Thursday, July 19, 2012

What's wrong with the Olympics? Part one - the economics

You’re going to see more and more hype in the next few weeks, as the world’s most political sporting event is held in London, and a vast wave of positive support will infiltrate the media, politicians and the event itself.

There is one good thing about the Olympics. It provides a showcase for the best in world athletics to compete and demonstrate the results of their hard work and training and be achievers. That is a good thing. The recurrence of this again and again, is a reason to smile. Opportunities to do this are special and remarkable.

Yet there is a lot wrong with it, so much I’m going to dedicate three articles about it.
  • The first is on the economic cost
  • The second is in the cost to individual freedom (and surrender to an authoritarian corporatist approach to sponsorship to fund the Games by "any means possible")
  • And thirdly is a lesser important point, it is how the transport infrastructure in London has not been upgraded to cope, despite seven years of warning.

No business case

From an economic point of view, there was no “business case” for the British government to support the Olympics being held in London. It comes with a direct financial cost to British taxpayers including future taxpayers, a direct economic cost imposed on much of London, a subsidised platform for sponsorship and the self-aggrandisement and glory claimed by politicians.

The Olympics are political, they are a statement to the world by a country seeking to show off. I need not go through the list of recent hosts to demonstrate that. The previous Labour government bid for this event to try to show off, it didn’t do it for the economy.

£11 billion is the total cost of the infrastructure, hosting and the “regeneration” work undertaken related to the London Olympics. £2 billion is expected to be recovered from sponsorship, ticket sales and broadcasting rights, the rest is a transfer from taxpayers to contractors. Nearly £2 billion of the expenditure is in “regeneration”, code for government subsidised property development. The goal being to make Stratford (the main games site) into a desirable place to live and for businesses to locate (it now has three railway, two underground and two light railway lines serving it).  With the exception of Canary Wharf/Docklands, the evidence of government sponsored regeneration actually providing a catalyst to economic growth and jobs in the UK, is scant.

So financially, it will lose money.

What about the economy? Some economists would claim that this money will be returned in bucketloads because of the increased tourism and investment it will bring, except that this doesn’t bear close scrutiny.

I heard a story of someone in UK Treasury who told then Chancellor of the Exchequer Gordon Brown, that the Olympics would not create a net economic contribution to the UK economy. Gordon allegedly said “don’t worry, we wont win”.

London is already one of the most popular cities in the world for tourism. Indeed it bulges at the seams with tourists. There is evidence that the Olympics deter visitors who may otherwise have come. It brings athletes, who by and large, are not particularly high yielding tourists. It brings coaches, trainers, broadcasters and the like. It brings some spectators. However, it also scares off many others.

Moody’s produced a report saying it was unlikely that the Olympics will boost the UK’s economy. It claims the main sector to benefit will be hoteliers, with 90% occupancy estimated, although at this time of year London typically achieves 80% anyway. Given it was Diamond Jubilee year anyway it seems difficult to imagine that the extra numbers, if they turn up, will actually compensate for the for the taxpayer subsidy. In fact there is some anecdotal evidence that the numbers expected are NOT turning up. A quick look at for London in the next two weeks shows ample availability for hotel rooms with considerable discounts.

This is despite rather weak analysis from Lloyd's regarding the multiplier effect of spending, ignoring what people would have invested or spent the money on had they had it in their own pockets - (it isn't relevant that Lloyd's is a bank that was bailed out by the state and is now majority state owned).   Goldman Sachs says:

Goldman expects the Olympics will boost UK economic output in the third quarter of 2013 by around 0.3 - 0.4 ppt quarter-over-quarter (QoQ) (+1.2-1.6%qoq annualized), but this will be largely reversed in the fourth quarter.

Noting that the economic impacts of the Sydney Olympics were negative compared to the forecasts.

Economic impacts of the Sydney Olympics

The effect is more serious than that when you consider that London hardly has any spare capacity in its transport infrastructure to cope with the deluge of people for major events. The result is that thousands of businesses are telling staff to take leave or to work from home during the Olympics. The reason being that significant parts of the public transport and road networks will be close to gridlock. Business trips are being deferred because of anticipated queues at immigration entering Heathrow. With business likely to be deferred over this period, and those undertaking business facing real increases in cost due to overcrowding on roads and public transport, it’s notable none of this was taken into account in the glowing self-justifying “business case” for the Olympics from the previous government.

The so-called “legacy” is also grossly exaggerated. The Olympic stadium is likely to be offered to a football team (yet to be selected) to be used at a price less than the cost it took to build it, effectively destroying some taxpayers’ wealth. The regeneration of the Stratford area will be seen in property values, but this remains a fraction of the total cost to taxpayers.

Unfortunately, what’s insidious is that it is completely politically incorrect for the media to talk about this now – in the run up to the Olympics. Any major newspaper publishing articles about it would be seen as churlish and spoiling something great. No major politician dare say that which millions of people are saying – how can a country with public debt expected to reach 92% of GDP, which is overspending to the tune of 8.3% of GDP, with a PM who talks about a decade of austerity, justify pouring billions of pounds into a two week celebratory event.

Yes most people will watch some of it, and enjoy that. However, they would’ve done so anyway. Yes, there will be a sense of national pride (except from some Scots and Ulster nationalists) about the event, and some London pride as well, but didn’t the Diamond Jubilee provide that too? Wouldn’t there have been pride if the British Olympic team competed and won elsewhere?

So I’m not celebrating. My money has gone into this event (more than the average, given my income). I am betting the net GDP effect, in the long term, will be negative, as it has taken money out of taxpayers’ hands. People who would otherwise have invested or spent it better, and will have deterred almost as many visitors as it will have attracted. It will have imposed significant costs on London businesses unrelated to the games, by almost gridlocking the transport network.

In short, a colossal waste of taxpayers’ money.  It is a massive vanity project, and who really believes it will result in more than a short term boost to participation in athletics? Wishful thinking.

The Olympics should be left to profligate semi-authoritarian developing countries, willing to squander their national wealth on showing off, or by seriously commercially minded bids from cities that can demonstrate they can make money out of it, financially, without taking from taxpayers.

Let’s stop pretending the Olympics is an investment, it’s a legacy from a profligate, image obsessed former Labour Government, that is a commitment now. All that can be hoped for is that it goes off without a hitch, shows London in a positive light and that the property developed can be sold for the best possible price – and a lesson learnt to never ever do this again.

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