THE RIGHT TO HOST THE OLYMPIC GAMES SHOULD BE AUCTIONED TO THE HIGHEST BIDDER

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1 THE RIGHT TO HOST THE OLYMPIC GAMES SHOULD BE AUCTIONED TO THE HIGHEST BIDDER I Introduction By Mark F Stewart & C L Wu * Approximately once every two years the ninety odd members of the International Olympic Committee (IOC) meet to choose which city will host either the Summer or Winter Olympic Games. The choice is made using a series of eliminating votes. The city that receives the fewest number of votes in each round is removed until one city remains. During the lead up to these meetings the IOC members travel the world to inspect the cities that are competing for the Games. The current method of choosing a city to host the Olympic Games is extremely wasteful. In the race to host the year Summer 2000 Olympics, the vying cities may have spent more than a quarter of a billion dollars to influence the votes of the IOC. These funds served no purpose other than to influence the allocation of the Games, and to enrich the lifestyles of the IOC members. If the Games were awarded to the highest bidder in an auction these funds could be used in a far more useful way. II How much is currently spent on bids? In their two books The Lords of the Rings and The New Lords of the Rings, Andrew Jennings and Vyv Simson outline the process by which the Olympic Games are currently awarded to a host city. 1 They explain in considerable detail an extravagant system whereby the bidding cities go to great lengths to entice the IOC members to vote for them. The books are full of stories of IOC members receiving gifts and favours, even a university place for an errant offspring. If only a small fraction of these excesses are true they are indicative of a particularly improvident process. A section in Jennings (page 151) describes the scene at Birmingham s Hyatt Hotel, where the IOC was meeting to choose the host for the 1998 Winter Games. The Hyatt s post room is already overflowing with gifts from the five bidding cities... The committee members get Vennini glass, Gucci handbags, personal computers, watercolours, limited edition prints, silk scarfs, ties, books and stetsons etc The actual amount of money spent by bidding cities is generally not well publicised. The official cost of Sydney s successful bid for the year 2000 Games (obtained from the Sydney Olympics Committee for the Olympic Games (SOCOG) web site) was $25.2 million. This figure, however, very much understates the actual amount spent in support * Department of Economics & Finance, RMIT. We would like to thank Dr Robert Brooks for his helpful comments. 1 The Lords of the Rings was written jointly by Vyv Simson and Andrew Jennings, while The New Lords of the Rings was written by Andrew Jennings only. 2 Not all IOC members accept gifts. 1

2 of Sydney s campaign. In his book The Bid, the Chief Executive Officer of Sydney s bid, Rod McGeoch, describes what is not included in the $25.2 million, the support received in kind. McGeoch talks of millions of dollars of free airfares given by Qantas; free hotel accommodation from the Australian Hotels Association; telephones from Telecom; computers from IBM; televisions, VCRs and monitors from Philips; fashion from Trent Nathan etc... (McGeoch, chapter 9). Nevertheless, by international standards the successful Australian campaign was conducted at a bargain basement price. The official figure for Berlin s bid for the year 2000 Summer Olympics was DM 86 million, approximately $70 million Australian (Jennings, page 184). Although there are no official figures for the Beijing bid there were many excesses. For example, there were news reports that industry in the Chinese capital stopped production each time an IOC delegate was in town so as to reduce the amount of smog. There are other pieces of information that indicate the costs potential bidders are prepared to incur to influence the IOC members. The IOC President Juan Antonio Samaranch managed to raise approximately $60 million from a variety of sources to finance the Olympic Museum in Lausanne (Jennings, page 61). In 1972 the IOC had only $2 million in the bank, by the early 1990s this figure had increased to around $150 million (Jennings page 54). Not only do cities bid to host both the Summer and Winter Olympic Games, they also bid for the right to be an exclusive national bidder. 3 There is also lobbying for the right to host IOC meetings. Presumably cities believe that hosting these gatherings will give them an advantage in some future bidding contest. These minor league bidding encounters are also staged at a cost. McGeoch criticises Jennings and Simson for exaggerating a few incidents in the bidding process (McGeoch, page 100-1). But in reading McGeoch s detailed report, one finds a tremendous amount of effort and energy was spent by the Australian team on lobbying. They travelled the world and participated at all IOC occasions in order to lobby the members. Just to quote one example, former Prime Minister, Gough Whitlam and his wife, both seventy eight years of age at the time, travelled extensively in Africa to lobby the leaders in that region (McGeoch, chapters 15 and 16). Thus the waste of resources is beyond doubt, particularly when the efforts of the unsuccessful cities are taken into account. It is obviously not possible to quantify the total amount expended during a bidding contest, but we can conject a figure by looking at the race to host the year 2000 Olympics. $30 million is probably a conservative estimate of the average official cost of each bid. Therefore, Berlin, Beijing, Brasilia, Istanbul, Manchester, Milan, Tashkent and Sydney together may have spent a quarter of a billion dollars endeavouring to sway the hearts and minds of the ninety or so IOC members. We can only speculate about the sort of full cost figure a team of economic consultants might come up with once they had imputed dollar amounts for the closing down of China s industry and added in the free airfares, the give away personal computers etc... 3 Sydney needed to be selected ahead of Melbourne and Brisbane as the official Australian bidding city before it could launch a campaign on the IOC. 2

