Monday, August 04, 2008

Countdown to Beijing – the Dollars and lack of sense

The most expensive sports event, and certainly the most costly Olympic Games will begin Friday. When all the bills are finally in (and yes they’ll all be paid), direct costs associated with hosting the Beijing Olympic Games will exceed $20 billion. Factoring in the additional infrastructure costs, final costs associated with the Beijing Games will top $40 billion. $40 billion to host the greatest excess in the history of mankind - $40 billion for what amounts to a two week ‘athletic festival.’

Standard & Poor's Ratings Services told Business Week they believe that Beijing is well-equipped to handle the costs associated with hosting the Olympic Games. They feel that the importance to China in terms of boosting its international standing is obvious, but the Chinese authorities appear to recognize that the Olympics isn't an end in itself. Indeed, their careful planning of this massive sporting event suggests the benefits of hosting the Games will continue long after the closing ceremony.

According to Business Week the cost of Beijing Olympics 2008 is considerable also compared with the 2012 Olympics, to be held in London. With the benefit of more updated construction material costs, London's estimated Olympic capital spending in late 2004 of $15.8 billion was only a little higher than Beijing's official estimates. This is despite the higher labor and other costs of building in London. Other candidate cities competing with London submitted lower estimates, with Madrid putting in the next highest bid at $11.6 billion.

Olympic Games costing a great deal of money, often producing billion dollar deficits date back to the 1976 Montreal Olympic Games.

When Montreal was awarded the 1976 Summer Games in 1970, then Montreal Mayor Jean Drapeau's infamous quote, “The Olympics can no more lose money than a man can have a baby.”

However, with rampant corruption, and lack of financial controls, Montreal did indeed lose money, over $2 billion dollars (US), when it was all said and done. In fact, the Quebec government — afraid the province would be humiliated internationally — stepped in at the eleventh hour and essentially put the entire municipal Olympic organizing effort under trusteeship. The facilities would likely not have been ready in time for the games had this not been happened, a reality trumpeted by the provincial government in a series of "Because of Quebec, we've done it all!" television commercials.

The Olympic movement stared into the abyss in 1979. Five years before the 1984, the only city remotely interested in hosting the 1984 Games was the city of Lost Angeles. Los Angeles had hosted the 1932 Summer Games. Californians made it clear – the only way Lotus Land would even consider hosting the 1984 Games was if the Olympics wouldn’t produce a deficit taxpayers would be forced to deal with.

Frugal L.A. officials examined the mistakes made by previous hosts, including the costly 1976 Games in Montreal. They decided not to overextend their budget by building new state-of-the-art facilities specifically for the Olympics. The city also stipulated that no new Olympics-related capital improvement projects would be built unless they were fully funded by private sources.

The federal government donated $75 million to pay for the Games, and the city's Olympic Committee earned an additional $53 million from the sale of Olympic commemorative coins by the U.S. Mint. Los Angeles made an estimated profit of $250 million from the Games, the first time the Olympics had turned a profit since 1932. Four years later, the Summer Games in Seoul raked in nearly $300 million in profits.

Peter Ueberroth stepped in as the head of the Games Organizing Committee. He was a prominent figure in the Games, receiving the Olympic Order in gold at its conclusion. Due to the success of the Games, he was named Time magazine's Man of the Year in 1984.

Ueberroth developed the concept of fewer Olympic sponsors with category exclusivity as a key benefit to an Olympic sponsorship, the genesis to the Olympic TOP program. American based companies (led by McDonald’s) bought into what Ueberroth was selling for the 1984 Games. The Montreal Olympics had more than 600 sponsors, the 1980 Lake Placid Winter Games close to 350 sponsors. An IOC TOP sponsorship is the designation given to major sponsors who invest in an Olympic quadrennial, a four year period that includes one Winter and one Summer Olympic Games. The practice began in 1984 and has been a cornerstone for Olympic sponsorships since.

Business Week raised some very interesting points in looking back at the investment Barcelona made when the Spanish city hosted the 1992 Summer Olympic Games.

Money isn't the only way to measure success, and many host cities are willing to swallow the debt in hopes of achieving the "Barcelona effect." The Spanish city took on a $1.4 billion dollar deficit after hosting the 1992 Olympics, but it successfully carried through a large-scale restoration initiative and put itself on the map as a major tourist destination. The attention brought by the Games as well as the city's investment in projects such as improving public transportation helped Barcelona increase its European tourism; it now ranks among the most visited cities in the world.

