7, 33.8 and 20.4 per cent in real terms for each type of megaproject respectively. Their work has led to the development of a technique called ‘reference class forecasting’ (RCF) (see Flyvbjerg 2008), which advocates developing budgets through a comparison with similar completed projects, rather than the bottom-up planning approach for each individual project that is commonly used. The RCF approach has been endorsed by the American Planning Association, and has been used in the UK, the Nether- lands, Denmark, and Switzerland, among others, to predict megaproject costs and benefits. Research into major IT programmes has confirmed similar results (Budzier and Flyvbjerg, 2011). Daniel Kahneman (2011, p 251), Nobel Prize winner in economics, has called Flyvbjerg’s advocacy for reference class forecasting ‘the single most important piece of advice regarding how to increase accuracy in forecasting through improved methods.’

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