KOREA FOCUS
Success Formula for the 2018 Pyeongchang Winter Olympic Games
Oh Jun-beom and Baek Da-mi

Researchers
Hyundai Research Institute

Joo Won

Senior Research Fellow
Hyundai Research Institute




I. Introduction
 
With the close of the 2014 Olympic Winter Games in Sochi, Russia, the next host country’s efforts to successfully stage the games will intensify. The 23rd Winter Olympic Games will be held in Pyeongchang, Gangwon Province, South Korea, from February 9 to February 25, 2018.
 
In general, whether an Olympiad is a success depends on various tangible and intangible variables such as higher international recognition of the host country as well as the host city, heightened national solidarity and pride, improved athletic ability, and economic gains. This report focuses exclusively on economic aspects. 
 
In its “Economic Impacts of the 2018 Olympic Winter Games in Pyeongchang” (Issues and Tasks, 2011), the Hyundai Research Institute estimated that the Pyongcheong Winter Olympics would add 64.9 trillion won to the Korean economy. The estimate represented the total tangible and intangible factors combined. Expenditures were excluded. However, this report includes expenses and revenues incurred before and after the games.
 
Most host cities of the Winter Olympic Games have been far from the demographic or economic centers of their countries. (See Appendix 1) Accordingly, the cost for construction of facilities and infrastructure to stage an Olympiad has been relatively higher. After the games, host nations and cities are typically stuck with facilities that are not used year-round and cause enormous maintenance costs. Therefore, there is a growing concern over the possibility that the balance sheet on the Pyeongchang Winter Olympic Games in 2018 might end up in the red.

 

Against this backdrop, this study examines the expenditures and revenues of recent Winter Olympics, and explores the preconditions for making the Winter Olympiad an economically successful sporting event. It looks at major expenses and revenues incurred by previous Winter Olympiads held in Nagano, Japan (1998), Salt Lake City, the U.S. (2002), Turin, Italy (2006), and Vancouver, Canada (2010), respectively; it also reviews the policies implemented by these host cities before and after their Olympiad. Based on these findings, this report also explores what will be the prerequisites to make the Pyeongchang Games a success in economic terms.
 

II. Expenditures and Revenues of Winter Olympics Host Cities
 
During the preparation phase, an Olympic host city needs to secure funds to finance the construction of facilities and infrastructure. Facilities construction involves sports arenas, accommodations, media villages, etc., and infrastructure construction involves social overhead capital such as expanded transportation and energy capacity. In general, the private sector, national government and host city finance the required construction. In terms of economic benefits, investment in construction boosts productivity, value added generation and job creation for the local economy. And naturally, spending by the national teams, officials, media personnel, etc. create a windfall.
 
The expenditures and revenues that are incurred during the Winter Olympics refer to the earnings and expenses generated from the operation of the games. Operating costs primarily involve salaries, facilities management, transportation, and the opening and closing ceremonies. Operating income mainly includes sponsorship, ticket sales, profits from trademark rights, and subsidies (support funds) from the International Olympic Committee and the host country’s government.

 

During the post-Olympic period, spending is mainly toward the maintenance of fixed capital investment facilities, such as stadiums, accommodations, media village, etc.  Increased name recognition of the host city often brings more tourists and subsequent spending, thus stimulating the economy and creating jobs. In most cases, admission fees to facilities represent only a negligible part of the post-Olympic revenue.
 
The most costly Winter Olympics has been the 1998 games in Nagano, Japan. The city spent $5.78 billion on the construction of facilities (based on the dollar value of 2013) and $20.52 billion on the infrastructure development. That is five times more than subsequent Winter Olympics on average. Facilities construction is the main reason for a post-Olympic financial headache and Nagano is strapped with the largest post-games deficit. Far less has been spent on facilities construction since the Nagano Olympics ― $2.9 billion by Vancouver, $1.97 billion by Salt Lake City and $1.37 billion by Turin.

 

As for the 2014 Olympic Winter Games in Sochi, the initial cost estimates by the Russian organizing committee slightly exceed the levels of spending since the 2002 Salt Lake City Olympiad. Pyeongchang forecasts its spending will not be markedly more than preceding host cities. But most estimates have fallen short of meeting actual expenditures, so the final spending estimates of the Sochi and Pyeongchang Olympics will likely be higher than expected.
 
In fact, the Russian government spent so heavily on the Sochi Olympics that it may have broken Nagano’s record. Russian opposition politicians Boris Nemtsov and Leonid Martynyuk estimated that Moscow allocated approximately $14.8 billion to operating expenses and $35.2 billion to infrastructure construction.
 

