Six Steps to Better Olympic Games
Hosting the Olympics is one of the most risky types of megaproject that a city or nation can take on. Here’s how to manage the risk.
With Alexander Budzier and Daniel Lunn
Hosting the Olympic Games is one of the most risky types of megaproject that a city or nation can take on, in terms of financial and economic risk. This is because cost and cost overrun for the Games follow fat-tailed distributions. Cost blowouts for the Games are larger than for any other type of megaproject.
What can be done to manage such outsized risk intelligently? Six things matter.
1. Face the Facts
First, and most importantly, the IOC and potential hosts must understand the existence of fat-tailed cost risk as a matter of fact, i.e., that hosting the Games is extremely risky business in terms of cost, instead of sweeping this fact under the carpet, as is done today. If the IOC and hosts do not understand the risk, and its particular fat-tailed nature, they cannot hope to effectively protect themselves against it.
Today, there is some understanding of risk with the IOC and hosts, but nothing that reflects the real risks. Instead of extreme randomness, the IOC assumes low randomness when it states that a 9.1 percent contingency for unanticipated expenses is in line with the level of risk for previous Games.*
This number is glaringly insufficient when compared with actual cost overrun in the most recent Games, which was 352 percent for Rio 2016, 289 percent for Sochi 2014, and 76 percent for London 2012, or when compared with the average cost overrun for all Games since 1960, which is 172 percent.
Either the IOC is deluded about the real cost risk, or they deliberately overlook the uncomfortable facts
Either the IOC is deluded about the real cost risk when it insists that a 9.1 percent contingency is sufficient, or the Committee deliberately overlooks the uncomfortable facts. In either case, host cities and nations are misled, and as novices it is difficult for them to protect themselves against such misinformation. They understandably do not know what the real numbers are, because they have no experience in delivering the Games. Independent review of any cost and contingency forecast is therefore a must, including for estimates from the IOC.
As said, hosts must understand the risk to be able to protect themselves against it. Such understanding is therefore a necessary first step for mitigating cost risk at the Games, and the IOC should be held accountable for misinforming hosts about the real risks under rules similar to those in corporate governance that make it unlawful for corporations to deliberately or recklessly misinform shareholders and investors.
2. Secure Contingencies
Second, once the real risks are understood it becomes immediately clear that larger cost contingencies are needed for the Games.
Reference class forecasting, based on Kahneman and Tversky’s (1979) work on prediction under uncertainty, has been shown to produce the most reliable estimates of contingencies, mainly because it eliminates human bias and takes into account unknown unknowns (Kahneman 2011: 251, Flyvbjerg 2008, Batselier and Vanhoucke 2016 and 2017, Chang et al. 2016, Horne 2007).
Further de-biasing should be carried out, following Kahneman et al. (2011) and Flyvbjerg (2013). Reference class forecasting would produce a significantly more realistic estimate of the necessary cost contingencies for the Olympics than the numbers put forward by the IOC.
Larger cost contingencies are needed for the Games
More realistic contingencies would have the additional advantage of softening the tight constraints on time and scope that drive fat-tailed outcomes at the Games. This, in turn, would help drive down cost blowouts and costs. In this manner, more realistic contingencies could help make a first clip in the fat tail of Olympic costs.
However, larger contingencies alone will not solve the problem. Cost risks must also be actively managed down.
3. Give the IOC Skin-in-the-Game
Third, the IOC should have skin in the game as regards cost, i.e., it should hold some of the cost risk that arise from staging the Games (Taleb and Sandis 2014).
The IOC sets the agenda, defines the specs, and has ultimate decision making power over the Games. Nevertheless, the IOC holds none of the cost risk involved. As a result there is little alignment between incentives to keep costs down and making decisions about cost, which is one reason costs explode at the Games, and will keep exploding.
For any other type of megaproject such massively misaligned incentives would be unheard of. In order to change this state of affairs, we suggest the IOC is made to cover from its own funds minimum 10 percent (and ideally 30 percent) of any cost overrun for the Games, to be paid on an annual basis as overruns happen.
Give the IOC real skin in the game
This would give the IOC the motivation it lacks today to effectively manage costs down. Cities and nations should refuse to host the Games unless the IOC agrees to do this. Lack of such agreement would be a clear sign that the IOC does not take cost control seriously.
We further suggest that antitrust bodies take a look at the IOC, which today is an unregulated monopoly, and consider regulating it for better performance in accordance with antitrust law.
4. Shorten Delivery
Fourth, anything that can be done to shorten the seven-year delivery phase for the Games should be considered. The longer the delivery, the higher the risk, other things being equal. For many Games, not much happens the first 2–3 years after winning the bid, which indicates that faster delivery would be possible, as it was before 1976.
Faster delivery may be supported by a more standardized and modularized approach to delivery, without the need to reinvent the wheel at every Games, and by using existing facilities as much as possible. Here it is encouraging to see that the IOC has decided to consider “turnkey solutions” for hosts in areas that require highly specific Olympic expertise (IOC 2014: 15). Standardized turnkey solutions should be developed as far as possible to help hosts reduce costs.
