Olympics Inc.

As potential investors in Vancouver's 2010 games bid, shouldn't we weigh the risks versus the rewards?

How you would react if you were told that you were required to invest in a franchise of a multinational conglomerate? Just for a moment, try to imagine that a local syndicate has issued a prospectus claiming that the only way this franchise can succeed is if every British Columbian is forced to become a shareholder.

Like other global franchise operations, this conglomerate has developed lots of rules to control product quality. In this respect, it's no different than McDonald's Restaurants, Subway, or The Body Shop. Instead of making submarine sandwiches or selling perfumed soap, the conglomerate's product is professional and amateur sports.

Most of its revenue comes from the sale of broadcasting rights and corporate sponsorships. Approximately 75 percent of those funds come from a single U.S. television network and a handful of U.S.based corporations.

Up until the 1980s, local franchises were permitted to negotiate the broadcasting agreements. However, officials at the head office seized control after they discovered some problems. Several local syndicates had been including side deals in their contracts with broadcasters to cover infrastructure costs, which was keeping far too much money in the local communities.

Franchisees have traditionally been permitted to keep 60 percent of the broadcasting revenue. In 1995, however, the executive committee of the conglomerate's board of directors reduced that to 49 percent beginning in 2004 so they could give a larger share to international federations that organize the sporting events. The executive committee also boosted the payout to national committees that send elite athletes to compete in sporting events organized by franchises. Several directors on the larger board happen to oversee these international sports federations and these national committees.

The conglomerate lets local franchisees sell their own sponsorships and licensing agreements within their own countries. However, these deals must not infringe on head office's 10 "product categories". Those are reserved for major global corporations such as Kodak, Coca-Cola, Visa, Xerox, Samsung, and Matsushita. The head office presently returns about 17 percent of this money to the local syndicate. That would help defray the cost of staging the athletic events.

It's tempting to refer to this international conglomerate as a corporation, but that wouldn't be accurate. Unlike large companies traded on a stock exchange, it isn't required to provide full and continuous public disclosure to any regulators. It doesn't have to answer to shareholders. The conglomerate also has a much larger board than the average corporation, with 126 directors, of whom 114 are men.

More than a third of the directors were once elite athletes, which gives them a great deal of expertise about the product. They prefer to call themselves delegates. The honorary president for life attracted bad press many years ago for awarding honours to two dictators, Erich Honecker of the former East Germany and Nicolae Ceausescu of Romania.

The local promoters have projected that the franchise will generate revenues of $1.35 billion, and every British Columbian investor will be required to help cover any operating deficit. The local group says the multinational conglomerate will only sell them a local franchise if you and all the other B.C. and Canadian investors spend $510 million to build facilities and two villages for international athletes. The investors are also liable for another $110 million to maintain the facilities after the franchise closes.

The local syndicate also claims that the multinational conglomerate wants you and the other B.C. investors to spend another $600 million on road improvements to help this franchise succeed. In addition, B.C. investors will have to pay $202.5 million and investors across Canada will have to fork over an equal amount to cover the expansion of the local convention and exhibition centre. The promoters hope that this investment will help the franchise's media relations.

The multinational conglomerate has also been told that Canadian investors might help finance a $2-billion rapid-transit project between the airport, Richmond, and downtown. The syndicate has also promised that Vancouver investors will pay for a new streetcar system between various venues. That project's first phase will cost Vancouver investors $65 million. Money managers acting on behalf of the same investors have said they'll guarantee a loan to build one of the villages. After the event, approximately 250 units will be converted into subsidized housing.

The multinational conglomerate has been so successful in attracting corporate support that it could afford to build an $85-million museum celebrating its accomplishments. After one of the local money managers, Vancouver Mayor Larry Campbell, recently visited the museum, he said he was so overcome with emotion that it made him more eager to invest in a local franchise.

Several media outlets are partners with the local syndicate trying to buy the franchise from the multinational conglomerate. They're not happy that a dissident shareholders'-rights group has surfaced, urging Vancouver investors to reject the syndicate's prospectus in a citywide plebiscite on February 22. The dissidents claim that all the expenditures, including a new transit line and improvements to the Sea to Sky Highway, will saddle the shareholders with billions of dollars in debt.