The operating expenditures and revenues officially announced by the organizing committee of each Winter Olympics mostly remained balanced. Operating expenditures showed an upward trend from 1998 to 2010. Operating expenses for the 1998 Nagano Games amounted to $1.36 billion and those for the 2010 Vancouver Games reached $1.88 billion. Estimations of total expenditures for both Sochi and Pyeongchang are relatively low. However, taking the findings of previous studies into consideration, these two Winter Olympics are likely to prove costlier than anticipated.
 
It is rare for a host city to suffer heavy losses in operating revenues and expenditures. Operating income tends to be adjusted to operating expenditures and both factors are incurred only in the Olympic year. Also, the International Olympic Committee helps the host city secure certain levels of income. Nagano and Salt Lake City record a surplus of $6 million and $7 million, respectively, in terms of the dollar value of 2013. Vancouver kept income and spending in balance but Turin posted a $4 million deficit.
 
Two years after their Winter Olympics, the number of visitors to Salt Lake City increased dramatically but the influx tended to drop in Nagano. The trends continued in both cities. When the total number of visitors each host city attracted after hosting the Winter Olympics is expressed in an index format (the hosting year at 100 points), the index for Salt Lake City soared from 113.0 points five years before the 2002 Winter Olympics to 118.2 points five years after the games. Unlike Salt Lake City, the indices for Nagano dropped slightly from 104.2 points to 97.9 points during the same period, although the number temporarily rose between 1996 and 1997, before the games.
 
As for the indices of incoming visitors for skiing, Salt Lake City saw the index rise from 98.7 points to 130.0 points during the cited 10-year period. Conversely, the indices for Nagano dramatically fell from 145.1 points to 67.5 points during the corresponding period. The negative growth index for the Japanese city seemingly resulted from prolonged economic slump throughout the 1990s, which significantly dented spending on ski trips. The number of skiers rose during the Olympic year but the city has failed to attract heavy traffic to its ski resorts ever since.
 

 

III. Promotion Policies for the Winter Olympics of Nagano and Salt Lake City

 

1. Success of Salt Lake City
 
Salt Lake City is regarded as one of the most successful host cities in the history of the Winter Olympic Games. It reaped higher profits by making the most of existing facilities and exerting post-games efforts to foster tourism and encourage the local sports industry to use Olympic venues.
 
Among the 11 venues for the 19th Winter Olympics, only three were newly constructed: the Utah Olympic Park, the cross-country ski resort, Soldier Hollow, and the indoor speed skating rink, Utah Olympic Oval. Eight arenas underwent major renovation for use at the games and instead of building an Olympic Village for the athletes and media workers, the dormitories at the University of Utah were used. These steps were instrumental in averting overruns on construction spending.
 
The Salt Lake City government has generated sustainable profits from the post-games use of facilities in collaboration with the sports industry. As part of this effort, the city successfully stabilized facility management by relocating the headquarters of the U.S. speed skating national team to the area. It also actively promoted the Orthopedic Specialty Hospital, which specializes in sports medicine, and publicized itself as the best-suited place for athletes to strengthen physical endurance by taking advantage of its geographical location at a high altitude.
 
Salt Lake City’s sports training facilities and successful attraction of tourists have contributed to revitalizing the local tourism industry as well as the local economy as a whole. After the Winter Games, facilities for summer sports and leisure activities were built under the ski jump tower at the Utah Olympic Park, enabling visitors to enjoy sporting activities all year round. The city also succeeded in converting sporting facilities into tourism resources. For example, the Utah Olympic Park allows visitors to ride a bobsled or steer a skeleton sled on their own.

 

2. Failure of Nagano
 
In contrast, Nagano is widely regarded as an unsuccessful host city. Failing to consistently generate income from its Olympic buildup, its excessive facility investment has resulted in a financial burden.
 
With the ratio of newly built sports facilities already very high, the city excessively spent on social overhead capital. It built four out of the five indoor venues that were needed to stage the Winter Olympics. The curling arena was the lone exception. The city also constructed a stadium for the opening and closing ceremonies, and the facilities for ski jump and cross-country events. In addition, hefty spending was directed toward social overhead capital construction during the five-year preparation period. It included the high-speed rail lines and highways. The amount was equivalent to nearly 14 years worth of SOC projects.

 

The city government of Nagano had difficulty in generating sustainable profits because its post-games facility use was mostly limited to the local population. The Olympic Stadium is used as a baseball park and the Olympic Village has been converted into a municipal housing complex. The rest of the Olympic facilities are also used mainly by local residents: an indoor swimming pool, a gymnasium, and a multi-use hall. A limited number of facilities, such as M-Wave, an indoor sporting arena, the Nagano Bobsled-Luge Park (also known as “Spiral”) and the ski jump tower, are used for competition and training. They generate only a modest amount of revenue.
 
