Beijing Olympics û Too large, too costly? Maybe not

The use of diversified funding sources and plans to use the venues after the games could see Beijing come out ahead, despite playing host to one of the most expensive Olympics ever.
Billed as the most expensive games to date, this summer's Beijing Olympics will likely run up a bill of significantly over $20 billion. Some may question whether this will be too much û that it will become a financial millstone around the Beijing municipal government's neck. But while the cost of hosting the games is huge, Standard & Poor's Ratings Services believes that Beijing is well-equipped to handle it. The importance to China in terms of boosting its international standing is obvious, but the Chinese authorities appear to recognise that the Olympics isn't an end in itself. Indeed, their careful planning of this massive sporting event suggests the benefits of hosting the Games will continue long after the closing ceremony.

Setting a record for construction
Beijing's bid documentation, submitted to the International Olympic Committee in 2000, estimated that the infrastructural work leading up to the games would cost up to $14.3 billion. Much of this relates to improvements needed to make Beijing a suitable venue for the games. However, steep gains in commodity prices over recent years have likely pushed construction costs well above this initial projection - thus the current estimates that suggest the total cost of hosting the games could be well over $20 billion.

The cost of Beijing Olympics 2008 is considerable also compared with the 2012 Olympics, to be held in London (see "The Cost of Olympic Gold: the Credit Effect of Hosting the 2012 Olympics" published January 20, 2005, on RatingsDirect). With the benefit of more updated construction material costs, London's estimated Olympic capital spending in late 2004 of $15.8 billion was only a little higher than Beijing's official estimates. This is despite the higher labour and other costs of building in London. Other candidate cities competing with London submitted lower estimates, with Madrid putting in the next highest bid at $11.6 billion (see chart 1).

It's easy to see why the Beijing Games require such a big investment. The new infrastructure includes some of the world's most impressive structures. The newly-opened passenger terminal at the Beijing Capital International Airport, for instance, has a floor area larger than all five terminal buildings at London Heathrow airport. The Beijing subway expansion plan also aims to make what was a two-line system into the world's most extensive underground network in less than a decade. A number of the sports facilities built for the Olympics, including the National Stadium and the National Aquatics Centre, are also architectural marvels that are possible only with the use of recently developed technology. Moreover, all of these facilities have been built at breakneck speed.

Some have made the case that China is pulling out all the financial stops to showcase its development during the Games. Despite years of exceptional growth, annual average income in the People's Republic of China remains relatively low at less than $3,000. And the infrastructure cost estimate in Beijing's bid document is close to the municipal government's total expenditure in 2006 (see chart 2). With pressing social spending needs in a country where regional income disparity has become a significant problem, it's not immediately obvious why Beijing should outspend much wealthier cities in hosting the Games. The risk of large losses, as in the cases of Montreal in 1976 and Athens in 2004, clearly increases with financial commitment.

Development first, games second?
A closer examination of the finances of the Beijing Olympics assuages many of these concerns. To begin with, many of the projects would have gone ahead whether the city had won the Olympics bid or not. China's capital city is a fast-growing metropolis û the population grew by almost 16% from 2000 to 2006, reaching 15.8 million. Until recently, Beijing's urban infrastructure also lagged significantly behind cities of comparable importance in the advanced economies.

Therefore, most of the capital projects involved improvements that were already in the city's development plan. Hosting the Olympic games required some re-prioritisation of the plan's projects. In a few instances, construction of sports venues proceeded, while budget constraints caused other projects to be postponed. The number of facilities built specifically for the Olympics (the National Stadium being one) is very small. Total spending on all sports facilities for the games is also modest. In early 2008, a Beijing vice-mayor revealed that the cost of Olympic venues will be no more than Rmb13 billion ($1.8 billion). Therefore, Beijing's bid document earmarked most of the capital budget for improving public facilities, such as the airport and the subway system.

Moreover, of the amount spent on the sports venues, the government shoulders only about one-half. In planning for the Olympics, the government made a conscious effort to seek diversified funding. It tendered commercially viable projects out to the corporate sector and offered financial support and incentives where necessary, as was the case with the National Stadium. The government also sought donations to build structures such as the National Aquatics Centre, which it financed with contributions by overseas Chinese. These measures helped to significantly reduce the financial burden.

Looking beyond the finish line
The Beijing government appears to have considered the issue of Olympic white elephants as well. Tenders for building sports venues encouraged winners to put these structures to commercial use after the games. Other venues went up in universities and other educational institutions which will make use of them after the competitions are over. These arrangements reduce the future cost to the government of maintaining these facilities.

The Chinese government is clearly eager to put its best face forward when the country is in the international spotlight this year. However, in doing so, it hasn't thrown its characteristic fiscal prudence to the wind. In this regard, attention to execution appears to have led to timely completion of various projects without substantial cost overruns.

Standard & Poor's hasn't assigned a local government credit rating to Beijing, as it has with most bidders for the 2012 Olympics. If we do, however, the city's rating fundamentals are unlikely to be affected by hosting what appears to be among the most expensive Olympic games ever. Indeed, the Beijing Olympics could be one of the most financially successful games in terms of revenue receipts. Indications are that strong revenue support is coming from commercial sponsors eager to reach what some forecast could become the second-largest consumer market in the next decade. Furthermore, unlike with the Athens games, slow ticket sales don't appear to be a problem due to enthusiastic local demand.

Fortunately for the Chinese central government, its guarantee to bear losses relating to the games is unlikely to be called upon. The need to absorb losses associated with the Athens Olympics had weighed heavily on sovereign credit support for similarly-rated Greece (see "GreeceÆs Sovereign Credit Worthiness Beyond the Olympics: a Marathon, Not a Sprint" published August 9, 2004, on RatingsDirect). Therefore, we don't expect the 2008 Olympics to weaken China's significant advantage vis-a-vis Greece either in terms of net government debt or budget performance (see table 1).

Beijing's experience may be more comparable with that of Barcelona. The Spanish city's substantial infrastructure investment leading up to the 1992 Games helped boost its appeal for visitors and businesses alike. The positive economic impact helped lift the city's credit ratings to its current level (AA+/Stable/--) from the A-/Positive/-- rating that we assigned in 1994. With the advantage of a rich and long history, Beijing could experience an even greater tourism boost. Hosting the Olympics could lead to long-term improvement in the city government's credit worthiness, rather than to a huge financial burden.

This article is written by KimEng Tan, a primary credit analyst at Standard & Poor's in Singapore.
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