The dissident group, which calls itself No Games 2010 Coalition, says that unlike publicly traded corporations, this syndicate is not offering limited liability to the shareholders. The group also claims that franchises in every other city have lost money after including the capital costs. The media outlets that are partners with the local syndicate have not given the dissident shareholders a great deal of space or time in their newspapers or on their radio and television stations.

One of the dissident group's most disturbing claims is that the local franchise will offer no dividends to investors outside the Lower Mainland and could cause many of them to lose their jobs. "This prospectus does not convince me to pull any money out of my pocket and put it into this investment," the group's chief researcher, Phil LeGood, told the Georgia Straight.

Meanwhile, two of Canada's largest money managers, Gordon Campbell and Jean Chrétien, have invested $19 million of seed capital in the syndicate. This will help the local group persuade the conglomerate to sell them a franchise.

Campbell and one of Chrétien's top executives, Sheila Copps, have already promised to give the syndicate $620 million of their shareholders' money to build the necessary facilities. Predictably, the dissident shareholders have accused the two money managers of violating their fiduciary duty to investors.

The Globe and Mail, one of the few media outlets that isn't a partner of the syndicate, revealed last summer that Copps and Sport Canada officials stayed in luxury hotels while visiting a franchise in Salt Lake City, which cost Canadian shareholders up to $3,476 per night for a single suite. Copps's officials also spent $57,000 of the shareholders' money on tickets, including four seats for the franchise's closing ceremonies at $1,512 per guest.

Chrétien has a warm relationship with Charmaine Crooks, a former elite athlete who is the multinational conglomerate's only local director. She is vice-chair of another shareholders' group called Team Yes 2010, which is desperately trying to get Vancouver investors to endorse the local syndicate's prospectus.

"This is an urgent situation now with this plebiscite," Crooks told the Straight in a recent interview. "We are in an emergency situation."

Several of the money managers' closest associates are on the board of the syndicate, which calls itself the Vancouver 2010 Bid Corporation. The corporation's chair and CEO, Jack Poole, has tried to generate public support in the upcoming plebiscite by suggesting that the franchise's product line extends beyond amateur and professional sports.

Poole recently told reporters that the franchise will also offer customers a generous helping of culture. Poole said this after Copps and various other money managers contributed $880,000 of the shareholders' money for an arts extravaganza called Celebration 2010, which is designed to generate more investor support for the franchise.

Gordon Campbell, the largest money manager in the province, has promised to do everything he can to promote the new franchise. He hired a consultant who claimed in November 2002 that the new enterprise could boost B.C.'s gross domestic product by as much as $10.7 billion and bring in almost $3 billion in additional tax revenue.

A subversive group that wants local investors to put more of their money into the health-care system has conducted a poll, which suggested that 62 percent of British Columbians don't believe Campbell when he claims that the franchise will have such a huge impact on the economy.

The preceding tale may seem a bit absurd to anyone who has never looked at the International Olympic Committee from a business perspective. However, Holger Preuss, a German economist and Olympic scholar, has written that there is a similar dynamic to an independent business dealing with a powerful head office.

"Based on the assumption that the Olympic Games are the product which the IOC is 'selling', the relationship between the IOC and the OCOGs [Olympic Games organizing committees] can be compared to a franchise system," Preuss wrote in an academic paper with the unwieldy title "Economic Aspects of the Olympic Games and Possible Consequences of a Corruptible Practice of Allocation".

Preuss noted that the International Olympic Committee assumes enormous power after the host-city contract is signed. "It could damage the image of the city and the organizers by not publicly praising the Games, hold back financial funds or could even withdraw the Games from a city and the OCOG as a last resort," he wrote.

Vancouver is one of three cities”¹the others are Pyeongchang, South Korea, and Salzburg, Austria”¹trying to woo the IOC's delegates, who will decide on July 2 who gets the franchise for the 2010 Winter Games. If Vancouver’s bid is chosen, an Olympic organizing committee will spend hundreds of millions of dollars of public funds developing the necessary venues and staging the Games.

