Friday, 29 November 2013

Olympics don't pay

The fact that large sporting event don't pay has been mentioned on this blog, and other blogs, many times. Now British economist John Kay has joined those of us who have doubts about the economics of large sporting events with this piece on the costs of the 2012 London Olympics.

Kay writes that the principal relevant facts are these:
The first detailed specification of what was needed for London to host the games was drawn up in 2002 by Arup. The report by the engineering and planning consultancy put the cost at £1.8bn, much of it to be privately financed. An extended assessment was then commissioned by the Department of Culture, Media and Sport from PwC. The financial consultancy’s 2003 report estimated the total cost at £3.1bn, requiring a public subsidy of £1.3bn. The balance would be recovered from the private sector and from asset sales after the games. According to PwC’s risk assessment, the probability that the taxpayer would need to provide as much as £2bn was less than 5 per cent.
The budget had by 2007 increased to about £6.5bn. At Treasury insistence, a contingency allowance, mostly unspecific, of £2.8bn – more than the total original projected cost – was added. The costs of land acquisition and of the Olympic Village were mostly excluded in the belief that they would be recovered from property sales after the event.
But what, you may ask, of the claims that the games “within budget”?
The basis of the claim that the games came in “within budget” seems to be that a small part – currently £300m-£400m – of that £2.8bn contingency remains unspent. That was achieved, however, by excluding a number of additional unbudgeted expenditures from the calculation, as the National Audit Office has highlighted. There is likely to be little, if any, net recovery of the further costs of land and housing, which were due to be recouped from property sales.

The costs were grossly and persistently underestimated, and the financial contributions anticipated from private sources overestimated by very large amounts. Every year, to the present day, the expected cost rose and the likely revenues diminished. The cost of the games to public funds has proved to be about 10 times the original estimate.
Kay continues,
There is a halo effect; the sporting success of the Olympics fosters the mistaken belief that they were an economic success. Papers recently produced by government on the “economic benefits” must be an embarrassment to the many good people of the Government Economic Service, conflating incommensurable monetary amounts and confusing costs with benefits. At the same time, a curious puritanism requires politicians to pretend activities intended to make us feel good about ourselves are justified by their contribution to “the economy”. The Olympiad was a good party, which cost the British population about £200 per head.
Kay then makes the important point that false accounts of the past prevent us learning lessons for the future, of which, he argues, there are many.
The Olympics remind us that enthusiasts typically understate costs and overstate benefits. Consultants win work by pleasing clients, and they rarely please clients by pouring cold water on their pet schemes. We should waste no more public money on risk simulations such as those in the PwC report; the outcome in this case was one of these supposedly statistically impossible events that seem nevertheless to occur on a daily basis. Establishing an allowance for “optimism bias” is realistic, but offers little incentive to make careful projections in the first place. Money put in a budget for general contingencies is not money you are likely to see again.
Just when will governments, and taxpayers, learn that big sporting events, be it the Olympics or the rugby world cup or the America's cup, don't make economic sense. And thus taxpayer money spent on them is taxpayer money wasted.

1 comment:

Anonymous said...

Probably fairer to say that the costs are regularly understated and benefits are overstated. There are still good reasons to host things like the rugby world cup, but there must be an understanding that it comes at a cost. If you want to host a party, you got to lay on some food and drinks - but then you get to host the party.

Discussions about whether the spend is appropriate or not is better than the dodgy dodgy economic impact reports prepared by consultants. They are as useful as traffic engineering assessments with 'travel time' saving projections.