THE BLOG
08/09/2016 05:40 pm ET Updated Aug 10, 2017

The Olympic Accounting Muddle

Tom Pennington via Getty Images

Depending on which article you read and which day you read it, Rio's costs of hosting the 2016 Olympics is anywhere between $4.6 billion and $20 billion. Given that Rio's Olympic revenues will be approximately $3.3 billion, there will be a substantial loss at either cost figure. But in one case it will be $1.6 billion and in the other $16.7 billion. With Rio's and Brazil's fiscal finances in deep deficit, and with public servants not being paid and social services in near dysfunction, it makes a significant difference whether the loss is $1.6 billion or 10 times greater at $16.7 billion.

So, how do we understand what the real cost is? First, there are essentially three buckets of money that are used to host the Olympics: operations costs, including security; venue construction or renovation costs; and infrastructure costs. Many press articles refer only to the operations costs, which account for spending during the 17 days of the Games and the temporary venues. Others refer to operations plus venues, and still others refer to all three.

When infrastructure costs are included, they are based on officially released estimates. The accuracy of these estimates should be treated with a healthy dose of skepticism. Second, consider that Rio was awarded the Games in 2009. At the time, and for several subsequent years, the Brazilian currency, the reais, was worth approximately 50 cents. Today it is worth about 30 cents. Suppose ROCOG (the Rio Organizing Committee of the Games) commissions construction of a broadcasting and media center and a velodrome in 2010 at a cost of 1 billion reais. At the time, this sum was equivalent to $500 million, but if the reais figure is converted at today's exchange rate, the cost comes in at $300 million.

Third, it is not clear what infrastructure spending is included in the Olympic budget. I have not seen a breakdown of Rio's infrastructure spending, but based on previous games, there can be ample chicanery here. For example, in the case of Beijing's hosting the winter Olympics in 2022, the Chinese have already announced that they are not going to count the high-speed railways they are building between Beijing and the sites of the Nordic and Alpine skiing events (60 and 120 miles from Beijing respectively) because, they say, these rails would have been built whether or not Beijing hosted the Games. Really? High-speed rail would have been built to develop two ski areas adjacent to the Gobi desert that receive less than 10 inches of snow per year, in a country that does not have a culture of winter skiing? Also not counted is the billions of dollars it is costing to transfer water from southern China to the north.

What we do know about Rio's infrastructure spending is that the metro from Ipanema beach to the wealthy suburb, 10 miles away, Barra da Tijuca -- where the main Olympic cluster lies -- was supposed to cost $1.6 billion and is now officially estimated at $3 billion. If anyone tells you that Rio would have built this metro line anyway, then you should suggest they join Trump's team of economic advisors.

Fourth, it is frequently claimed that a majority of construction spending on the Games is being defrayed by the private sector. Perhaps, but some facilities that were to be privately funded have required infusions of public funds as the developers have pulled out, been indicted for corruption or gone bankrupt. Further, in order to induce the private spending, the government has offered handsome inducements: land grants, tax abatements and low-interest loans from a state bank. These all represent significant public costs, but they are not included as costs in the Olympic budget.

I lean to the $20 billion cost estimate. Here's why: In addition to the above issues, the initial budget estimate for the Games was $14.4 billion (and that was before golf and rugby were added as sports for 2016.) The average cost overrun for the summer Games since 1976 is 252 percent, according to a study at the University of Oxford. An update of this study estimates that Rio is experiencing an overrun of 51 percent before including infrastructure costs. Using the modest 51 percent estimate and the initial budget yields a cost of $21.7 billion.

Even this number minimizes the profound social costs (77,200 evictions of residents from favelas), environmental degradation and instability that hosting has engendered.