One of the more maligned cities to ever host an Olympic Games was the city of Atlanta, which hosted the 1996 Summer Games. 1996 represented the Centennial of the first modern Olympic Games held in 1896 in Athens. Atlanta was selected ahead of sentimental favorite Athens and Toronto.

Business Week reported plans to revive and modernize the Southern city were in the works prior to the Olympic Games of 1996, but these renovations were accelerated once the U.S. won the bid. The federal government spent $609 million to prepare Atlanta for the Games, with the majority of these funds ($424 million) going toward highways, the MARTA mass transit system, and other infrastructure improvements. Security costs amounted to $96 million. Unlike many host cities, Atlanta managed to successfully reuse its $200 million Olympic Stadium by converting it into Turner Field, home of the Atlanta Braves. The Games were plagued with transportation issues with events held throughout the region as opposed to an Olympic hub (events held in close proximity to each other).

Economic impact studies as Business Week pointed out predicted that the millennial Olympics would have a positive effect on Sydney’s 2000 Summer Games. They were wrong. A 2002 report by the auditor-general of the state of New South Wales showed that the event cost around $6.4 billion, including government spending of over $2 billion. Sydney anticipated a tourism boom following the Games and predicted that newly constructed sporting venues would be put to long-term use, but the report found otherwise. There was no substantial increase in tourism, and the annual upkeep for the venues, many of which are not actively used, costs the government $11 million a year. Sydney created an Olympic hub, investing hundreds of millions of dollars in Olympic facilities located 45 miles from downtown Sydney.

A GAO report (Government Accounting Office in this context) pegged the cost for the 2002 Salt Lake City Winter Games at $1.3 billion (at least that’s what the 2002 Games cost American taxpayers). The 2002 Winter Olympics in Salt Lake City, where the biggest and most expensive Winter Games ever (well at least until the 2006 Torino Games), featured 2,400 athletes and a price tag well in excess of $2 billion.

The 2004 Athens Games played like a classic Greek Tragedy. Originally budgeted at $5.7 billion, revised to $7.2 billion, final estimations for the Athens Games have costs ranging between $8.5 and $12 billion. Generations and generations of Greeks will be forced to pay for what was no more then a two week party.

The 2006 Torino Olympics were billions of dollars over budget. Stefano Bertone, a Torino lawyer and co-founder of the Turin Anti-Olympics Committee wasn’t surprised hosting the Olympic Games was an economic nightmare for the citizens of the Italian city.

"There is no intention from the promoters and the bidders and organizers to reduce the impact and dimensions of the Games, they want public funds handed to them to build and build," Bertone said. "It has nothing to do with sports and friendship or peace."

The Games were forecast in 1998 to cost $616 million US and ballooned to more than $3 billion US. What the final bill is and how long it'll take for taxpayers to erase the debt is anyone's guess. There has been no cost-benefit analysis or audit.

TOROC originally forecast 1.5 million spectators, a figure downgraded last year to 1 million. Organizers are scrambling to reach the 900,000 mark.

As the Business Week report suggested: it’s easy to understand why the Beijing Games require such a big investment. The new infrastructure includes some of the world's most impressive structures. The newly-opened passenger terminal at the Beijing Capital International Airport, for instance, has a floor area larger than all five terminal buildings at London Heathrow airport. The Beijing subway expansion plan also aims to make what was a two-line system into the world's most extensive underground network in less than a decade.

A number of the sports facilities built for the Olympics, including the National Stadium and the National Aquatics Centre, are also architectural marvels that are possible only with the use of recently developed technology. Moreover, all of these facilities have been built at breakneck speed.

China's capital city is a fast-growing metropolis—the population grew by almost 16% from 2000 to 2006, reaching 15.8 million. It is important to not only appreciate but understand many of the infrastructure costs where needed if Beijing was going to reach its full potential as a world city.

It’s really a matter of how you look at hosting an Olympic Games. If your Olympic hosting glass if half full you see the big picture. If your Olympic hosting glass is half empty you see little if anything to be gained by hosting an Olympic Games.

In September 2006, reports from Vancouver, the city set to host the 2010 Olympic Games, painted a very scary scenario for the residents of this British Columbia city.

