Cut the political talk, London 2012 was a bad investment!


s I mentioned in a previous article which was written prior to the 2012 Olympics, when countries host Olympic games, the costs are usually under estimated, while the benefits are often over estimated. This is simply due to general marketing hype plus noise made by politicians to garner support from residents in the city set to host the Olympics.

And guess what? London was no exception. From a poltical and economic perspective, the sad thing is that the true costs and the true benefits of the London Olympics will never be known as very few post-event cost benefit analyses actually occur after the Olympics.

The original budget for the games in London was between GBP 2.4 -3.9 bn. By 2007 the costs had jumped to GBP 9.3 bn. Now critics’ comments and supportive research indicates that the Olympics cost the UK around GBP 13 bn and a revealing investigation by Sky Sports claimed it could be as much as GBP 24 bn, partly due to transportation upgrades. According to reports about GBP 1 bn was allocated to security alone.

As was projected, and seen in other Olympics, many non-Olympic tourists were scared off by a ‘filled to the brim’ city and simply decided to skip London during the Olympics. Britons themselves stayed home during the Olympics due to the fear of overcrowding. Through anecdotal evidence, it appears that many of the city’s most popular suburbs and attractions were much less crowded than usual during the beginning of the Olympics. Data is still coming in which will reveal whether the ‘overcrowding’ fears continued to punish retailers on the back of the Olympics.

Analysis firm Experian Footfall noted that shop visits were down during the two-week long games in East London by as much as 9.6 percent, while West London saw a general ‘modest decrease’ in both weeks but the data was deeply impacted by the location of the events. Not surprisingly, UK hotels benefited from the Olympics with higher occupancy rates (an increase of approximately 4.8 percent) and higher revenue per available room (a common measure in the hotel industry) which increased 95 percent.

Jeremy Hunt, a UK cabinet minister admitted that the Olympics provided little short-term economic boosts, which is exactly what retailers have reported. In the longer term Hunt stated that the Olympics gave London a ‘profile on the global stage’. That is a fairly questionable statement though since the city is already well represented. He continued by saying that the Olympics might help Britain’s economic trade. Although this argument was more plausible for Beijing 2008 and might be spot on for Brazil’s 2016 Olympics (given the city’s need for infrastructure and the lack of ‘global’ popularity of the country and the city) the argument does not hold up for an already strong tourist destination like London which is also the second largest financial hub of the world.

For sure the 2012 Olympics were beneficial to the UK in terms of revenue, but from a net benefit (tangible and intangible) perspective the sheer cost, let alone the purported UK wide benefits, makes this extremely questionable. Much like how war benefits an economy, but produces no return on investment, the Olympics can be seen in a similar light – apart from buildings, infrastructure and general beautification, which provides some marginal benefits. Nevertheless, the UK will in no way recoup the GBP 13-24 bn price tag.

If we think of the Olympics as a proper investment, the GBP 24 bn price tag (including infrastructure) should provide a yearly return of at least 3-5 percent for the government (or something to that effect) in perpetuity, or GBP 700 m net benefits per year forever, or GBP 85 per London resident per year. It is possible, but as we have seen from previous Olympic Games, such as the ones held in Beijing and Athens, simple upkeep of the now unused Olympic facilities alone can cost hundreds of millions per year.

So, spare me the political talk. Olympics are not economically beneficial. They are an investment as much as supply side economics are realistic.

Content Source: Trading Floor


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