At this stage, it's unclear whether or not the organizing committee will be subject to federal and provincial freedom-of-information laws or public-sector financial-reporting rules. But before all that can happen, some of the potential shareholders in the franchise”¹the residents of Vancouver”¹will get a chance to say what they think of the idea in the plebiscite.

Like any franchising opportunity, this one involves risks and potential rewards. On the upside, it's possible that the IOC will negotiate more lucrative television contracts after the current multiyear deal with NBC expires in 2008. Corporations might also continue coughing up more cash in each successive Winter Olympics to attach their names to the IOC’s five rings. And there is no disputing the IOC’s deft marketing touch, which has managed to link an elite sporting event to such universal ideals as world peace, altruism, achievement, and fair play. There is probably no other franchise operation in the world that has the ability to bring its customers to tears or get them parading in the streets.

But the public should also understand that there are several downsides, including a lack of certainty over the projected broadcasting, sponsorship, and ticket revenues. There could be cost overruns on major capital projects, which are entirely financed from the public treasury. Another risk is that although an orgy of public spending could benefit the construction and tourism sectors, the rest of the economy could suffer greatly from a misallocation of public resources.

The value of the franchise could fall if the Olympics lose their lustre in a new wave of scandals over performance-enhancing drugs, corrupt judging, or bribery in the awarding of IOC franchises.

If that's not enough, there is also a risk of a terrorist attack.

RISK ONE: BROADCASTING REVENUES

The Vancouver 2010 Bid Corporation has assumed that 40 percent of its revenues, or about $540 million, will come from the International Olympic Committee's sale of broadcast rights. However, it's possible that the IOC may alter the broadcasting revenue-sharing formula again in the future, which could deprive a Vancouver Olympic Games Organizing Committee of a huge amount of money.

Robert Barney, coauthor of Selling the Five Rings: The International Olympic Committee and the Rise of Olympic Commercialism (University of Utah Press, 2002), told the Straight that the IOC’s biggest challenge is dealing with athletes who use performance-enhancing drugs. If the IOC loses its credibility, this could lead to a drop in television ratings, which would reduce revenues and alienate corporate sponsors.

Barney's book recommended that the IOC negotiate broadcasting contracts prior to awarding an Olympic festival to a city. "It is incumbent on the IOC to reduce that risk to the lowest possible level, since host cities are responsible for assuming accrued debt (unless, of course, the host city works out an arrangement with regional or national governments, as was the case in Sydney)," Barney wrote, adding that it would also help if sponsorship deals were also worked out in advance. There is virtually no chance that this will happen prior to the IOC’s vote in July to choose the host city for the 2010 Winter Olympics.

The IOC’s total broadcasting revenues from the Winter Games have increased sharply over the past two decades. At the 1984 Sarajevo Winter Olympics, for example, the IOC collected US$103 million. That rose to US$325 million for the 1988 Winter Olympics in Calgary. A decade later in Nagano, broadcasting revenue reached US$513.5 million. The value of the broadcasting rights rose again to US$738 million for the 2002 Winter Olympics in Salt Lake City. The 2006 Games in Turin, Italy, are expected to generate US$832 million in broadcasting revenue for the IOC.

"I think they'll increase in Vancouver," Barney said. "I would be somewhat surprised if they didn't, no doubt about that."

The IOC told Vancouver officials that they expect to match the 2006 amount in 2010, with 49 percent returned to a local organizing committee. The IOC also instructed the local bid corporation to discount that figure by more than 10 percent in its revenue estimates, according to a recent report by B.C. auditor general Wayne Strelioff.

Barney told the Straight that the IOC’s former lead negotiator on television rights, Montreal lawyer Richard Pound, has been replaced by Gerhard Heiberg of Norway. Barney credited Pounds negotiating skills for boosting IOC revenues so sharply through the late 1980s and 1990s. He added that Heiberg and his associates will have to be extremely effective to achieve similar results.

"They have to treat the American market with kid gloves, or in the way that Americans understand, or they're going to suffer accordingly," Barney said.

His book described how Pound helped stave off an attempt by a U.S. congressman in 1991 to transfer control of U.S. broadcast negotiations from the IOC to the U.S. Olympic Committee. The USOC complained at the time that the IOC’s television revenues per household for the Winter Games were 10 times greater in the United States than in Europe, and therefore more of the profits should flow back into the United States.

