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What Happens To Rio’s Economy Once The Olympics Leave?

Fireworks explode above the Maracana stadium during the opening ceremony of the Rio’s 2016 Summer Olympics. CREDIT: AP PHOTO/LEO CORREA
Fireworks explode above the Maracana stadium during the opening ceremony of the Rio’s 2016 Summer Olympics. CREDIT: AP PHOTO/LEO CORREA

When Rio de Janeiro sent in its original bid to host this year’s Summer Olympics, it estimated that it would cost the city just $2.8 billion to build the necessary facilities and infrastructure and make sure the games run smoothly. At the time, the Brazilian economy was booming, creating growth and prosperity for many of its residents. It all may have seemed like a solid investment.

Now Brazil’s fortunes have seriously shifted. The economy is in its worst economic recession since the 1930s. And the cost of hosting the games has ballooned to an extra $4.6 billion in direct costs and may reach $10 billion with everything taken into account.

That the price tag of hosting the Summer Olympics has gone far over the original projections and will cost the city dearly should have come as no surprise, however. Research consistently finds that hosting the games is a losing proposition for any city.

Host cities have to spend a lot of money in three major areas: infrastructure like transportation and housing to make room for the influx of enormous crowds, building Olympic-specific venues like swimming pools and running tracks, and operational costs like ticketing and security. The International Olympic Committee requires that host cities have a minimum of 40,000 hotel rooms available, for example, which meant Rio had to build over 15,000 new rooms.

CREDIT: Patrick Smith
CREDIT: Patrick Smith

The cost always ends up being more than anticipated. In fact, for every Olympics since 1960 for which there is reliable data, not a single one has come in on budget, according to a paper from the University of Oxford. By contrast, usually at least 10 to 20 percent of large-scale projects will be on or under budget.

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The overruns are huge. Hosting the Olympics runs over original cost projects by 156 percent, on average, the authors find. Almost half had cost overruns above 100 percent. On average, hosting the Summer Olympics ends up costing cities $5.2 billion more than originally expected.

With its current direct costs to be a projected extra $4.6 billion, Rio is set for a cost overrun of 51 percent — very costly for a city already struggling economically, and about on pace with the median for all games since 1999.

Yet it is still no where near as large as some other Summer Games. Montreal’s 1976 Summer Olympics went over by 720 percent; Barcelona went over by 266 percent in 1992.

CREDIT: Patrick Smith
CREDIT: Patrick Smith

“Judging from these statistics it is clear that large risks of large cost overruns are inherent to the Olympic Games,” the Oxford paper’s authors write.

Part of the problem is that host cities consistently underestimate costs in their original bids. “[T]he budget is more like a fictitious minimum that is consistently overspent,” the authors write. But the cities are also required to guarantee they will cover any surplus costs. “This means that the host city and nation are locked in to a non-negotiable commitment to cover any such increases,” they write.

“The overwhelming conclusion is that in most cases the Olympics are a money-losing proposition for host cities.”

Host cities could still decide it’s worth the gamble of the unexpectedly high price to capture the benefits of tourism and investment or even just a big injection of civic pride. But research finds those don’t pan out either, according to a paper from the American Economic Association.

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The benefits host cities can capture from broadcast rights, domestic and international sponsors, ticket sales, and licensing aren’t negligible: Vancouver got $1.58 billion in 2010 and London got $3.27 billion in 2012. Yet they’re dwarfed by the costs of hosting — $7.56 billion for the former and $11.4 billion for the latter.

The paper also finds that other potential benefits don’t come to pass. Unless a city’s unemployment rate is already high, employment from the construction projects that hosting requires doesn’t create any stimulus, and it’s a gamble as to what the job market will look like. Utah predicted the 2002 winter games would generate 35,000 jobs, but just 4,000–7,000 jobs were created during the games and the bump quickly dissipated. That meant the government spent about $300,000 per each job created.

Similar patterns held for other Summer Games, such as those in Los Angeles and Atlanta. “Overwhelmingly…studies show actual economic impacts that are either near-zero or a fraction of that predicted prior to the event,” the authors write. “If one wishes to know the true economic impact of an event, take whatever numbers the promoters are touting and move the decimal point one place to the left.”

Tourism also doesn’t appear to increase much overall, given that such a huge event can actually make some people stay away, while financial gains to chain hotels, restaurants, and car rentals don’t necessarily stay in a local economy.

And the sports facilities that are built tend to bring little value once the athletes leave. They are often so specialized that a city has to spend more money afterward to make them usable for other purposes, and building stadiums rarely comes with economic benefits anyway. “[T]here is no reason to believe that the investments required to host the Olympics will provide higher returns than alternative infrastructure projects that could have been carried out instead,” the authors write. Rio could have, for example, invested $4 billion in building its roads and bridges.

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“[T]he overwhelming conclusion is that in most cases the Olympics are a money-losing proposition for host cities,” they add.

The case is even worse for developing economics, such as Brazil’s, where growth may already be on an unstable course.

Past experiences don’t bode well for what will happen to Rio after the crowds and cameras leave. The cost overrun when Athens hosted the games in 2004, plus the debt it took on to cover it, played a role in weakening the country’s economy, which to this day is in deep crisis. It took Montreal 30 years to pay off the debt it took on to finance the huge cost overrun of the 1976 games.

“The high average cost overrun for the Games…should be cause for caution for anyone considering hosting the Games, and especially small or fragile economies with little capacity to absorb escalating costs and related debts,” the authors of the Oxford paper write.