Nagano’s failure in developing unique and competitive tourism resources had a negative impact on the growth of the local tourism industry and the local economy as a whole. Although the Olympic Legacy Tour program and Zenko-ji, one of the three most magnificent Buddhist temples in Japan, are considered the city’s major tourism resources, the temple tour is not a large money-making business and the tour of Olympic sites is not attractive enough to encourage prolonged visits. Nagano only keeps ice sports facilities in place but lacks tourist attractions like a ski resort, where people can regularly visit.

 

Nagano has been viewed as a failure as an Olympic host city in that it was not able to develop specialized industries, such as tourism, by utilizing its infrastructure built for the Winter Olympics. It is even said that the road network provides visitors with convenient access to neighboring locales instead of bringing them into the city.

 

IV. Implications
 
The keys to the economic success of the 2018 Pyeongchang Olympic Winter Games lie in four factors: keeping preparation expenses in check, minimizing fixed facility investment, enhancing post-games use of facilities, and maximizing the influx of tourists.
 
First, host cities of previous Winter Olympics tended to spend more money in the preparation stage than originally planned. Beginning with the 18th Nagano Winter Olympics to the 21st Vancouver Winter Olympics, host cities had an average cost overrun of 62 percent. Keeping this in mind, Korea’s central and provincial governments must tightly control spending to avoid excessive costs.

 

Considering that Olympic preparation costs usually come from taxes paid by the general public, cost increases may lead to tax hikes. Therefore, government agencies including the Ministry of Strategy and Finance, the Ministry of Culture, Sports and Tourism, and related local government agencies need to strictly consider if any increase in preparation costs is justifiable. If an increase is deemed inevitable, any changes in the budget plan and the entire decision-making process should be made public to ensure transparency. If problems arise later, the responsible entities should be held accountable.
 
Second, it is necessary to drastically curb investments in fixed facilities, of which post-games use has yet to be determined. Unlike Summer Olympic sports, the majority of Winter Olympic sports are not so popular and undertaken only in the winter, which makes the post-games use of Winter Olympic facilities relatively infrequent. As a result, previous host cities had to deal with a huge financial burden that arose from the post-games operating costs of fixed facilities. To prevent such potential pitfalls, competition arenas should be built in a way that allows easy dismantling. Also, newly constructed accommodation facilities need to be designed in ways to make them available for rent or conversion.
 
Third, it is necessary, from now onwards, to create an agency responsible for the post-games management of Winter Olympic facilities and draw up and implement a roadmap. The agency’s main tasks should be to hold cost factors in check, explore possible post-games utilization of facilities, and secure profitability based on a thorough cost-benefit analysis on alteration of facilities. It is desirable to place the agency under the umbrella of a finance or budget-related cabinet ministry so that it can operate independently from the Ministry of Culture, Sports and Tourism as well as the Pyeongchang Organizing Committee for the 2018 Olympic Winter Games.

 

It is also necessary to devise a practical roadmap based on rigorous assessment of the post-Olympic utilization of fixed facilities. It should be coupled with a time schedule for various phases: demolition and restoration, downscaling of facilities, change of use, and continued maintenance.
 
When seeking ways to use Olympic venues after the games, non-economic factors should be excluded in establishing potentially profitable, specific and feasible criteria. If Olympic venues are to be converted to community culture and sports facilities, they need to be properly downscaled in consideration of the host city’s potential population growth, income levels, age demographics, and use of leisure time. If some facilities need to be maintained for future training of winter sports athletes, the amount of costs to be shared and agencies responsible for facility maintenance should be specified. These agencies might include sports-related organizations, the central government, local autonomous bodies, etc.
 
Fourth, economic benefits resulting from enhanced public recognition as a host city of the Winter Olympics should be maximized by enlarging tourism infrastructure and developing tourism products. With a few years to go before the Pyeongchang Winter Olympics, Korea should launch vigorous marketing campaigns to bring more visitors from abroad. Fortunately, the number of foreign tourists, especially that of Chinese ski tourists visiting resorts in Gangwon Province, has increased since Pyeongchang was named the host of the 2018 Winter Olympics in July 2011.
 