U.S. Representative Tom McMillen's bill, the Olympic Broadcast Television Act, also sought to eliminate antitrust law in the sale of Olympic broadcasting rights. This would have permitted the U.S. networks to collude on a single bid, as does the European Broadcast Union, which could sharply reduce IOC revenues.

Barney’s book reported that several U.S. television executives had suggested the antitrust exemption because they were concerned about spiralling fees for Olympic broadcasting rights. Prior to the judging scandal in figure skating at the Salt Lake City Games, NBC suffered through some of the worst Winter Olympics ratings in history.

RISK TWO: SPONSORSHIP AND TICKETS

The Vancouver 2010 Bid Corporation has estimated that it will generate $454 million from Canadian sponsorships and supplies, and another $131 million from its share of the IOC’s sponsorship program. However, B.C. auditor general Wayne Strelioff warned in a recent report that the IOC could expand its list of reserved sponsorships, cutting the local organizing committee out of certain categories such as breweries and automobiles.

"Whether the sponsorship target of $454 million (US$293 million) will be achieved cannot be predicted with confidence at this time," Strelioff wrote. "For example, one key assumption is that several corporations will be prepared to pay significant asking prices for sponsorship. However, the ability and willingness of Canadian businesses to become sponsors depends greatly on the state of Canadian business, notably in 2005 and 2006."

Linda Oglov, vice-president of bid marketing with the Vancouver 2010 Bid Corporation, told the Straight that she doesn't believe the IOC will increase the number of sponsorship areas because its marketing program is based on the notion of exclusivity.

"I don't think there will be more categories," she said. "I think what could happen is there could be a change in categories."

She said she doesn't dispute there is a risk in hosting the Olympics, which she described as "the crí¨me de la crí¨me of the international sporting world". She also acknowledged that there were "some challenging numbers" in the bid book.

Oglov and Terry Wright, the vice-president of bid development, have both worked extensively with the Commonwealth Games in Victoria and Kuala Lumpur Wright, a chartered accountant, has also provided software to other major events, including the Olympics.

"We know the potential and the risks," Oglov said. "The first thing we had to do was satisfy ourselves that we thought it was worth doing, and we did that. We did that, I think, based on a pretty clear-headed analysis of our own personal experience, plus the experience of other Olympics. We spent three years at it."

The Vancouver bid book states that all 51 national sporting federations in Canada have provided written guarantees to cooperate with a local organizing committee. The auditor general's report stated that the local organizing committee will pay the Canadian Olympic Committee and the IOC $153 million if Vancouver hosts the Games.

"The Canadian team gets marketed by the OCOG [Vancouver organizing committee] for the Games of 2006, 2008, 2010, and 2012," Oglov said of the payment.

U.S. corporations have bought some of B.C.’s biggest companies in recent years, including Westcoast Energy, MacMillan Bloedel, and Future Shop. Oglov said it might be easier to sell Canadian sponsorships to these U.S. corporations because they'll have deeper pockets and they might have more experience buying sponsorships. "I think from a sponsorship perspective, it doesn't have a negative impact," she said. "Probably the opposite."

However, these U.S. parent companies will not be able to buy the U.S. sponsorship rights from a Vancouver organizing committee. And corporate concentration in key sectors, such as the airlines and the media, could reduce the number of potential bidders for sponsorship rights in certain categories.

Also, many Canadian head offices are in Toronto and Montreal, which are several thousand kilometres from where the Games will be held. Earlier this year, the Vancouver Sun reported that only 49 of the Financial Post's largest 500 companies in Canada are based in B.C.

The Vancouver 2010 Bid Corporation has estimated that it will collect $218 million from ticket sales, which Strelioff noted was higher than the previous two Winter Olympics. Last November, a study commissioned by the B.C. government predicted that a Vancouver organizing committee for the Olympic Games would sell $180 million worth of tickets”¹a difference of $36 million, or 20 percent.

