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TOKYO 2020: PUBLIC OR PRIVATE INTEREST?Eva Marikova LeedsMoravian CollegeBethlehem, PA
ICAS, July 1, 2016
Introduction• Olympic Games are a wonderful spectacle• Ex-post economic studies indicate that the Games do not have a positive impact on the local, let alone national, economy
• Flyvbjerg and Stewart (2012): All Games run over budget (179% mean & 122% median)
• Puzzle: Why do cities bid to host the Olympic Games?
Outline of Presentation• Part I: Political Economy
• Mancur Olson’s collective action argument• Olympic stakeholders
• Part II: Revenues and Costs• Tokyo 2020 Candidature File• Economic impact studies• Projections of revenues and costs
• Public protests• Conclusion
Public Choice Explanation
• Mancur Olson (1964): collective action produces a public good, which can be• Enjoyed in common (non-rival)• Used without payment (non-exclusionary)
• Streets, fireworks, national defense• All group members benefit in common and sometimes
cannot be compelled to pay• The market (voluntary action) under-provides public goods• People free-ride; they want to use the good (benefit) without pay
Public Choice and the Olympics• Citizens individually recognize that the net benefit of the Olympics will be negative• They do not lobby against the Olympics• They wait for others to organize
• Promoters of the Games are small groups who organize more easily and lobby for the Games• Small groups can compel payment or participation
• Politicians respond to organized groups and bid for the Games
Stakeholders• IOC• Public• Politicians• Special Interests
International Olympic Committee (IOC)• The most powerful arm of the Olympic Movement
• National Olympic Committees (NOCs) — “country representatives”• International Federations (e.g. FIFA) — “sport representatives”• Organizing Committees for the Olympic Games (OCOG) — stage
• The Olympic Charter sets all rules, including the rules for choosing the Olympic host• The process -- from finding cities to selecting one – takes two years• The key element in the bidding process is a package of guarantees
to the IOC that ensures the payment for items such as security and construction of facilities as well as a guarantee that the local and national government will cover any budgetary shortfall
• Since the IOC is a nonprofit institution, one of its goals is to maximize revenue: Short-term vs. long-term?
Public: The Voters• The public has potentially conflicting goals
• Patriotism or nationalism—let’s stage the Games!• Financial considerations & taxes—for the Games?!
• Many foreign cities have rejected hosting the Games• In Japan, “popular referenda are not well-established”
• Local Autonomy Law: 2% of voters can propose a petition, but the local assembly does not have to run a referendum; non-binding
• There were 23 referenda (excluding town mergers) mainly against nuclear and industrial waste plants (1996-2015)• e.g. Maki (Niigata)• “Troublesome facilities”
• The first referendum in Tokyo (Kodaira) was in 2013• There have been no Tokyo-wide referenda
Politicians: Tokyo 2020 Bid • Shintaro Ishihara was the governor of Tokyo from 1999 to
2012• He headed Tokyo 2016 Bid Committee—for patriotic as
well as nationalistic reasons• Response to Beijing 2008
• He next headed the Tokyo 2020 Bid Committee• A necessary condition of the bid was the willingness of the national
government to provide the required IOC guarantees: 2011• A “sufficient” condition was the appeal to the IOC: compactness of
the plan• The Bid Committee of the winning city “mutates” into
OCOG: Tokyo 2020
The Presence of Corruption• Naoki Inose, the next governor, carried the Olympic torch;
he was present in Buenos Aires when Tokyo was selected in September 2013, along with Shinzo Abe• Inose resigned in December 2013 following corruption
charges unrelated to the Olympics• Yoichi Masuzoe, the following governor, had no official Olympic function• He also resigned—but he was an Olympic cost cutter
• The Tokyo OCOG was formed in January 2014• It is headed by Former Prime Minister Yoshiro Mori
(President) and Toshiro Muto (CEO)• Mori has reputed Yakuza connections
Construction Industry• The industry is a well-organized cartel (dango) despite
many reform attempts• Its members bid for public projects• It relies on strong voluntary industry associations • The threat of ostracism ensures proper behavior
• There is interplay between the construction industry, “Construction” (LITT) Ministry, and elected representatives• The industry hires retired ministry bureaucrats (amakudari)• The industry gives politicians campaign contributions• It also regularly wines and dines politicians• Politicians help the bureaucrats by ensuring that the bidding
rules allow the cartel to operate• Japan has been called “the construction state”
Economic Impact Studies• To present a successful bid, the Bid Committee must
argue that it can organize Games with a large positive impact on a shoe-string budget• This inherent contradiction is “Olympic magic”
• Forecasting the impact on employment and income is both theoretically and practically complicated
• Consider the question of additional tourists/attendees• Even if more tourists come than in previous years, we do not know
how many would have come without it• How many residents leave on account of the Olympics?• Typically outflows dominate inflows in the Olympic year
• Nevertheless, economic impact studies are performed• To evaluate them, we start with the Tokyo bid’s costs and revenues
Costs and Revenues• The Candidature File essentially presents two budgets to
the IOC • The operational budget (staging the games) estimates
