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Sochi Olympics: Going for the gold, spending in the red

Final costs for hosting the Socgi Olympic Games are estimated to be more than $50 billion. Above is the newly built railway station 'Adler' in Sochi.
Final costs for hosting the Sochi Winter Olympic Games are estimated to be more than $50 billion. Above is the newly built railway station 'Adler' in Sochi.ALEXANDER ZEMLIANICHENKO - POOL / EPA

The Winter Olympics in Sochi, Russia likely will take the gold for being the most expensive Games in history.

Originally estimated at some $12 billion, the final costs for hosting the Sochi games is expected to exceed $50 billion—far surpassing the high of $15 billion in Athens in 2004.

That money, equal to the annual GDP of Burma, is unlikely to be recovered.

No Olympic games in history have made it into the black, according to Robert Barney, founding director of the International Centre for Olympic Studies at the University of Western Ontario, Canada.

"Most of the games don't count the funds used by governments and taxpayers to subsidize them. When you do that, not one game has made money," he said. 

But cities and nations repeatedly make lavish promises and put on extravagant efforts to host the Olympics largely because the politicians who lobby for the Games are usually different from the politicians who have to clean up the mess.

"It's a victory to host the games and all the publicity and good feeling that goes with it," said Scott Minto, director of the Sports Business MBA program at San Diego State University. "Everyone gets patriotic and fired up to host them."

"The problem is they don't see the issues that come eight or 10 years out after they actually host them," he said. "The politicians who pushed for the games are long gone and don't have to face the problems of cost overrides and empty stadiums that aren't being used after the games end." 

Sochi, where the Games open on Feb. 7, is located in a remote part of Russia—on the Black Sea coast near the border with Georgia. It has a subtropical climate and is considered a summer resort.

Kickbacks and security
Reasons cited for the climbing costs at Sochi include kickbacks to local construction companies, tight security measures to prevent terrorist attacks—and building winter facilities in local mountains.

Russian officials have cited their desire to turn the city of 343,000 people into a destination for winter sports after the Games have ended.

"Like most host communities, the Russians hope to increase tourism and expose the world to Russian culture and progress," said Pat Rishe, professor of economics at Webster University.

But it's questionable whether Sochi can become a tourist destination, said Arthur Fleisher, professor of economics at Metropolitan State University of Denver. 

"Will people flock to Sochi after the games? It's highly unlikely," he said. 

"You're building these stadiums and places to go, but who goes to them after the fact? Look at Athens. Most of the facilities there are in bad condition and unused and they cost hundreds of millions to maintain," he said.

A report by an opposition leader in Russia claims that building the new Olympic Stadium in Sochi will cost $19,000 per seated fan, as opposed to the average cost per fan in previous games of $6,000. 

The report also states that more than 90 percent of the money being used in Sochi is coming from the government and not private enterprise.

"The Russian government has a ridiculous amount of money invested in the Sochi games," said Christopher Finlay, a professor of communication studies at Loyola Marymount University.

"The issue is: Can they create a brand new ski resort area for people to come to?" he said. "It could lead to an investment benefit, but who knows if it will."

None of this is to say there aren't benefits to hosting the games.

"It's a feather in the cap of leaders who were responsible for getting the games," said Rishe. "It's also the idea that the Games will bring development and that the facilities will be used after the Games are over. At least that's the feeling."

It depends on the city, said Minto. "Improved high speed transit and other infrastructure projects can help local construction workers and be good for people," he said.

One study says that cities that become hosts, and those that don't but make a bid, experience a 30 percent increase in international trade, as they "show themselves to be open for business with the global community."

And another says that host countries win 54 percent more medals than when they're not a host nation.

But not every city feels the pull of hosting. Denver had been awarded the 1976 Winter Games but Colorado voters rejected a $5 million bond issue to help finance the Games in 1972—amid reports of drastically rising costs to host them. 

Without the state's money, the International Olympic Committee moved the games to Innsbruck, Austria.

"The argument is that people will spend money going to the Games but that money would likely be spent someplace else," said Fleisher. "Locals might not even go to the Games because of the expense and just say it's too crowded with the influx of visitors to stick around."

It took Montreal 30 years to pay off the billion-dollar debt it incurred during the 1976 summer games. 

Reducing the costs
Some say that the Games should be hosted by cities that are ready-made to handle them to reduce the costs.

"I'd love to see both the Summer and Winter Games rotate among five to six host cities," said Rishe. 

"It would be similar to the Super Bowl. They would be in cities that have the facilities and infrastructure mostly in place to handle the Games. It would make things more cost-effective. But I doubt the IOC will let that happen," he said. 

"The problem is that developing countries would feel left out if the Games kept going to only certain major cities," said Minto. 

"It's a global feel-good moment to be awarded the games, celebrating sport and peace. But it's gotten so big and such an investment that developing countries could be on the financial hook for a long time."

Other alternatives include different ways of looking at construction. Chicago, which has been hosting international events since the 1893 World's Fair, proposed a possible construction solution in a recent bid.

"Chicago in its failed attempt at hosting the 2016 Games came up with the idea of dismantling some of the buildings for the Olympics and salvaging the materials to cut down the cost of maintenance," said Barney. "That could be a way to go in the future."

There's no doubt the costs of hosting Olympic games are rising, 

The summer Olympic games for 2016 and the Paralympic Games are being held in Rio de Janeiro—which will also be hosting some games of soccer's 2014 World Cup in Brazil—at a reported cost of $14.4 billion. At least that's the bid Rio put in at the time it was awarded the Olympics in 2009. 

Brazilian officials have said that most venues for the Games are already in place. But more spending is seen for ongoing projects such as airport and subway expansions and construction of roads in and out of Rio.

Experts expect the money spent in Rio to go well beyond the initial bid. 

"I don't expect Brazil to see a net economic benefit from the games," said Fleisher.

"There are short-term benefits for sure, but you have to wonder if some of the money couldn't be better spent on health care or other items people need," he said.

While cities will continue to bid for hosting the Olympics, a change in the economics would be welcome. said Barney.

"There's nothing like attending an Olympic festival, and I've been to many," he said. "It's a great experience on TV and the competition is so good. It's just that something has to be done about the grandiosity of it all." 

—By CNBC's Mark Koba. Follow him on Twitter @MarkKobaCNBC.

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