With what is possibly the weirdest Olympics in history in our rearview, I figured it's a good chance for a finance blog to take a look at, well, the finances of the Olympics!
Today's edition will be focused on the economics of hosting an Olympic Games on the host cities. In the next post, we'll look at the economics of the athletes and the true financial cost of being able to call yourself "an Olympian." By the end of this series, you'll be able to "well actually" your way through any dinner table conversation that gets a little too xenophobic, if it's anything like my household. Let's dive into the economics of the Olympics, starting with Tokyo.
How To Become An Olympics Host City: The Dreaded "Bid"
Japan is no stranger to playing host for the Olympics. The country hosted its first Olympics in Tokyo in 1964, a notable historical Olympics as these games gave rise to the famous pictogram artwork style carried forward into future games in order to bypass the language barrier frequently encountered at the Games.
Japan then hosted the Winter Olympics in Sapporo, Hokkaido, in 1972. They then hosted the Winter Games again in 1998 in Nagano, before winning the bid to host the 2020 Summer Games in Tokyo which, due to COVID, ended up taking place in 2021. They also submitted numerous unsuccessful bids to host the Games from 1960-2016 before being accepted again for 2020. But what does it mean "to bid?"
The planning of the Olympics for any given year actually starts many years prior to the event. Each country interested in hosting has a purpose-built committee, the National Olympic Committee (NOC), responsible for the logistics of submitting a bid and hosting a Games. The Japanese NOC began their voting process to select a host city for the 2020 Games back in 2011, between Tokyo and Hiroshima. However, Hiroshima withdrew due to the tsunami that struck eastern Japan in 2011, leaving Tokyo as the Japanese representative to host the 2020 Olympics. This is the part where it gets expensive.
Tokyo then created a bid committee of 64 high-ranking government and private sector officials. Together, they developed the budget, logo and marketing plan for the games in order to submit an official bid to the International Olympic Committee (IOC), the international governing body for the Olympics. The budget for the games proposed by Tokyo's NOC was $75 million, which was low compared to past unsuccessful budget proposals. However, the American Economic Association estimates that the cost of forming the committee, building proposals and essentially taking it on a roadshow in order to obtain the Games stands in the region of "hundreds of millions of dollars," so it's likely that the Japanese NOC was already underwater before they even started.
So far, we have just run through the process of submitting a bid. The IOC actually has to accept your bid in order to be considered a candidate, and they have some tough guidelines for acceptance. Likely the most famous, and most expensive, qualification the IOC has is its "infrastructure clause." This infrastructure clause is essentially a nebulous, generally non-specific outline of what constitutes an ideal host city, including:
A potential commitment to build "a signature architectural marvel" to host the Opening Ceremonies - think "The Birds Nest" in Beijing 2008 or the freestanding Olympic Cauldron in Atlanta 1996
Potential "major" updates to public transit
A minimum of 40,000 hotel rooms for spectators
At least 15,000 rooms to accommodate the athletes in one area, commonly referred to as "The Olympic Village"
The insistence on these infrastructure upgrades can be a blessing and a curse. Living in Atlanta, I get to see what this clause does to a city first-hand. Out of the Olympics, we were given:
The Olympic Cauldron and the creation of Centennial Olympic Park, both monuments to the 1996 Opening Ceremonies that now serve as downtown Atlanta landmarks
Turner Field, built for the Olympics in 1996 and served as the home of the Atlanta Braves until 2019
The Georgia Institute of Technology student dorms and aquatic center, both purpose built for the Games. Serving as the Olympic Village, the dorms face the major highway running through the heart of the city and are a now-iconic part of the Atlanta skyline
However, there is an extreme dark side that comes with the upgrades, and that is the possibility of extremely rapid gentrification. In Atlanta, inner-city neighborhoods of low-income housing were essentially razed to make room for the improvements. The displacement of these low-income families resulted in skyrocketing homelessness in the city, worsening the economic conditions for many.
Keep in mind that there are many cities, each with their own NOC and roadshow that vie for the honor of hosting an Olympics, so each NOC has to present the most competitive pitch they can. As a result, many countries go WAY overboard on how much they are willing to spend..
Congratulations! Your Bid Has Been Accepted! Now What?
Just like when you told your parents that you promise to walk it and feed it and brush it if they got you a new dog, this is the part where you actually have to follow through on your commitments you made to the IOC. And this can be...a lot more than you bargained for. Tokyo is figuring this out the hard way.
During the bidding process, Tsunekazu Takeda, head of the Japanese NOC, estimated that hosting the games could generate $2 billion in profit for the city of Tokyo, based on the spending estimates they brought to the bid. Fast forward to 2021 and the costs have skyrocketed. Despite using cardboard beds in the Olympic Village, Tokyo 2020 has become the second-most expensive Olympic Games of all time, clocking in at $26 billion, only surpassed by Beijing's $45 billion in 2008. To be fair, some of this was out of their control: just postponing the Games for a year due to the pandemic cost an additional $2.8 billion, but the costs overall have skyrocketed, and that's pretty typical. Rio de Janeiro, who hosted the 2016 Summer Olympics, estimated $2.8 billion in its bid to the IOC. After winning the bid and developing the city to be able to host, the final receipts totaled an eye-watering $13.1 billion, a 368% overspend.
Who Actually Pays For The Olympic Process?
This is the part that I think most people get confused about. I certainly was. I figured that it's the same kind of thing as a new NFL stadium: taxes on hotels, along with probably public subsidies and maybe bond selling? Oh BABY was I wrong about that.
