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Why Tokyo's Olympic Costs Will Almost Certainly Overrun The $5 Billion Budget

Tokyo Olympic Games
Tokyo Olympic Games


Members of the Tokyo 2020 delegation celebrate after Tokyo was awarded the 2020 Olympic Games during the 125th IOC session in Buenos Aires, Argentina, Saturday, Sept. 7, 2013.

Early this month, Tokyo won its bid to become the host city for the 2020 Summer Olympic Games. Many in Japan are rightfully very happy about this. In many ways the successful bid is seen as a result of successful economic policy — Abenomics in action.

However, there's one thing that should be noted. Tokyo won with a bid to spend $5 billion total. That number is almost certainly complete nonsense.

Tokyo's budget is already dubiously small compared to historical precedent or rival Istanbul's bid, which neared $20 billion, even if the Japanese plan to reuse 1964 Olympic stadiums as a way to keep costs down .

The real reason to suspect Tokyo's Olympic budget, however, is because Olympic Games always go over budget. According to data collected by Professor Bent Flyvbjerg of Oxford’s Saïd Business School, every Olympic Game since 1960 that has reliable data on final costs (16 games) has overrun its original budget.

Professor Flyvbjerg found that there was an average cost overrun of 179 percent in real terms. That's a pretty absurd figure. In fact, given how frequently Olympic costs inflate during construction, it has become expected — which is a weird situation, when you think about it.

As Professor Flyvbjerg and Allison Stewart write in a working paper:

A budget is typically established as the maximum – or, alternatively, the expected – value to be spent on a project. However, in the Games the budget is more like a fictitious minimum that is consistently overspent. Further, even more than in other megaprojects, each budget is established with a legal requirement for the host city and country government to guarantee that they will cover the cost overruns of the Games. These data suggest that this guarantee is akin to writing a blank cheque for a purchase, with the certainty that the cost will be more than what has been quoted.

As Professor Flyvbjerg's research notes, the fact that 11 host cities apparently never even bothered to uncover or publish their overruns is also worrying.

Of course, recent events don't look too good for Tokyo either. London's 2012 Summer Olympic Games overran by 101% in real terms, according to Professor Flyvbjerg. The next games, the 2014 Winter Olympic Games being held in Sochi, Russia, is on track to be the most expensive games ever, with an estimated $51 billion in costs — quite a bit more than the original $12 billion bid. The cost for the 2016 Summer Olympic Games in Rio has been creeping up, a prominent factor in this summer's violent Brazilian protests.

The odds are against it being any different for Tokyo, and you have to wonder if it'll be worth it. Kazumasa Oguro, an associate professor of economics at Hosei University, told Fortune this week that he expected the positive economic impact of the games to be around 3 trillion yen ($30 billion) between 2013 to 2020. "Tiny," according to Oguro.

However the games aren't all about financial value. Look at the city of Barcelona, which hosted the Summer Games in 1992 — widely held up as one of the best games ever. Not only did the Olympics rejuvenate the city, many suspect they helped make Spain one of the dominant sporting nations of recent years. According to Professor Flyvbjerg's research, the Barcelona games came in at 417% over budget, but few people seem to remember that now.

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