MELBOURNE -- This week London will become the center of the sporting universe with the first Summer Olympics 2012 event, a soccer match, being held today.
The Olympic Games is regarded as the world’s most prestigious sporting event, but economically speaking, is the host city/country always a winner?
According to Melbourne economist John Madden, the answer will vary between bidders and events.
Profit or loss?
Madden, the Deputy Director of the Centre for Policy Studies at Monash University, has conducted in-depth studies into the economic costs of mega-events, using Sydney 2000 as a case study. He is primarily focused on answering the question: Do the large economic benefits predicted for Olympics host countries actually materialize?
His research reveals that Sydney (2000 Games) incurred an economic cost roughly equal to the deficit involved in hosting the event. The on-budget Games operations resulted in a cost of $2.86 billion, which was covered by Games revenues.
However, off-budget costs, such as security and transport, meant that the Sydney 2000 Games operations ran at a net economic loss. After taking into account the cost of constructing venues and infrastructure, the total net cost of the Games was $2.2 billion.
This is not to say that being a "host" city or country cannot be profitable. In fact, Seoul made a record profit of $479 million for hosting the 1988 Summer Olympic Games, while Los Angeles banked $224 million for their efforts in the 1984 Games.
"Both are reported to have been quite profitable on the operating phase of the Games. Furthermore, Los Angeles made use of existing Olympic facilities, while South Korea (a less well-known tourism destination in 1988) has been estimated to experience an Olympics tourism legacy," Madden says.
Measuring the costs
To date, an accurate assessment of the economic impact of the Olympic Games has been a challenge.
Typically the economic analysis of the Games is carried out through an economic impact study, an exercise in which data on the construction and operating phases of the Games are input to an economic model to determine consequences for economic variables such as real GDP, export volumes, import volumes, inflation etc.
Madden argues that when done well, such studies can elucidate economic dimensions of the Games that would otherwise be very difficult or impossible to understand from the Games financial statements alone.
"Examples of these are the regional distribution of economic impacts, the scope for fiscal stimulus benefits during economic downturns or the crowding out of other economic activities during economic booms, and the impacts (via, for example, indirect exchange rate effects) on distant industries that are otherwise not connected to the Games."
However, Madden claims that inaccurate forecasts of the economic impacts of the Olympics, or of other sporting events, result from the use of estimating methods that fail to account fully, or sometimes hardly at all, for the displacement of other economic activities by the event.
"By and large, economic studies do not seem to figure prominently in pre-bid policy analysis by host cities/countries of the merits of making a bid to host the Games," Madden explains.
"Rather, they appear to form part of post-bid exercises to sell the Games to the taxpayers of the host city/country. This might create incentives to use modeling methods, or inputs to those modeling methods, that inflate the economic benefits of the Games."
Madden explains that prior to hosting an Olympics Games bidding cities will undertake budget estimates for hosting the Games. Revenue items include Olympic broadcasting revenue, ticket sales, advertising sponsorship, merchandise licensing, etc.
For some host cities, like Sydney, these revenues cover little more than the operating costs of running the Games (ticketing, transport, information systems, telecommunications, ceremonies, drug testing, and so on). Much of the cost of hosting a Summer Olympics is often made up of capital costs (new venues, transport infrastructure and urban renewal).
"Capital costs are often substantially underestimated at the bidding stage, with cost blow-outs often occurring in the rush to get venues completed in time for the Games," Madden explains. "At the time of the bid the overall cost of the London Olympics was estimated at £3.4 billion, but this now has escalated to perhaps as high as £11 billion."
Bad news for Londoners as Madden reports, "tax payers at the national, state/provincial and city level are required to cover any publicly incurred deficits from the Games."
Sydney 2000 vs. London 2012
Madden suggests that London is unlikely to experience an overall economic benefit from the 2012 Games. He points to the London Games having a much higher cost than Sydney. But he does concede that London might fare better than Sydney in providing wider economic benefits that might offset its higher costs. He outlines several reasons for this.
"In Sydney, the construction of purpose-built Games facilities involving expenditure of $1.9 billion (in year 2000 prices) accounted for the bulk of the cost of the Games to economic welfare," he explains.
Though Sydney's Olympic Stadium continues to be used, it still struggles to cover the operating costs and recoup the original construction costs. However, Madden speculates that the story might be different for a densely populated city like London.
"There are a number of factors that may cause the London Olympics effect on economic welfare to be considerably less than its accounting costs. These include the London Olympics having a large urban renewal component, and the likelihood that in a city of its size there is a greater chance of facilities and infrastructure built for the Olympics having a profitable post-Olympics use."
Venues such as London's new Olympic Stadium will continue to be used after the Games by the burgeoning population, and possibly sold to a local football club as a way to recover operational costs.
A benefit that some commentators contend is a tourism legacy arising from showcasing the host city. According to the IOC and official government figures, tourist visits to city of Sydney were up by 11% in 2000, with an additional 1.1 million people visiting Australia between 2000 and 2004.
However, Madden's research suggests something entirely different. He finds no evidence for an Olympics-induced tourism legacy for Sydney in the years following 2000. He argues that for cities with a high international profile (such as London), it is unlikely that the Olympics will give a further boost to tourism growth.
A final factor distinguishing the London Games from those of Sydney is the state of the overall economy. When Sydney hosted the Games, it was in a period of essentially high employment. Whereas, the 2012 London Games are occurring during a recessionary period.
"Unlike Sydney, it turns out that a good deal of Olympics expenditure is occurring during a recessionary period. The stimulatory effect of this expenditure may considerably lower the cost of hosting the Games."
Today it's not uncommon for large-scale renewal projects to be associated with the Games.
Sydney introduced a program of works around the Sydney Olympic Park that was focused upon Sydney's Homebush area which was an extensive wasteland.
However, the most famous case study is Barcelona; the 1992 Games created a long lasting positive legacy for one of Spain's most popular cities. The Games produced more than 200 parks, plazas, schools and other public facilities in Barcelona.
Most of these amenities were inserted into derelict areas where crime was high. In one area in particular, El Rival, buildings were retrofitted to house a modern museum, police station, and other amenities [Source: University of Washington]
In the bidding phase for 2012 Olympics, the then Mayor of London, Ken Livingstone, presented a similar vision.
According to a London East Research Institute report, there will be several Olympics-led regeneration initiatives for the five East London Olympic host boroughs: Newham, Tower Hamlets, Hackney, Waltham Forest and Greenwich). However, such claims have been met with some some skepticism.
Lastly, there are numerous benefits that cannot easily be prescribed a dollar value; Madden explains that these "intangible" makes hosting the Games appealing, despite the economic costs. These intangible effects are things like national pride, cultural unity, promotion of healthy living etc.
Until there is an economic assessment that takes into account all these variables -- applied universally -- it will be difficult to accurately assess the full economic impact of hosting the world's biggest sports event.
But we could say that whatever the economics costs and gains from hosting a mega-event like the Olympics, there are some clear winners: the athletes, who train hard to make their respective countries proud, and the sports lovers, who pay their way as taxpayers or tourists.