The FINANCIAL -- New research conducted at Saïd Business School, University of Oxford
shows the London Olympic Games are on track to be the most expensive to
date with a projected cost of £8.4 billion in real terms – 101% over
budget.
The London budget overrun is significantly more than the average overruns for Games during the past decade, reversing a positive trend of falling cost overruns for the Games. However, the London overrun is in line with average budget overruns for all Games of the past 50 years.
The research compares cost data from summer and winter Olympic Games of the past 50 years. According to Saïd Business School, the researchers examined costs incurred by the Organising Committee including security, transportation, technology and ceremonies, and Games-related construction costs including sports venues, athletes’ villages, press and media centres. The researchers compared these total sports-related costs as estimated in the initial Games’ budgets to the final Games’ costs. The data show that, on average, total sports-related costs of the Games of the past 50 years are 179% greater than the bid budgets in real terms.
For a city and nation to decide to put on the Olympic Games is to decide to take on one of the most financially risky types of megaprojects that exist. However, the research shows that host cities seem to be becoming better at predicting costs. Since Sydney in 2000, the Games have come closer to achieving their bid budgets, with an average overrun of 47% for 2000-2010, as compared to an average overrun of 258% before that (1968-2000). Professor Bent Flyvbjerg, lead researcher on the study, and his co-researcher Allison Stewart believe this difference is the result of both better transfer of knowledge to bid committees from previous Games host cities and, in some cases, more strategic final accounting on the part of the host cities. ‘The costs that are in the public domain are unlikely to represent the full final cost of the Games,’ says Stewart. ‘Instead, these represent the politically acceptable costs. The real costs are often not reported in a single place, unless significant auditing and investigation are conducted after the Games.’
‘While all major programmes are prone to cost overruns, due largely both to optimism and conscious strategic misrepresentation, overruns of the Games are in a league of their own. When compared with typical overruns on other major programmes, such as transport and IT programmes, the Olympic Games’ budget overruns are extreme, both for their size and frequency,’ says Flyvbjerg.
Comparing total costs for all Games of the past 50 years, the London Olympics are projected to rank ahead of Beijing, Barcelona and Montreal as the most expensive Games in history. The total London 2012 sports-related budget has increased by 101% from £4.2 billion in the 2005 bid to £8.4 billion in real terms. ‘Though there is little the London Games can do now to limit the cost overruns, it is important the Committee keep a firm hand on the budget in the remaining weeks leading up to the Games, or the situation could worsen,’ say Flyvbjerg and Stewart. ‘As we learned from Delhi’s experience with the Commonwealth Games in 2010 and the Athens Olympics in 2004, in the final stages of preparation the focus can quickly shift from cost control to delivery at any cost, resulting in significant additional overruns. While London is well prepared, transportation, security, and broadcasting are three areas that could potentially require urgent financial attention if the organisers’ projections are incorrect.’
The reason that the Games are so greatly over budget may lie not in the nature of the Games themselves, but in the context in which they are planned. As Stewart explains, ‘Unlike other major programmes such as bridges, Airport s, IT or engineering works, the Games are always a unique undertaking to that city. Of the thousands of people engaged to work on the programme, few of them will ever have been on a Games committee in the past. This means they are highly reliant on the information they can obtain from the International Olympic Committee (IOC) and the other host cities around the world. While a significant amount of information is transferred from these organisations, there is inevitably a gap in experience that means the Games are always starting from scratch in certain areas.’ These areas include budgeting and scoping, according to Stewart. ‘Because of this, it is unlikely we will ever see the costs of the Games come in under the bid budget.’ For cities preparing bids for future Games, Flyvbjerg and Stewart recommend an approach known as ‘reference class forecasting,’ in which previous Games’ costs are used as the basis for future Games budgets. ‘While the situation of each city is unique, there is a remarkable consistency in cost overruns. By starting from existing information, the Games are more likely to come in on budget.’
‘Although London 2012 has fallen victim to the budgeting pitfalls that have plagued all Games for the past 50 years, this should not detract from the fact that London is on-schedule, fit-for-purpose and ready to host the Games’, says Stewart. 'And with London looking to be the most expensive Games ever there is all the more reason to now ensure perfect execution so the UK obtains the value for money that may justify this very large investment in a time of fiscal austerity,' concludes Flyvbjerg.
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