3 III Why an auction? The cost of conducting the bids (described in Section II) serves only to allocate the Games to a host city and to bestow great benefits on the IOC. Given the IOC members include many multi-millionaires, aristocrats, a vice-president of the NBC, a judge from the International Court of Justice and many other privileged individuals, the well-being of this group should not be a concern. In economics we would say that there are substantial rents attached to the hosting of the Olympic Games. To allocate these rents using lobbying will result in a large portion of these rents being dissipated during the process. By auctioning the right to host the Games, which infers the sale of the rents, this money is simply transferred from the host city to the IOC. As there would be no need to conceal the price paid so the IOC would be obliged to devote these funds to a socially desirable cause. The IOC, conscious of its public image, could use the funds in any number of philanthropic ways. They could donate the money to one of the international aid organisations, or establish their own. Any of these options would be far superior to having the funds squandered on lobbying the IOC members, and may even earn President Samaranch the Nobel Peace Prize. The benefits of the auction are threefold: 1. The process would become transparent, which would end the allegations of corruption against the IOC. 2. The auction would generate funds that could be used in a worthwhile way. 3. The huge waste of resources would be avoided. IV What price could the games fetch? In the contest to host the year 2000 Summer Olympic Games, each bidding city had a one in eight chance of success. As Berlin was prepared to spend $70 million on its bid, assuming risk neutrality, this implies that the Germans would have paid more than half a billion Australian dollars to secure the Games with certainty. 4 There are, however, a number of qualifications that need to be considered when evaluating this figure. 1. As risk aversion is the usual state of affairs, the figure may be an under estimate. 2. In section II it was explained that the official figures for the cost of running bids understate the true costs, again implying that half a billion dollars may be too low. 3. The half a billion dollar figure depends on Berlin believing it had a one in eight chance of success while spending $70 million on its bid. If the German s though their chances were better than this, the amount they would have paid for the Games would be less than half a billion. As Tashkent, Milan and Brazilia dropped out of the race early, Belin s chances were improved. Having said this, Sydney and Beijing were very much the front runners during this campaign, yet Berlin was still prepared to spend these funds on their bid. 4. As the Olympic Games have rarely been run at a profit, there may not be large amounts of money available to pay for the right to host. But an auction, as opposed to the current bidding process, would mean that little money would need to be spent until a city was actually awarded the Games. Therefore, a city could firstly cost all aspects of hosting the Games and then work out a price it could afford to pay at 4 $70 million x = $560 million. 3

