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September 15, 2006

Higher Game Costs, Fewer Game Benefits

"The Province needs to develop a more comprehensive definition of Olympic costs so that all Games-related costs can be reported."
Acting Auditor General Arn van Iersel, The 2010 Olympic and Paralympic Winter Games: A Review of Estimates Related to the Province's Commitments, p. 8

In case Premier Campbell's government needs help in defining Olympic costs, the Acting Auditor General provided Exhibit 8 (pages 40-41 of his report) where he showed $1.5 billion in costs plus undetermined costs for Provincial Crown Sponsorships, Games related marketing, Vancouver Convention Centre Expansion Project, Indemnification of Vancouver and Whistler, and the Whistler Legacies Society. A footnote points out that VANOC has budgeted $90 million as expected revenue from Provincial Crown Corporations, so the items identified with a question mark for costs are substantial.

On September 14, the Vancouver Province carried a story on the Acting Auditor General's report even though the paper is on doorsteps in the wee hours of the morning while the Report was not released until mid-morning. As a courtesy, auditors provide organizations with advance copies of reports so as to include a response from the body being audited. It is a major violation of protocol to comment publicly on an audit report that has not been officially released, yet that is what Colin Hansen, Minister responsible for the games, did when he described the yet to be released report as "encouraging". The paper quoted Hansen saying: "Let's put it this way: I found the auditor-general's comments around the $600 million encouraging". If spending in excess of $1.5 billion when the promise was the cost would not exceed $600 million is "encouraging", then the Campbell government is out of touch with reality. The hit to the taxpayer is worse since the federal government and various municipalities are on the hook for a further $1 billion, bringing the minimum cost to $2.5 billion, and that doesn't include the Canada line. Hansen owes the Acting Auditor General an apology for commenting on his pre-release version of the report, and he and the Premier owe the public an apology for the way costs and benefits have been incorrectly estimated.

Further bad news is that the list of more than $1.5 billion in expenditures does not include various liabilities from the blank cheque the province signed for cost overruns. The Acting Auditor General wrote: "There are a number of legal routes through which, in our opinion, responsibility for games costs could be shifted to the Province. The Province has guaranteed to the IOC that it will cover any financial shortfall of VANOC. … We acknowledge that, legally, the guarantee is provided only to the IOC. In our opinion, however, the obligation of the Province to ensure the financial success of the Games has the potential to cause the guarantee to be subject to a much broader exposure." In its response, the province denied that it is subject to broader exposure. If things go wrong, and it looks like they will, the lawyers will be very busy.

In addition to understating costs, the province has likely overstated benefits. The Auditor's report said the estimated $4 billion in economic benefits flowing from the games depends on "strong and early marketing efforts" but a provision in the agreement with the IOC prevents international marketing from occurring until after the 2008 Beijing Olympic Games, six years after the start date proposed in the original study of potential benefits. The Auditor then warned that: "This raises doubts as to whether those economic benefits originally forecasted can actually be achieved. The Province will need to be creative and coordinated with its marketing efforts if it is to achieve the originally forecasted economic benefits." He could have included an observation that the original benefits and revenues were forecast prior to the U.S. announcing new travel documents, probably a passport. Those requirements and limited marketing are very bad news for the province.

The Canadian dollar has also increased in value since the bid was won, but revenues are primarily stated in US dollars. Since the bid was won, $150 million has been lost due to currency fluctuations, or in the words of the Auditor: "… as a result of not hedging US dollar revenues for broadcasting and international sponsorships at the time the Games were awarded, approximately $150 million less in revenue will be realized."

The province's $600 million budget originally included a $139 million contingency fund; the unallocated amount of the contingency is now $76 million. That amount is trivial relative to the risks and undetermined costs identified by the Auditor. Grab your wallet because B.C. taxpayers are going to be paying for the games for decades.


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2006 David D. Schreck. All Rights Reserved.