Bidding Wars and Olympic Madness

Politicians' egos, buoyed by the private economic interests that stand to profit and the frenzied international competition for hosting the Olympics, drive the bid. It leads to untethered grandiosity. Putin's pet project in Sochi seems to be a case in point.
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The latest estimated bill for the Sochi Winter Olympics in February 2014 is $51 billion. It is a good bet that the final number will be higher still.

The majority of the expense is for general infrastructure, not sports, facilities. Reportedly, over half of the necessary investment will come from a handful of Russian Oligarchs who previously were set up by Putin to take over state enterprises at bargain basement prices. Now, Putin is requiring them to repay the favor. One way or another it is still the public's money.

In spending $51 billion-plus, the Russians will outdo the Chinese with the previous Olympic spending record of $40 billion. These are remarkable sums for an event that lasts 17-18 days and generates between $3 and $6 billion (for the Winter and Summer Games respectively) from all of its television, ticketing, sponsorship and licensing money.

The competition to host the Games has become a sport in itself. It all begins 11 years before the actual Olympics. Thus, in February of this year, the United States Olympic Committee sent around a letter to 50 cities in the United States, soliciting their interest in hosting the 2024 Summer Olympic Games. There will ensue a two-year contest among the interested cities in the U.S. to be selected as this country's entry in the international competition. Each of the 204 National Olympic Committees (NOCs) belonging to the Olympic Movement will be able to enter a prospective host city from its country in the race. In 2015, the IOC will decide which of the worldwide applicants will become finalists (of which there are typically five, unless a city decides to drop out or becomes disqualified). Then, after numerous reports, presentations and site visits, the IOC will select the winner in 2017 -- seven years before the Games are staged.

The economic structure of this process does not bode well for the bidding cities. There is one seller (a monopsonist, the IOC) and multiple would-be buyers (potential host cities) from around the world. A competitive auction like this should lead each buyer to raise its bid (in the form of fancy facilities, modern infrastructure, promised security, image, etc.) up to the point where any expected net benefit is eliminated. The reality may be still worse because the group doing the bidding may be representing the interests of the entities (e.g., construction companies and unions) that stand to gain the most from a successful bid, rather than the economic interests of the city as a whole.

Part of the problem is that the large sums spent on infrastructure and facilities often serve the purpose of the Games themselves rather than those of the city's long-term development needs. The city is left with underutilized roads and stadiums that cost millions to maintain and occupy dozens of acres of valuable real estate, as well as an outsized burden of debt servicing. If the city is able to rationally coordinate the capital spending for the Games with the actual development interests of the area, then the Olympics may be an economic benefit. The independent scholarly research on the topic, however, suggests that this rarely happens.

Instead, politicians' egos, buoyed by the private economic interests that stand to profit and the frenzied international competition for hosting the Olympics, drive the bid. It leads to untethered grandiosity. Putin's pet project in Sochi seems to be a case in point. Putin is trying to convert Sochi, a traditional, Russian summer resort on the Black Sea, into a thriving world winter resort. Its subtropical climate, even in the nearby mountains, does not appear to be auspicious for winter sports and the Russians are having to store mountains of artificial snow under thermal blankets in case mother nature does not render the mountains skiable come February. The Russians are also building a modern airport along with thousands of kilometers of roads and railways to provide transportation to the Sochi area as well as to the Olympic cluster in the nearby mountains. If Sochi does not become a prime winter ski resort, then the vast bulk of this investment will be wasted, as will the investment in local hotels, restaurants and related facilities.

Last month, at an IOC-related conference in St. Petersburg, Russia, the three finalist candidate cities to host the 2020 Summer Games made their preliminary presentations. The facilities and infrastructure budget in Istanbul's bid was $19 billion, in Tokyo's it was $4.5 billion, and in Madrid's it was a diminutive $1.9 billion. Madrid noted that 80 percent of its facilities are already in place, meaning that not many new edifices paying homage to the glory of the Olympic Games would be erected. Later this summer in Buenos Aires, the IOC membership will assemble to award the Games to one of these (not-so-lucky) cities.

From the perspective of fiscal sanity and possible economic return -- not to mention the concern with carbon footprint and sustainability that the IOC claims to have adopted -- one might hope that the Madrid bid would be favored. Don't count on it. If the future repeats the past, it is gigantism and extravagance that will win the day.

Andrew Zimbalist is the Robert A . Woods Professor of Economics at Smith College, Northampton, Ma. He has extensively published on and consulted in the sports industry. His next book, The Sabermetric Revolution: Assessing the Growth of Analytics in Baseball, will be published this fall.

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