More fundamentally, it is necessary to promote Gangwon Province, where Pyeongchang is located, as a world-class tourist destination by developing new tourism resources and Winter Olympics-related sightseeing programs, and building transportation infrastructure to provide easier access to tourist spots. Pyeongchang’s heightened recognition should lead to hosting internationally famous theme parks such as Disneyland, developing tour programs to Mt. Kumgang in North Korea and the DMZ area, and increasing maritime leisure facilities. It is also necessary to upgrade the tourism infrastructure in Gangwon Province by means of both improving its transportation network system through an early implementation of the National Traffic Network Plan and improving existing lodging facilities through the attraction of private investment.

 

[Appendix 1] Host Cities of Past Winter Olympic Games

 

[Appendix 2] Study on Olympic Budgets

 

This study compared budget estimates to actual expenditures. Budget estimates are included in the bid file submitted to the International Olympic Committee by each candidate city that wants to host the Winter Olympics. Actual expenditures refer to the total costs of hosting the games that are computed after the games. Costs include the expenses of running the games by the host city’s Organizing Committee for the Olympic Games and expenses for Olympic-related activities contained in the non-OCOG budget, from which infrastructure building costs are excluded.

 

The study revealed that the percentage of budget overrun at recent games against their budget estimates averaged 61.8 percent. Turin recorded the highest cost overrun, while Vancouver recorded the lowest. The analysis conducted by Flyvbjerg and Stewart (2012) showed a significant difference in budget estimates and actual costs of hosting all Winter Olympiads since 1960.

 

[Appendix 3] Recent Increases in Winter Tourist Arrivals in Korea

 

The number of winter tourists visiting Korea has sharply increased after Pyeongchang was chosen in July 2011 to host the 23rd Olympic Winter Games. The number of tourist arrivals in Korea in winter (from December of the previous year to March of the relevant year) rose to 3.41 million in 2013 from 1.92 million in 2006. During the corresponding period, the number of Chinese visitors to Korea also increased from 240,000 to 920,000. The proportion of Chinese visitors against the total number of inbound tourists in Korea also more than doubled to 27 percent from 12 percent. For the 2013 winter season, the number of visitors from the greater China region and Southeast Asia reached approximately 1.5 million, and their share in the total number of inbound tourists surpassed 40 percent.

 

In particular, the number of tourists from the greater China region to ski resorts in Korea has sharply increased since 2011. During the Lunar New Year’s holiday, the number of Chinese tourists from the greater China region (mainland China, Hong Kong and Twain) who made accommodation reservations at the 14 ski resorts in Gangwon Province hovered over 10,000 in 2010 and 2011, but has doubled to some 20,000 since 2012.

 

[References]

 

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2) Lee, Won-gi, “A Study on the Post-Games Utilization of Olympic Support Facilities: With Focus on the 2018 Pyeongchang Olympic Winter Games,” mimeograph, Seoul National University of Science and Technology, 2013.
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4) Hyundai Research Institute, “Economic Effects of Hosting the Pyeongchang Winter Olympics,” Issues and Tasks, 2011.  


5) Choi, Chris, “Legacy of the 2010 Vancouver Winter Olympics: Strategy for the Post-Games Management of Facilities,” Korean Tourist Policy, No. 48, 2012.


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9) Chappelet, “From Lake Placid to Salt Lake City: The Challenging Growth of the Olympic Winter Games Since 1980,” European Journal of Sport Science, Vol. 2(3), 2002.


10) Flyvbjerg and Stewart, “Olympic Proportions: Cost and Cost Overrun at the Olympics 1960-2012,” Saïd Business School working papers, 2012.

 

11) IOC, Olympic Games: Legacies and Impacts, 2013.

 

12) ____, Fact Sheet the Olympic Winter Games, 2013.

 

13) ____, Report of the IOC 2014 Evaluation Commission, 2014.

 

14) ____, Report of the IOC 2018 Evaluation Commission, 2018.

 

15) Pilipenko, “The Sochi 2014 Winter Olympics ― the cost-benefit analysis and ways to improve the project efficiency,” Pan-European Institute, 2013

 

16) PWC, Global Summary of the Impact of the 2010 Olympic and Paralympic Winter Games on British Columbia and Canada 2003 to 2010, 2011.

 

17) Ralston et al, “What are the Economic Impacts on a Nation Hosing the Olympics,” USSR working paper, 2008.

 

18) Zimbalist, Andrew, “Is It Worth It? Hosting the Olympic Games and Other Mega Sporting Events is an Honor Many Countries Aspire to ― But Why?” Finance & Development, 2010.

 

19) Nagano Economic Research Institute, “Legacy of the Nagano Olympics: Economic Effects and Changing Regional Structure,” 1999.

[Weekly Economic Review 14-08, No. 579, February 21, 2014,
Hyundai Research Institute]