“Games at half the cost, twice as fast, with zero cost overrun” should be the new slogan for Games management
Finally, a much more ambitious goal could be set for schedule and cost, to drive innovation at the Games, for instance: “Games delivered at half the cost, twice as fast, with zero cost overrun.” We suggest that going forward the IOC adopts this slogan as one of its goals. That would show true ambition and willingness to innovate regarding cost control. Today’s budgets and schedules are so bloated that this goal would not be unrealistic for a professional and experienced delivery organization. Unfortunately, as a monopoly that answers to no one the IOC is unlikely to innovate unless it is forced to do so.
5. Host Same Place Several Times
Fifth, to directly tackle the Eternal Beginner Syndrome — i.e., the fact that hosts are always novices — proposals have been put forward to host the Games in one or a few permanent locations — e.g., Athens — or, alternatively, that two successive Games should be given to the same host, so facilities could be used twice (Short 2015, Baade and Matheson 2016).
As a further variation on this theme, Games could be spread geographically with different events going to different cities, but with each event having a more or less permanent home, say track and field in Los Angeles, tennis in London, equestrian events in Hong Kong, etc.
A permanent and professional delivery authority is needed, as for Formula One and the Tour de France
This could be combined with a permanent and professional delivery authority, responsible for staging the Games every time and accumulating experience in one place in order to secure effective learning and build what has been called a “high-reliability organization” for delivering the Games, something that has been sorely missing so far in the history of the Games (Roberts 1990), but something that exists elsewhere, to learn from, e.g., Formula One and the Tour de France.
6. Walk Away
Finally, and perhaps most effectively, prospective host cities could mitigate their risk by simply walking away from the Games. Indeed, this has become a preferred strategy for many cities.
Over the past 20 years the number of applicant and candidate cities have fallen drastically, from a dozen to a few (Zimbalist 2015: 24; Lauermann and Vogelpohl 2017). Most recently, Barcelona, Boston, Budapest, Davos, Hamburg, Krakow, Munich, Oslo, Rome, Stockholm, and Toronto have made highly visible exits from the bid process.
For the 2022 Winter Olympics, the IOC ended up with just two potential hosts, namely Almaty in Kazakhstan and Beijing, with the latter — not known as one of the world’s great winter sports resorts — winning the bid.
For the 2024 Summer Olympics the same happened, with Paris and Los Angeles as the only potential hosts, after three other cities pulled out. To protect itself from further humiliation with the 2028 Summer Games, the IOC broke precedent and selected the next two Summer Games hosts simultaneously by negotiating a deal with Paris and Los Angeles, according to which Paris would win the bid for the 2024 Games and the 2028 Games would go to Los Angeles without a bid round.
Finally, for the 2026 Winter Olympics the IOC had to extend the invitation phase after no city had bid for the Games well into 2017.
The exodus of candidate cities has been acutely embarrassing to the IOC and has caused reputational damage to the Olympic brand
The exodus of candidate cities has been acutely embarrassing to the IOC and has caused reputational damage to the Olympic brand. Cities have explicitly and vocally cited extravagant costs and cost overruns as a main reason for exiting the bid process.
With Agenda 2020, which is being touted by the IOC as protecting the interests of host cities, the IOC has made a first attempt to address the exodus, and to protect its brand and product (IOC 2014, 2017). But the initiative, though welcome, does not address the root causes and looks like too little too late. Tokyo 2020 was the first test case and did not go well, to say the least. Paris 2024 and Los Angeles 2028 will have to demonstrate a step change if the new IOC approach is to gain any credence.
Our guess is that more reform will prove necessary to stop the exodus of host cities. As rightly observed by Los Angeles mayor Eric Garcetti, “Most cities, unless you have a government that’s willing to go into debt or pay the subsidy of what this costs, most cities will never say yes to the Olympics again unless they find the right model,” with the “right model” being defined by significantly lower costs (Ford and Drehs 2017).
Garcetti said this before the covid-19 pandemic and its large extra debt burdens on governments. Post-covid-19, the appetite and ability for governments to go into further debt or pay a subsidy to finance the Olympic Games will likely be low and the pressure to keep costs down will likely be high. Perhaps this can finally get the IOC to take Olympic cost and cost overrun seriously and try to manage them down in collaboration with host cities.
As rightly observed by Los Angeles mayor Eric Garcetti, “Most cities, unless you have a government that’s willing to go into debt or pay the subsidy of what this costs, most cities will never say yes to the Olympics again”
………………..
*) For references and the full study, see Flyvbjerg, Bent, Alexander Budzier, and Daniel Lunn, 2021, “Regression to the Tail: Why the Olympics Blow Up,” Environment and Planning A: Economy and Space, vol. 53, no. 2, pp. 233–260 (free download).
