The price of the Olympics

London’s Games will cost anywhere from £8bn to £24bn. Are the economic returns worth the investment? Matthew Partridge investigates.

What will the bill be?

The Public Accounts Committee estimates that the bill for the Olympics could be as much as £11bn. Sky News has come up with a similar figure. However, Sky points out that this doesn't count money spent on extra security or Tube improvements. Adding these costs may push the total up to £24bn.

Researchers at Oxford's Sad Business School, just looking at the official budget, come up with a slightly lower figure. Yet even they think that the bill will come to £8.4bn. The original budget in 2005 was £4.2bn. The London Games will be the most expensive in history (see below).

Why so high?

The Public Accounts Committee recently produced a report criticising cost overruns in several areas, including security. It claims that "estimates for venue security could have been better informed at an earlier date". However, the problems may have started at a much earlier point.

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Forbes' Patrick Rishe points to claims that Ken Livingstone, who was London mayor in 2005, deliberately underestimated the costs in order to win public backing for the bid. Rishe points out that such shenanigans go on with other sporting projects. In the United States local government typically makes a large contribution to the costs of stadiums.

This means that "city leaders and team owners overstate benefits while understating costs of building new sports facilities. By the time construction is completed the eventual costs to the public are significantly higher than projected." Michael Joseph Gross suggests in Vanity Fair that even before the bid was launched "there was a worry that the budget estimate was a... fantasy".

Will the Games benefit the economy?

According to the Financial Times, the Olympics "may continue to support the fragile UK labour market over the summer". Indeed, a large number of temporary workers have been hired, "from bar staff to cleaners and traffic marshals". However, it also notes that the effects of this won't last.

Indeed, as Peter Dixon of Commerzbank says, any hiring "is likely to be unwound again later in the year". Olympic Chief Jacques Rogge claims in The Daily Telegraph that the Games will leave a big long-term legacy. "For every pound spent on infrastructure, 75 pence has been dedicated to legacy purposes. This initiative helped finance the radical transformation of a huge section of east London from a contaminated, neglected landfill into the glittering new Olympic Park."

However, others are sceptical about whether such investment is cost-effective. As The Economist puts it, "building an Olympic Park is an expensive way of sprucing up a run-down part of London. That Velodrome is grand, but who will use it when the Olympians are gone?"

What about the sponsors?

Unlike taxpayers, sponsors are likely to do well out of the Games. There is strong evidence that spending money on sports advertising boost sales. A recent academic study by Columbia College in Chicago found that American firms that spent large amounts on sport sponsorship grew at an above average rate. The very biggest spenders grew the fastest. As well as boosting revenue, sports advertising helps "raise ever further the costs of entering the global market. It is spending like this that makes competing with Coke hard, even when making fizzy drinks is easy."

To prevent non-sponsors linking themselves with the Games through 'guerilla marketing', the organisers have been given huge powers to censor advertising. Nick Cohen points out in The Spectator that other businesses argue that "they have paid taxes towards the £9bn cost of the Games but are not allowed to use the Olympics to seek custom as they could use Wimbledon or the Jubilee".

Are lessons being learned for the next Olympics?

The next city to host the Olympics will be Rio in Brazil. According to the Associated Press, it should be able to benefit from preparations to host the 2015 World Cup, as well as facilities built for previous events. Yet even at this stage problems are starting to appear. "Ongoing legal disputes, a worrisome hotel infrastructure and the large number of projects needed to be carried out simultaneously as the Games approach are some of the obstacles that could end up derailing some of the city's plans."

Even Olympic officials are starting to get worried "that the deadlines are getting tighter and the workload is increasing". According to TV network ESPN, Brazilian politicians are demanding the organising committee "release more information on the committee's finances, including the officials' salaries". Overall, "the 2016 Games must avoid the overspending and the misuse of public funds that marked the 2007 Pan American Games in Rio".

The most expensive Games in history

Bent Flyvbjerg and Allison Stewart of Sad Business School at Oxford looked at the costs of hosting the Summer and Winter Olympics from 1960 to 2012. They found that every single Games during this period has gone over budget. This suggests that, "for a city and nation to decide to host the Olympic Games is to take on one of the most financially risky type of megaproject that exists".

According to their data, London is set to become the most expensive Olympics in history. This means more than Barcelona 1992, which cost $11.2bn in 2009 prices. However, at 101%, London's budget overrun is actually slightly below the historic average. It is certainly an improvement on the notorious Montreal 1976 Games. Although the Canadian city spent 'only' $6bn, this blew the original budget by a whopping 1,266%.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri