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Cost risks of hosting Olympics similar to natural disasters, study warns

Cities considering hosting the Olympics should compare the financial risk with models applied to natural disasters, pandemics and war, a team of Oxford university researchers have warned.

The study, Regression to the tail: why the Olympics blow up, accuses the International Olympic Committee of playing down what the researchers argue are the unavoidable dangers of big cost overruns. 

The report suggests would-be host cities should temper their ambitions by assuming their budgets for the games could rise threefold.

The IOC and organisers of the Tokyo 2020 games are wrestling with the logistics of holding a postponed Olympics, which the Oxford researchers calculate are already the most expensive summer games ever. 

The Tokyo bid originally foresaw a $7.3bn price tag for the games, but Japan’s national auditor, which has highlighted how the government has folded certain costs into non-Olympic budgets, has said the final cost may be more than three times greater.

Although Japanese officials remain adamant the games can go ahead despite ongoing concerns about coronavirus, domestic support appears to be waning. A recent poll of 13,000 Japanese companies by Tokyo Shoko Research found more than half were opposed to the games being held next year.

 According to the researchers, the cost overrun for the Rio summer Olympics in 2016 was 352 per cent, while for London 2012 it was 76 per cent. The average cost overrun for both summer and winter games since 1960, they calculated, was 172 per cent.

 According to the researchers, the cost overrun for the London 2012 Olympics was 76%
 According to the researchers, the cost overrun for the London 2012 Olympics was 76% © Leon Neal/AFP

To explain Olympic cost blowouts, the researchers said overruns did not, over time, undergo a “regression to the mean” — the statistical phenomenon that looks at the impact of repeat events on outcomes.

Instead, they experience a “regression to the tail”, with overruns for individual games so variable that possible outcomes for host nations stretch into infinity. “Deep disasters such as earthquakes, tsunamis, pandemics, and wars tend to follow this type of distribution,” said the authors.

“Such events are not just the unfortunate, happenstance incidents they appear to be, that are regrettable but will hopefully be avoided in the future, with more awareness and better luck. Instead, Olympic cost blowouts are systematic, ruled by a power law that will strike again and again, with more and more disastrous results.”

Bent Flyvbjerg, an economist at Oxford’s Saïd Business School and leader of the research, accused the IOC of being “either deluded, or deliberately overlooking uncomfortable facts” when it sets contingency levels for the games.

He also argued the Lausanne-based organisation should be held accountable for misinforming hosts about the real risks.

Mr Flyvjberg said the IOC was being unrealistic in the level it sets contingency provisions. The IOC’s understanding of risk, he said, was based on an assumption of “slow randomness” rather than the “extreme randomness” that the Oxford researchers believe governs the financial risks of hosting the games.

The underlying reasons that make overruns inevitable, said Mr Flyvjberg, include the lack of ability of a host to reverse its decision, or any chance to save on cost by delaying the project. 

Hosts are, by their nature, “eternal beginners” — each bidder effectively starts from scratch on a megaproject where there is, in that city, almost no relevant institutional memory for running one.

There is also the “blank cheque” syndrome whereby the host city is legally obliged to cover cost overruns, while the IOC takes on no such liability. 

The Oxford report suggests a number of possible solutions, including granting two successive games to each host and larger cost contingencies.

The IOC attacked the findings, saying it had not been asked for data by the researchers for many years and arguing the study took a “fundamentally flawed approach”, mixing two different budgets: the budget for the organisation of the games and the infrastructure budgets of the host city, region and country.

“This gives the completely wrong impression that these infrastructure budgets serve only the four weeks of Olympic Games competition and must be ‘written off’ immediately afterwards,” the IOC said. “This is simply not true. It also seems like the legacy of the Olympic Games is completely left out of the picture.”

The IOC introduced so-called “Agenda 2020” reforms in 2015 to cut the cost of bidding and staging the event, such as encouraging cities to use existing stadiums. 

The future of the games is also secured for the next decade, after the 2024 summer Olympics were handed to Paris and 2028 to Los Angeles. 

But those awards came after the two cities were remaining bidders for the 2024 games, in a process that started with a crowded field. 

After cost concerns ended prospective bids including from Hamburg, Budapest, Boston and Rome, the IOC was anxious to secure the future of the world’s biggest event for the next decade and persuaded Los Angeles to step aside for four years.

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