RISK THREE: CONSTRUCTION BOONDOGGLES

There is always a possibility of cost overruns on megaprojects in B.C. The Coquihalla Highway project, for example, was originally pegged at $250 million in 1978, according to Bill Rayner's book Scandal!! 130 Years of Damnable Deeds in Canada's Lotus Land (Heritage House, 2001). Rayner noted that by the time the final leg from Merritt to Peachland opened in 1991, the cost had reached $847.8 million. The Coquihalla was timed to open for Expo 86.

The auditor general's recent report stated that the federal government has proposed that the convention and exhibition centre expansion be connected to the existing facility, which would increase the capital cost from $495 million to $550 million. That would be a 10-percent increase before the work has even begun. Most local residents have probably forgotten about the huge financial overruns in the construction of the Stetson Bowl in Surrey. Imagine how the public would react if there were a half-dozen of these construction fiascos all happening at the same time.

RISK FOUR: POOR USE OF PUBLIC RESOURCES

The German economist Holger Preuss has claimed that the economic effect of the Games is often overestimated. "The extent of the benefit for the overall economy depends on the economic situation of the city when the Games-related investments are realized," he wrote. "A phase of increased investment activity and increased consumption expenditure in line with an economic upswing or boom may weaken the positive economic effects if, for example, it results in crowding-out effects or increased imports."

Robert Barney told the Straight that he is often asked about the economics of hosting the Olympics. "Are they put on at cost? Do they break even? Do they make a profit?" he said. "My standard response is it depends on which bean counter is counting the beans."

The B.C. government's November report claimed that hosting the Games would translate into higher volumes of visitors to B.C. for at least two years prior to and five years after the event. The No Games 2010 Coalition issued a news release in December noting that Utah sales-tax revenues rose by only 0.7 percent in the first three months of 2002 during the Games period over the same quarter in 2001. It added that Utah also lost 24,000 jobs since December 31, 2000.

The coalition has also claimed that tourism is declining in importance in B.C.. The industry contributed 5.2 percent to the provincial gross domestic product in 1986. In the 15 years after the World's Fair, the percentage fell to 4.8 percent of provincial GDP.

Soon after Premier Gordon Campbell was charged with drunk driving, the No Games 2010 coalition sent a fax to the IOC in Lausanne, Switzerland. Under the premier's memorable mug shots, the fax stated: "It's Our Time to Shine."

The premier is quite accustomed to taking risks, and not just when it comes to getting behind the wheel of a car after a few drinks. In the early 1980s, Campbell built the Georgian Court Hotel on Beatty Street, collecting $238,560 in fees. A dozen years later, 600 investors in the limited partnership finally received a four-percent return on their shares, according to a story by Rick Ouston in the Straight in 1995. Campbell had misread the market for hotel rooms near the new BC Place Stadium.

Campbell's risk-taking was rewarded in 1986. He took a gamble as a one-term city councillor that he could snatch the mayor's chair against a far more experienced opponent. He won in a landslide against Harry Rankin.

But Campbell’s zeal in chasing the 2010 Winter Games could turn out to be the most audacious risk of his career. He has boasted repeatedly that the Games will pay for themselves. According to a presentation by the bid corporation’s Terry Wright earlier this year to Vancouver city council, the Campbell government has guaranteed that provincial taxpayers will cover 100 percent of any overruns in the staging of the Games. The province has also agreed to split the cost of any security overruns with the federal government.

The public spending on the Games will undoubtedly enrich construction workers as well as some of Campbell’s friends. Shareholders in Intrawest will get lots of publicity for their Whistler and Blackcomb ski operations. David Strangway and Peter Ufford might find it much easier to market real estate near Squamish, which can then finance their new private university. Peter Wall's hotel will benefit from a new trade and convention centre. Peter Brown's Cannacord Capital Corp. and the bank-owned investment dealers could collect fat fees by arranging financing for capital projects. Bars and restaurants will do more business.

"Those who benefit most from staging the Games in a certain city are not the [IOC] Sponsors, who have a global market anyway, but rather the local and regional construction industries," Holger Preuss wrote.

Jack Poole, the chair and CEO of the bid corporation, is a developer. The chair of Team Yes 2010, David Podmore, is also a developer. And the premier is a former developer. In less than a month, they'll discover if Vancouver residents share their enthusiasm for taking risks.

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