B.C. Auditor General Arn van Iersel released a report last week stating the 2010 Olympics are going to cost $2.5 billion, and not the budgeted $600 million. The report, which sent reverberations throughout Vancouver, suggested British Columbia taxpayers better get ready to assume an additional $1.5 billion to pay for the Games.

"Our review of VANOC's venue capital cost estimates, however, indicates there are risks that may result in additional costs to the province," he said in his report. "There are still many pressures facing the capital budget for the Games and risks inherent in the operating budget as well."

Van Iersel included every potential Olympic related expense in his report. The auditor-general included the $775-million Sea-to-Sky Highway upgrade in his figures, as well as $41 million for the B.C. government's Olympic Secretariat and $20 million to build roads into the Callaghan Valley, the route to the 2010 Olympic Nordic Centre.

"The highway was included in the bid book in the first instance," van Iersel told The Province. "The purpose of the secretariat, as we understand it, is to help the province manage its Olympic commitment and we think that's a fair cost to include."

The Sea-to-Sky Highway is a classic example of how government’s position projects in hosting an Olympic Games. The current highway between Vancouver and Whistler (about 75 miles) is a treacherous two lane highway. If Whistler is going to become a world class ski resort, it will only do so if the highway between Vancouver and the ski resort makes Whistler more accessible. What Van Iersel seemed to forget when he released his report 23 months ago it was that the Sea-to-Sky Highway would inevitably be built. The Olympic Games might have been the catalyst, but the highway was going to happen.

"Way back when we were bidding for the Games . . . one of the things we looked at was the access to Whistler," John Furlong head of the Vancouver Organizing Committee told the media after the report was announced. "We had a conversation with the province about the road and the plans were to build it by 2012. The Games have triggered a timing change, that's all."

Chris Shaw of 2010 Watch, an outspoken critic of Olympic bookkeeping, said Van Iersel's report was a case of "I told you so."

"It's the Enron-style accounting we have been warning about since 2002," said Shaw. "The question is what are they going to do to make sure things don't get worse?"

While the Sea-to-Sky Highway expense makes sense, a number of other key items and mistakes made by Vancouver organizers fit more along the lines of other Olympics Games – bad planning and poor economic projections have only made a bad problem only a great deal worse.

The Vancouver Olympic Organizing Committee had budgeted $470 million for facilities. That figure was revised to $580 million 23 months ago; a figure few observers believe is realistic.

"Whether the revised enhanced [$580 million] budget will be sufficient to deliver a venue package that meets [International Olympic Committee] satisfaction is questionable," warns the federal report by Pacific Liaicon, a subsidiary of construction powerhouse SNC-Lavalin Inc.

It’s interesting that while Furlong was quick to point out British Columbia had been in the planning stages for the Sea-to-Sky Highway, he could only spin the spiraling venue costs.

"This is a very, very complex project," said Furlong, who said last week the Olympics will come in under its $580 million construction budget. "I believe that we have the confidence of the people of the province.” Remember as the head of the Vancouver 2010 Olympic Bid Committee, projected $470 million. Why anyone would have any faith in Furlong’s ability to deliver a revised facilities budget nearly 25% higher then his original budget makes no sense.

"It is . . . abundantly clear that VANOC is not far enough along on design, completion of Project Definition Reports, or tender and award of contracts for all their venues to be able to state unequivocally that they can deliver Olympic 2010 venues within the revised $580 million total budget," the report concludes.

Of greater concern are the suggestions that the facilities would be ready well before the Games, offering Canadian athletes a real competitive advantage at the 2010 Games and that isn’t going to happen.

"It should ... be noted that in the worst cast scenario, similar to Torino 2006, the venues could be delayed to just prior to the Olympic events," the federal report by Pacific Liaicon report says.

"This would ... result in Canadian athletes not being able to do practice runs on the actual Olympic venues as presently planned. In addition, another downside effect is that additional escalation that is presently not provided for in the $580-million [construction] budget would be incurred."

Their 2008 Beijing Games will be debated on many different levels. Politics and how they should or shouldn’t play a role in a city hosting an Olympic Games. Sponsorship and the value of investing hundreds of millions of dollars in an Olympic Games. Broadcast revenues and whether the Beijing Games will result in a return on the billions of dollars networks have paid for Olympic rights. And athletes and their use of performance enhancement drugs. Those are all issues that will be front and center in the next three weeks but one issue won’t be debated – the costs of the Beijing Games.

For Sports Business News this is Howard Bloom. Sources cited and used in this Insider Report: Business Week.

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