4 auction. Notwithstanding this, we believe that many governments would be prepared to pay a price to host the Games that would result in a loss being made. Cities are likely to believe that the loss would be worth incurring to secure the economic benefits that would flow. KPMG has estimated that hosting the Sydney Olympics will add approximately $7,000 million to Australia s GDP over the period 1991 to 2004 (from the SOCOG web site). The preceding discussion underlies how difficult it is to estimate the price the Games would fetch. Given the amount of both public and private funds that have been raised for bids (either as dollar amounts or in kind) and that this money has been spent with no guarantee of success, clearly the Games could command a high price. V How should the auction be organised? There are many options regarding how the auction should be conducted. This paper discusses some of the options and makes a recommendation. Our main theme, however, is that any form of auction would be superior to the current method of allocating the Games. As far as the auctioneer is concerned, an auction should be designed to maximise the chances that the item being sold goes to the buyer who values it most highly, and that the price paid is as close as possible to that purchaser s maximum valuation. For the participants in the auction, they would like to secure the item, but do not want to pay a price above its value to themselves. There are generally four different auction types: 1. First Price, where the bids are sealed, the highest bidder wins and then pays the price they bid. 2. English, where the bids are made openly, the price ascends, the highest bidder wins and also pays the price he or she bid. 3. Dutch, the bids are again made openly, but in this case the price descends and the first bidder wins. 4. Vickrey, the bids are sealed, the highest bidder wins and pays the second highest bidder s price. This type of auction is named after the Nobel prize winning economist William Vickrey. With the First Price and Dutch auctions each participant has no knowledge of what their competitors are bidding or will bid. In these circumstances there will be speculation about the valuations of competitors, and in an endeavour to win the auction at the lowest possible price they may bid below their true valuations. In this situation there is an increased chance of the item not going to the bidder with the highest valuation. Vickrey (1961) and McMillan (1994) explain this, and the comparisons between the other auctions, in more detail. An English auction will generally result in the item going to the bidder with the highest valuation, although the winner will only pay a price marginally above the second highest bidder s valuation. This occurs as once the second highest bidder has dropped out, the final bidder would not continue to bid up the price. Another potential problem with this type of auction, or any auction where bids are made openly, is that the chances of collusion are increased. 4

5 With a Vickrey auction the optimal strategy for each of the participants is to bid an amount equal to their true valuation of the item. To bid less would reduce the chances of winning at what would have been a profitable price. To bid more would increase the chances of winning, but will lead to a price above the winner s true valuation (a pyrrhic victory). In these circumstances each bidder should bid their correct valuation and this would ensure the item goes to the purchaser with the highest valuation. The important advantage of the Vickrey method is that the incentive to under-state one s valuation is the weakest of all the four auction methods, since the price payable is determined by someone else (the second highest bid). Also, as the bids are sealed there is less chance of collusion. The Vickrey auction satisfies our criteria. VI What about the technical aspects of the Games? An objection that may be raised against using an auction to choose a city is that no consideration is given to what we may term the technical aspects of the Games. The question is will the city with the highest bid also be the city that will run the Games in the best technical way? Obviously the two need not coincide exactly. The problem with the IOC voting on the technical aspects, however, is that this will inevitably lead to costly lobbying. While acknowledging that the city with the highest bid need not necessarily be the city which will run the Games in the best way, we believe that this city will be technically competent. The main purpose of hosting an Olympic Games is to show case a city to the world. Consequently cities have a very strong incentive to carefully consider the costs and benefits of hosting before bidding. Failure to do so may lead to world wide embarrassment. Also, we envisage that some of the funds for the bid would come from potential sponsors. The organising committees for the bids would not be able to raise enough money unless they could show the sponsors that the Games would be run in a technically sound way. Hence, we believe that the auction should be the deciding factor in awarding the Games to a city. VII Conclusion The current method of choosing a host city for the Olympic Games wastes substantial resources. By simply selling the right to host the Games these resources could potentially be used in a more desirable way. Any of the different auction techniques discussed in Section V are far superior to the current method of choosing a host city. The objection is likely to be raised that an auction would result in the Games only going to wealthy countries. This is likely to be the case, nevertheless the current method of choosing cities has also resulted in this occurring. The Olympic Games is only one of many international sporting events allocated to host cities via lobbying. We believe that auctioning the right to host such events would be a superior method of selecting hosts. 5

6 VIII References Jennings, A. The New Lords of the Rings, Simon & Schuster Ltd (1996). Simson, V. & Jennings, A. The Lords of the Rings, Simon & Schuster Ltd (1992). Sydney Olympics Committee for the Olympic Games (SOCOG) World Wide Web Site, McGeoch, R. & Korporaal, G. The Bid, How Australia Won the 2000 Games, William Heinemann Australia (1994). McMillan, J, Selling spectrum rights, Journal of Economic Perspectives (Summer 1994). Vickrey, W. Counter-speculation, auctions, and competitive sealed tenders Journal of Finance (1961). 6