LONDON IS STILL REELING from the success of the Olympics. The initial scepticism that the Games would turn into urban carnage was quickly replaced with optimism, excitement and pride. The city performed admirably, proving it was able to hold a world-class event. Now we are waiting to see how our economy will perform, as the effects of those two weeks of activity trickle into economic indicators.
The bidding process for potential host cities has become increasingly competitive because of the perception that the Games help attract tourists and generates income. But will the “Olympic Effect” be the economic stimulus to counteract austerity and lift us from the doldrums?
Host Cities – Winners or Losers?
In 1976, Montreal hosted the Summer Olympic Games, predicting they would cost $124 million. In fact, the city incurred a debt of $2.8bn (£1.7bn) that was only paid off in 2005. As a result, cities did not want to host the 1984 Games and they only went ahead when Los Angeles agreed to host on the strict condition that it was under no financial obligation. The LA Games were a relative success, incurring minimal construction costs by using existing facilities and raising substantial funds by selling sponsorship to corporates. From then on, the Games became more commercialised and the financing model had a new focus on private contributions.
But the LA Games proved to be the exception and not the rule. Other nations failed to raise significant private financing and budgets overran. The Olympic Committee only funds operating costs. Capital expenditure for building and infrastructure falls entirely on the local and national government. Budgets consistently overrun. Athens initially projected that its Games would cost $1.6bn, but ended up costing 10 times that. Beijing’s initial estimate was $1.6bn, this overran by $38.4bn. Vancover’s turn to host the game nearly came to a screeching halt after overspending. The city was bailed-out by the Olympics Committee and Standard & Poor’s lowered the city’s credit rating as a result.
100m Sprint vs. a Marathon
The question is whether the economic benefits of the Games are pragmatic and, if in fact, the long and short term benefits out-weigh the upfront costs.
The most obvious short-term benefits come from ticket sales, TV rights, tourism, increased sales and spending on construction and infrastructure. UK retail sales were the first indicator that included the Olympic period, showing a sharp uptick in July. The improvement was largely a result of increased non-specialised stores such as department stores, a likely beneficiary of increased tourism. However, retailers noted no extra activity as a result of the Olympics and the increase in retail trade is more likely a result of falling inflation and rising employment. House prices saw their biggest fall ever in August as potential buyers deserted the market, distracted by the Games.
The long-term benefits of the Olympics are even harder to quantify, including newly constructed facilities and infrastructure, event facilities, urban revival, enhanced international reputation, business opportunities and corporate relocation.
The UK tried to capitalise on the opportunities presented by the Olympics. Cameron held a record 12 international business summits during the Games, hoping to build trade opportunities. The Olympic committee also made gallant efforts to ensure the legacy of the facilities with plans to lease the Olympic stadium to football clubs and planning permission to convert the village into private sector housing.
However, plans for the Olympic legacy are not the sound of dollar signs ringing: they are strategies in damage limitation. The Olympics has historically left its host cities with big white elephants: buildings go unused and governments have to foot the maintenance costs. Twenty-one out of the twenty-two stadiums built for the 2004 Summer Games in Athens were unoccupied in 2010.
Economic impact analysis of the Summer Olympics of Los Angeles and Atlanta (Baade & Matheson, 2002) show the effect of the Olympics on the long-term economy is insignificant. The economy virtually returned to its normal pattern afterwards. Any increase in economic activity is temporary at best.
The real result of the Olympics will be determined by the success of the urban regeneration. We could argue that investing in London’s East side could have gone ahead without the Games and at a much lower price tag. But political gridlock often means these projects are indefinitely delayed in red tape. The Olympics gave the occasion and incentive to finally invest in London’s poorer areas.
The Cost of Gold, Silver and Bronze
The official figure for the cost of the Olympics is £9bn, but it is hard to determine exactly how much has been spent because costs are accounted for in three separate budgets and many are hidden away on the balance sheet of government bodies. Recent reports have put this figure at £11bn, after the cost of buying the Olympic Park land and legacy projects are factored in.
It is with sad irony that we compare the Government’s initial £6.2bn austerity plan in 2010 with the £11bn spent on the Olympics. The Government put up taxes and cut welfare and benefits and all the while spent money on arenas and sculptures that have a questionable future once the Olympics finishes.
On the surface the figures are deplorable. But the drive to fiscal austerity is a long-term shift. For years, the UK spent more than it earned and leveraged itself to the hilt. Irrespective of the Olympics, our fiscal policy needed a change of tact. Spending £11bn on the Olympics is pennies compared to the UK’s £1.2tn debt burden.
The Olympics may have been a temporary escape from reality in what has been a grim few years for many but the economy now faces the hangover after the party – stomach the financial costs and try to do something with the Olympic facilities.
However, we shouldn’t feel too downtrodden. The Games creates something known in accounting as “goodwill”. It’s the intangible improvement in reputation, morale boost and pride that accounts for the discrepancy between what we spent on the Games and what we earned.
Our economy is suffering from high uncertainty from the Eurozone crisis and a government-driven austerity policy. This has culminated in constraints in supply, low consumer confidence and a credit crunch. “Goodwill” is exactly what the UK economy needs. Successful austerity programmes only work when implemented with high levels of confidence. The UK needs the self-belief to start businesses investing again, consumers spending and banking lending. The Bank of England’s governor put it eloquently in a recent press conference:
“It is to our Olympic team that we should look for inspiration. They have shown us the importance of total commitment when trying to achieve a goal that may lie years ahead”.
The “Team GB” ethos may be the greatest benefit of the Olympics.
Eimear Daly is a market analyst at Monex Europe
Reinmoeller, professor of strategic management at Cranfield School of Management, has proposed an Eight Actions Model to help organisations increase margin and perform ahead of market expectations
When thinking about Iran as a potential market it’s important to go in with open eyes. This means being aware of some of the myths as well as being clear on the challenges
Third of UK companies with defined benefit pensions schemes are paying out more from their scheme in pensions than is being received in contributions
Parity Group promotes group financial controller Roger Anthony to group finance director