After the Olympic Games conclude on Aug. 8, Japan will still be tallying the final cost of hosting the games. Indications are that the final price tag could be more than $20 billion.
Was it worth it?
The most recent polling data suggest the answer is a resounding "no," at least as far as the Japanese are concerned. Over 83 percent of the people polled, who live in Japan, believe the Olympics should not have taken place this week. To the Japanese, it is not just the expense of the games, but the holding of this event while the country is in the midst of a resurgence in the Delta variant of the coronavirus. Many fear the games will cause a "super spreader" within the country and possibly the world.
In an effort to reduce those risks, the Japanese government banned spectators from the games in Tokyo, while announcing a state of emergency to combat the latest surge of COVID-19 cases. The nation has reported more than 118,000 cases and 14,800 deaths so far, which is not much compared to other countries, and they want to keep it that way. However, this week, the government announced the third day of record-breaking coronavirus cases. But the rate of vaccinations has also been hampered by Japanese government requirements that vaccines must be vetted through the Japanese medical regulatory system before being administered. As a result, only a quarter of the population has had at least one shot thus far.
As for the cost of hosting, it is well known that hosting Olympic games is one of the most expensive events a nation can organize. The average cost of hosting such an event is about $12 billion. Construction costs of an Olympic Village plus various arenas is the biggest single item. In Japan's case, construction will total about $3 billion. In addition, non-sports related costs can be several times the construction costs, if history is any guide.
The forecast when Japan originally bid for the games was $7.4 billion. Since then, however, the games were postponed for a year due to the pandemic. That added another $2.8 billion to the price tag.
Cost overruns have always been an issue in budgeting for the Olympic games. Tokyo was no exception. The question will be just how much over budget the costs turn out to be. Estimates range from 25 percent to 50 percent of the original estimate. The most recent official budget released by Japanese auditors set the price at $15.4 billion, but analysts believe that is way too optimistic.
Given the costs and problems involved, you might wonder why countries still compete to host the games? Many countries believe it offers a chance to show off their nation, while creating a sense of national pride. There is also an assumption that the Olympics can improve the host nation's global trade and stature, while also increasing tourism (therefore boosting local economies).
Unfortunately, the historical facts do not necessarily back up those claims. The 2008 Beijing Olympics, for example, generated $3.6 billion in revenues, but cost the host city much more. London generated $5.2 billion in sales back in 2012, but faced $18 billion in costs. Most host countries had similar economic experiences. Measuring other benefits has been difficult to quantify.
The financial impact of cost overruns and accumulated debt can also be far-reaching. It took Montreal 30 years to pay off the debt it incurred after the 1976 Summer Games. The 2004 Games in Athens were so costly that it contributed to the financial and economic debt crisis of Greece for a 10-year period between 2007-2017.
Unfortunately, this time around, thanks to the pandemic, the benefits to Japanese tourism will be far less than expected. Empty stadiums will cost the Organizing Committee of the Olympic Games more than $800 million in lost ticket sales. Advertising revenues will likely be lower. An estimated $2 billion in hotel rooms, meals, transportation, and merchandise will fail to materialize as well.
While a $20 billion hit to the Japanese economy is sustainable (less than 1 percent of Japan's Gross Domestic Product), it hurts nonetheless. The ruling Liberal Democratic Party government is already attempting damage control in the face of the voting public's unhappiness with holding the event.
At the same time, organizers are holding their breath as the number of new coronavirus cases increase. More than a dozen new cases were reported this week among Olympics personnel, bringing the total thus far to more than 150. A U.S. pole vaulter, Sam Kendricks, a world champion tipped for a medal at the Olympics, tested positive for COVID-19 and was forced to drop out of the games. Organizers had hoped to contain the spread of cases, but have been less than successful thus far.
You would think that with all of the above problems in Tokyo, the Olympic Winter Games might be in jeopardy, or possibly postponed. No such luck. China, the cradle of the coronavirus, is scheduled to host the winter games on Feb. 4, 2022, less than seven months away. Go figure.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at firstname.lastname@example.org.
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