Is The UK Taking The Olympic Route To A Debt Trap?

What will London achieve after hosting the games this year?

These and other questions relating to the costs and benefits of hosting the 2012 Olympic games have been raised many times since the International Olympic Committee (IOC) awarded London the right to host them.

The Olympic games' financing structure has raised concerns about how any debt incurred may well become the host city's.

Even though the games are, in general, quite successful, host city debts have been known to occur due to the vast borrowing required to fund Olympic infrastructure investments. In time, Olympic infrastructure can balance such debt, but whether the real value of the infrastructure matches the amount of debt incurred cannot be assured.

London is hosting the games at a cost of $14.3 billion this year, and most of those expenses will be borne by taxpayers. A combination of newly built venues, existing facilities and temporary facilities will be used for the games. Three zones within Greater London -- the Olympic Zone, the River Zone and the Central Zone -- are being prepared.

The Olympic Stadium in Olympic Park, which will be the centerpiece of the 2012 games, has been estimated to cost around $750 million. The security operation for the games will be another important expense, which is expected to cost about another $750 million. When the games conclude, the city plans to convert Olympic Park into one of the largest urban parks in Europe. There are also plans to open an Olympic museum in the park.

One point to be noted is that, according to the rules of the IOC, although the games are the committee's responsibility, the host city is contractually obligated to bear the costs of any debt acquired while hosting the Olympics. This means that the IOC absolves itself of any debt that arises from hosting the games.

Olympic supporters claim that the games bring host cities onto the international stage and accelerate their development.

It's a chance for London to bolster its global image, Allan Smith, a London-based construction manager residing, said.  Also, the legacies of the games will help in gaining sustainable development for the city,

On the other hand, those against hosting the Olympics claim that the economic benefits of being an Olympic host are not higher than the costs involved. Materials and resources utilized to construct Olympic facilities should have been used on more fruitful and urgent construction projects, Peter Simon, a financial analyst residing in London, said.

The 1976 Montreal Olympics might be remembered even now for Nadia Comaneci's perfect 10 scores in seven gymnastics events. However, it is a sad fact that it turned out to be a financial disaster for Montreal. It took 30 years for Montreal to repay the debts incurred from those games.

Greece held its 2004 Summer Olympics at an estimated cost of $15 billion. The cost of hosting the 2004 Olympics had a noticeable effect on Greece's financial stability. The infrastructure built by spending millions now lies empty serving no purpose.

Jacques Rogge, the head of the IOC, commented in 2011 that Greece's hosting of the 2004 Athens Olympics contributed to the country's massive debt. He had noted that if the external debt of Greece was considered, up to 2 to 3 percent of that could be attributed to the Games.

The official cost of the 2008 Beijing Olympic was $2 billion, which only included the direct costs of construction of the sports facilities and related venues. According to reports the actual total construction cost exceeded $40 billion, including non-sport infrastructure facilities.

Reports do suggest that the expenses in hosting the Olympic contributed to the China's economic problems of overinvestment and inflation. Demand for raw materials, equipment and labor to construct the Olympic facilities added to the rising pressures on prices in China.

After the Games concluded, the sports facilities were made open for use by local sports clubs. Also plans are laid to convert the village into apartments, which are yet to be completed.

A common claim is that the Olympics result in considerable job creation, specifically in the construction and tourism industries. Heavy investment in stadiums and other infrastructure is part of the Games hosting. This will generate jobs, contributing to the economy of the host nation at least four years before the actual event.

The Olympics are also expected to attract thousands of visitors during the duration of the Games, the majority comprising foreigners. The argument is that their increased spending boosts the local economy. However, many point out that these are exaggerated claims. In fact, the European Tour Operators Association (ETOA) found that hosting the Games might actually have a negative impact on tourism to the host city.

In the 2000 Olympics in Sydney, Australia, the government found that the number of tourists who turned up during the event was much less than what was expected. The government too expected the event to raise the tourism industry by three to four times. But it found that the event did not work any wonders to its tourism industry.

Visitor numbers to Greece actually fell by around 10 percent in 2004 when Athens held the Games amid overcrowding fears. It is seen that foreign tourists may be displaced as they would have visited the host city but are deterred because of the Olympics. Tourists, normally arriving in the city during the period when the Olympics are hosted, are deterred due to the perception of high prices and congestion caused by the hosting of the Games. Domestic tourists and day-trip visitors, who would otherwise have visited the city, too prefer to stay away.

A major hope is that the Games will boost UK's reputation on the international stage, both as a business centre and as a tourist hotspot. This expectation, however, is not agreed upon unanimously.

London is already a large and established tourist destination. And it is questionable whether the tourist infrastructure could accommodate more demand. For instance, Heathrow airport is at full capacity. As a result, we are not factoring in any increase in tourism in future years either, Samuel Tombs, an economist at Capital Economics, said.

Many activities are displaced as a consequence of the Games. Since businesses that are positively affected by the Games are able to pay higher wages, they take workers away from other economic activities.

Also the investment that would have been used in industries not directly related to the Olympics in the host city is discouraged because of higher prices. This holds particularly true in the case of the prices of construction services during the building phase of the Games.

Certainly, hosting the Games will typically require improvements in the transportation system. So proponents relate infrastructural improvements with economic growth. Infrastructural investment will have a positive impact on international capital flows. However, the criticism is that if infrastructure investments are rational, their benefits could be realized without actually hosting the Games.

Since the entire cost of infrastructural projects are shouldered by the host city, there is an issue as to the continued usability of the facilities for the public once the Games have concluded.

The infrastructure for the Games will include press facilities and long stretches of high technology cables linking press centers with stadiums. All these can be expected to be never used again after the Games. So the long-term values of such infrastructure projects are certainly questionable.

Supporters argue that many projects which are beneficial to the public are executed as a result of hosting the Games. A typical case put forward by the proponents is the subway network in Athens. At the same time, it is worthwhile note that though the rush involved in the Games hosting will speed up public projects, there will be many hidden costs as a result of this acceleration that are quite often overlooked. In the case of Athens, there were several instances of non-optimal financing and ineffective planning decisions, which increased the costs in order to hasten the project.

While there are numerous factors that resulted in the Greek debt crisis, many consider that the 2004 Athens Olympics served the purpose of being a critical catalyst. Critics of the Games believe the Athens Olympics resulted in initiating a careless spending spree which plunged the economy of Greece into utter chaos.

The inability to integrate the venues once the Games are over adds to the failure to justify the huge investments incurred. Also there is the annual maintenance cost of the Olympic venues, which for instance in the case of Athens is nearly $730 million.

Within the next few weeks, the global focus will be on London as the 2012 Olympic Games will commence July 27. It remains to be seen whether London has splurged beyond its means, especially in these times when the global economy is faltering and the debt crisis looms large over the euro zone.