Turns out, there are three main ways that the Games get paid for:
City government budgets
City governments are typically working from their balance sheets when they pitch to host the Games. Think of your own situation: you have a monthly budget. If you want to host a house party, you'll need to roll that into the cost of your budget, thinking about food, drinks, cups, games and maybe some party favors. Those costs add up, but maybe you're not alone.
Maybe a friend wants to pitch in to help host the party. That friend at the Olympic level is the IOC. The IOC, like any other incorporated body, brings in revenue. They, however, disburse around 90% of their revenue to other countries in order to fund host cities, NOC's and even Olympians to ensure "everyone has a right to compete." But that fund is spread pretty thin, so let's go back to the house party: you have your money and your friend's petty cash thrown in, but you're still over budget. So what do you do to recoup the losses? You charge a cover at the door! That, my friend, is taxes.
Taxpayers are, of course, on the hook. During London's 2012 Summer Games, taxpayers had to shell out over $4 billion of the $14.6 billion total cost. Greek citizens were even more screwed in their 2004 hosting duties. Taxpayers in Athens are assessed an annual tax of $56,635 until the total bill is paid, and this tax has actually been attributed as one of the main reasons the Greek economy has repeatedly defaulted in recent years. Boston had an active bid to host the 2024 Olympics until the mayor discovered that the taxpayers would be forced to pay the overflow costs. Upon discovery, the bid was pulled and the Games were awarded to Paris, because they're not taxed enough as-is.
Finally, you have good old-fashioned debt. Rio was forced to take a loan from the Brazilian federal government in order to cover the overages they faced in building out their infrastructure in preparation of 2016. Back at our fictional multi-national house party, this is basically looking at your party, saying "it's just not enough" and throwing down the credit card to cover the rest of it. Not a great plan.
Why Would You Want To Host The Olympic Games?
All of this sounds admittedly terrible, but there are some bright sides to hosting the games! For one, it puts your city on the map. Had you ever heard of Sochi before they hosted the Winter Olympics in 2014? Didn't think so.
Second, it can be the impetus your city needs to improve the infrastructure. Sure the bill is steep, but if you needed the fixes anyway, this gives your local politicians a backdoor into spending money they don't have (e.g: yours).
Third, it can definitely boost tourism. In addition to the athletes, media and spectators visiting your city during the two weeks of the games themselves, The Council on Foreign Relations estimated that the six months preceding the Games, as well as the six months following, see boosted tourism numbers due to the novelty of the event.
The Dark Side of Hosting The Olympics
I hate to be that guy, but the downsides seem to outweigh the benefits here. For one, the Olympics are a misleading smokescreen from a political standpoint. Case and point: Salt Lake City. Investopedia mentions that the job creation in Salt Lake City due to the infrastructure improvements was around 7,000. While this seems like a good number of new jobs, it was only 10% of what was forecast by NOC officials.
Second, it can be extremely wasteful. The development of new stadiums are occasionally leveraged after the Games. Look at the Olympic Stadium in London that now serves as the home of the Premier League's West Ham United, seeing fans (under normal circumstances) week in and week out. Or the aquatic center in Atlanta I mentioned earlier that is now the home of Georgia Tech's swim team. But these are the exceptions, rather than the rule. Sochi and Vancouver, for example have brand new stadiums and venues that lay dormant, purpose-built for the Olympics that now just take up space.
Third, it can be taxing (sorry) on the economy. The poster child for this is 2016's host, Rio. After the Games concluded, many of the newly-built venues were abandoned. The Games then saw Brazil's GDP contract by over 3% in that year, resulting in a horrific investment for the country. The income also does not pay for even a portion of what it costs to host. Beijing, mentioned earlier as the most expensive Olympics in history, only generated $3.6 billion in revenue on a $45 billion spend, running a net loss of $41.4 billion. Los Angeles is the only host city in modern Olympics history that actually made money on hosting because the infrastructure already existed, resulting in a lower budget needed for hosting.
Finally, you have the most overlooked issue for hosting the Olympics: bad PR. Perception of your city can alter radically as a result of hosting the Games, and not always for the better. Tokyo is firmly in the spotlight this year for hosting the Games under the shroud of a resurgent COVID pandemic, thanks to the newly discovered Delta variant that is ripping through industrialized nations. Japanese citizens staged protests outside of the arena housing the Opening Ceremonies due to the large influx of people that descended on Tokyo for the Games, potentially bringing about new infection vectors.
But this is hardly the only time the Games brought about negative attention. My hometown Atlanta Olympics in 1996 had two PR disasters: the Kerri Strug broken leg incident, which opened a national conversation around pushing young athletes too hard, and the bombing of Centennial Olympic Park and the national news coverage around Richard Jewell who was wrongfully accused of planting the bomb.
The only Games to have it worse than Atlanta? That would be Munich 1972, when terrorists took Israeli athletes hostage, and later executed them, at the airport during the Games, bringing about questions around athlete safety. PR can make or break tourism for your city, and a negative event during an Olympics magnifies the effects even further.
Why Do Cities Keep Volunteering?
So hosting the Olympics seems like a terrible deal. It's expensive, time consuming, obfuscating and can result in cripplingly bad press that sends your city down a hole of despair. But cities are going to keep hosting for one reason: clout. Imagine for a moment that you're the mayor of some American city. Atlanta, Los Angeles, Chicago, whatever. Your resume will look one hell of a lot better if you have "hosted the Olympics" somewhere on there. It doesn't matter the cost, it doesn't matter the work. It's all about the prestige, when sometimes, it would be better left to someone else.
What do you think about the economics of hosting the Olympics? Let me know in the comments below! And don't forget to sign up for my email list below so you can get these in your inbox as soon as they post. Thanks for reading!