costs of about ¥300 billion (2012 yen ~$3 billion)• The capital budget (construction of facilities) has costs of
about ¥400 billion (2012 yen ~$4 billion)• From private sources (OV), national taxes (NOS) and Tokyo (TMG)• These expenditures started in 2015
• Assume that these costs add up to ¥1 trillion• General infrastructure costs are not in the Tokyo bid
• They are estimated to about ¥6 trillion• The Olympics may cost on the order of ¥10 trillion
Economic Impact Studies• To evaluate the studies, I use a Keynesian multiplier
• Assume that Olympic expenditures are new additional ones• ΔGDP = multiplier x ΔOlympic Expenditures• The first TMG forecast (2012—before the bid) for the
impact of the Olympics was about ¥3 trillion• Taking the bid cost of almost ¥1 trillion—this assumes a
multiplier of 3• Keynes thought it was about 2.5 in a recession• The TGM study was thus optimistic, but not unreasonable• Other studies (e. g. Mizuho) have much higher forecasts
Bank of Japan Study (2016)• This study examines the impact of the total expenditure,
including infrastructure• It forecasts ¥10 trillion in new expenditure• This includes construction, such as hotel refurbishment
• The study does not apply a multiplier, effectively setting it to unity, which is in line with recent studies
• It finds a cumulative ¥10 trillion GDP impact through 2021• Using ~ ¥500 trillion current GDP and spreading the new
construction over many years, GDP in 2018 will be 0.6% higher• This report notes that labor market reforms are needed
Costs Overruns & Public Protest (1)• The public protested against the environmental impact of the National Olympic Stadium (NOS)
• The largest overrun so far is associated with the NOS budgeted at ¥130 billion• 1964 National Stadium was torn down in May 2015• Kasumigaoka—Meiji Shrine Outer Gardens
The Zaha Hadid Design• It was reestimated at double the cost in July 2015 • As much as ¥300 billion• The public was outraged
(pacifist constitution issue)
• Demonstrations caused Shinzo Abe to scrap the plans
The Kengo Kuma Design• Replaced Hadid’s design
• It should cost ¥149 billion
• A little over the initial ¥130 billion estimate
Costs Overruns & Public Protest (2)• Kasai Slalom Course was initially planned for a nature preserve—Canoe slalom• A petition drive succeeded in moving the venue
• Three proposed venues (Youth Plaza Arena A, B and Wakasu Marina, both in Tokyo Bay) have been scrapped
• Games are no longer compact• Only 50% of venues are within 8 km radius of OV
• This shows that public pressure can be effective
IOC Response• Long-run revenue goals of the IOC imply that the IOC wants to see a lot of bidders for the Games• 2004 Athens: 12 applicants & 5 candidates• 2020 Tokyo: 5 applicants & 3 candidates
• IOC has stated in its 2020 Vision plan that greater usage of existing facilities is welcome• This should lower potential costs and attract more
bidders• IOC has agreed to proposed changes in the budget• Victim of moral hazard
Revenue Projections & Risks: Staging• Recall that initial projections were for ¥300 billion• IOC contributions and ticket sales each contribute 23%• TOP and local sponsorships bring 34% of revenue• Past Olympics suggest that these revenue sources are not
risky, but • Disasters could discourage tourists• Sponsors could pull out
• Sponsorship revenue • TOP program has a dozen multinational companies (Bridgestone,
Panasonic and Toyota)• Tokyo has 15 Gold Partners (~¥15 billion contribution)• Plus 23 Official Partners (~¥6 billion) (=>¥363 billion >¥300 project.)
Revenue Projections & Risks: Building• Recall that the NOS is to be nationally financed• The TMG is to cover most other construction• The OV, however, is to be privately financed
• This poses a risk to Tokyo taxpayers• Recall that it represents 25% of the construction budget
• The contractor for the 2010 Vancouver Games went bankrupt and the city had to cover the shortfall
• Cost of development rose by 40% for the 2012 London OV• No private developed was found in a recession• The OV was publicly financed
Cost Projections & Risk: Staging• The greatest risk to staging costs comes from security • Munich 1972 Olympics• Tokyo subway sarin incident (1995)
• Security costs rose over three times for the London 2012 Olympics• The private security company did not meets its
personnel obligations• Additional military and policemen were needed• The cost was borne by the British taxpayer
Cost Projections & Risk: Construction• The cost of construction started to rise last year• There is a labor shortage• This is why the BOJ report implicitly advocated labor market reforms
• Other important costs include steel• Business cycle considerations
• A boom could increase costs• A downturn could reduce tax revenues
Interpreting the December 2015 Forecast• Tokyo-to made, but did not fully reveal, a new forecast for
the Olympics for ¥1,800 billion• Estimated costs rose because of costs of construction,
facility rental, security, transportation and “highway lanes”• The new forecast has been contrasted with the original
¥300 billion estimate for the operational budget• It has also been compared to a comprehensive cost
• London 2012 cost about 10% less• Sochi 2014 cost 3 times more
• Revenue forecast of ¥450 billion from tickets and sponsors implies a ¥1 trillion plus shortfall—paid by the taxpayer
Conclusion• The budgets in Tokyo’s Candidature File were unrealistic• The 2020 Games will not have a significant positive
impact on the economy• Tokyo’s bid for the Games was based on the confluent
interests of politicians and the building industry• Given no notable public pushback, politicians proceeded
with the bid
