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2012 London Olympics: Economic Benefits Not What You Think

By , Money Morning •

With the whole world eagerly focused on the 2012 London Olympics, it's easy to think of this year's games as one big fundraising event for the city - but it's far from the case.

Like any host city, London expected a three-week surge in visitors to draw record revenue for the region and its vendors.

But the 2012 London Olympics, like global sporting events before, will disappoint.

Instead of luring money to the city, it actually drives out the usual spenders and decreases tourism, drastically reducing revenue for local businesses. That means host cities hardly ever recoup the costs it takes to prepare for holding the Olympic Games.

Just look at Montreal.

Montreal, which hosted the 1976 Olympics, is the best example of the negative economic side effects of the Olympics.

The city's mayor infamously said "the Olympics can no more lose money than a man can have a baby."

He couldn't have been more wrong.

Mismanagement and unexpected costs left the city's citizens with a $1.5 billion debt that took three decades to erase. The final payment on the debt was made in 2006.

"The government wants to say that not only are we going to have a good time with this event, but it's also going to make us rich," Stefan Szymanski, professor of sports management at the University of Michigan, told CNN. "And that's just not true."

Olympics Actually Hurts Tourism

London usually sees 300,000 foreign and 800,000 domestic tourists per day during the month of August. It is widely expected that these numbers will be down this year following the 2012 Olympics.

"These people have been told implicitly that they should stay away and they have done so," European Tour Operators Association Chief Executive Tom Jenkins told the AFP. "The numbers are currently dramatically down on last year. How far down will be determined by how long Transport for London maintains the 'don't come into London' campaign."

Of the 2,500 U.K. hotel owners surveyed by TripAdvisor, 58% said the Games would have no impact on business, while just 35% think they will see either a short-term or long-term positive effect.

The transportation industry has a more grim take on hosting the Games - their business has already suffered.

"Our business is down by about 20-40 percent depending on the time of day," Steve McNamara, general secretary of the Licensed Taxi Drivers Association, told the AFP. "Normally about 90 percent of our customers are Londoners but they've all left the city and haven't been replaced by tourists. I don't know where all these tourists are or how they're getting about, but London is like a ghost town."

Not only is a tourism decline hurting the city's revenue; London is already in debt because the cost of Olympics hosting starts with the bidding process.

Olympics Economic Benefits Dead from Start

London had to beat out other U.K. cities before it went up against the international field to finally win the bid.

This process is driven by private interest groups supporting construction, architecture, bankers and lawyers who care little for London's fiscal well-being and more for their own pockets. That means they pressure the city to overbid.

"Even in an ideal world where aspiring host cities behaved rationally, the competition to land the games would leave the winner just about breaking even, or maybe with a small windfall," said Andrew Zimbalist, an economics professor at Smith College who recently published International Handbook on the Economics of Mega Sporting Events. "But we don't live in an ideal world. In practice, host cities tend to be captured by private interests who end up promising much more than the city can afford."

The winning city isn't the only one hurt by the bidding process. Chicago, during its three-year bid process, spent $100 million on advertising, preparing venues for inspection, and promotions in a losing effort to lure the Olympic selection committee to choose the Windy City.

2012 London Olympics Costs Continue to Rise

The British government has raised its 2012 London Olympics budget estimate to nearly $15 billion - almost four times the initial amount of $4 billion.

Some economists project an even higher cost and only some of this investment is tied up in infrastructure projects that may be useful in the future.

With about half the revenue raised going to the International Olympic Committee, London is going to need $10 billion more in revenue than originally projected just to break even.

It is a common trend for host cities to understate budgets. Athens' initial budget was $1.6 billion, but the final public cost is estimated at closer to $16 billion, ten times higher than originally thought.

And each year, the cost of hosting gets higher.

Atlanta spent $2.4 billion in 1996. Sydney spent $6.8 billion in 2000 and is still trying to fill the rooms it built. Athens, which spent $16 billion in 2004, has venues that are in disrepair because it cost hundreds of millions to maintain them.

Beijing seems to be the only recent host to have benefited in terms of tourism, but only after spending a monstrous $40 billion in 2008 -- the most expensive Olympic Games in history.

Then there's always the fear the exposure will cast an unappealing light on the city, driving away future tourists.

"Should the Games be plagued by disorganization (e.g., the current security snafu in London), the pervasive pollution of Beijing, the violence of Munich, Mexico City or Atlanta, or the corruption scandals of Salt Lake City and Nagano, then the PR effect might be negative," said Zimbalist.

The only instances of success have been Barcelona, which did enjoy a significant tourism boom following the 1992 games, and Los Angeles, which hosted the 1984 games and already had the infrastructure and venues needed.

But two examples of success are hardly anything to brag about.

Bottom Line: "I think the Olympics is and should be a great sporting event, but it is not and should not be considered a major economic event," said University of Michigan's Szymanski.
"It's a lot like having a party. It's a good time but it doesn't make you rich."

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