Goldman Sachs: A host of medals might make up for Olympic costs

HISTORICALLY, the financial reward of hosting the Olympics has been mixed: the 1972 Munich Olympics and the 1976 Montreal Olympics made significant losses, while the Games held in Los Angeles (1984), Barcelona (1992) and Atlanta (1996) each made a profit. Moreover, if you fully account for all of the costs related to the hosting of a Games – including the cost of constructing facilities and infrastructure, together with security and other ancillary costs – it is questionable whether any Olympics ever truly makes a profit in a narrow financial sense.

The London 2012 Olympics are expected to make a profit (in the sense that revenues will exceed the day-to-day cost of running the Games), but this will still leave the UK with a significant bill for construction and other ancillary costs.

This caveat aside, the management and cost effectiveness of the development and preparation for the Olympics generally appear to have been a success, with the infrastructure for the Games completed on time and below (the 2007) budget.

At the time of London’s successful bid in 2005, the provisional cost of hosting the Games was estimated to be around £3bn. This increased sharply to £9bn in 2007, when the first fully-detailed (i.e. realistic) estimates of the total cost were provided. Since then, the estimated total cost has fallen to £8.5bn, partly reflecting the impact of the recession in reducing overall construction costs.

The implications of this expenditure for public finances have been limited: £8.5bn represents 0.55 per cent of annual UK GDP, or 1.4 per cent of annual government revenue (although the spending itself has been spread over a number of years). Over time, a significant portion of the government’s £8.5bn bill is likely to be recouped through the sale of land and other facilities.

While financial management and good preparation are clearly important in establishing a successful Olympics, a narrow focus on the financial performance of the Games misses the wider economic effects – both short- and long-term – that hosting the Olympics can have on the host nation.

The short-term effects derive from the expenditure on goods and services related to the hosting of the Olympics, which are recorded as output when the expenditure occurs. The London Organising Committee of the Olympic Games (LOCOG) estimates that it is likely to spend around £2bn in total – in temporary employment of staff, security – with more than half of this amount (around 0.3 to 0.4 per cent of GDP) likely to be spent within the third quarter itself.

Hoteliers, restaurateurs and retailers are also likely to witness an increase in output, as they cope with the additional demand from overseas visitors. Set against this, however, some tourists may avoid coming to the UK because of the Olympics, and the output of other businesses is likely to suffer as a result of transport disruption.

It is difficult to estimate what the net effect of the indirect and other offsetting effects will be. As a central estimate, we have assumed that these effects will broadly net out and that the overall short-term effect of staging the London Olympics will be to boost UK economic output in the third quarter 2012 by around 0.3 to 0.4 percentage points, quarter on quarter, and 1.2 to 1.6 per cent annualised.

The long-term benefits of hosting the Olympics include the promotion of London and the UK as tourist venues and as a potential location for foreign investment, as well as the lasting impact on the local community from regenerating a previously run-down part of London. By their nature, these effects are more difficult to estimate but they are not necessarily less important than the short-term effects.

Sporting enthusiasts will argue that focusing on the financial management of an Olympics, or on the economic costs and benefits of being the host nation misses the point.

Much as there are short and long-term economic effects, there are also short and long-term benefits for sport. The long-term benefits take the form of the facilities that will be left behind once the Games are over and the promotion of sport in the community.

But, for competitive sporting enthusiasts, perhaps the most important bottom line of hosting the Games is the short-term benefit they typically bring by way of a larger medals haul. On average, the host nation has won 54 per cent more medals than when it was not hosting. If medals are your preferred currency, this represents a high return on investment.

Kevin Daly is UK economist for Goldman Sachs.