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Will the London Games Be the 'Recession Olympics'?

With public debt swelling and the British taxpayer having to foot the bill for once-almighty banks such as the Royal Bank of Scotland or Lloyds, the 2012 London Olympic Games are posing a considerable challenge to a city that celebrated wildly in 2005 when it trumped Paris's bid to host the prestigious sports event.

Four years on and with work well under way for the Olympic stadium in the east of London, Britain is going through its worst economic downturn since the Second World War, and questions have begun to arise over how glamorous the Games should be.

“Now we’re in a recession, with huge fiscal problems, can we really afford to put on high-spec games? Mathew Elliot, chief executive and founder of the Tax Payers’ Alliance, told CNBC.com.

The UK government has ring-fenced a $13.95 billion budget for Olympic construction and infrastructure, which includes a contingency fund of more than $3 billion. Nearly $750 million of the funds have been allocated to plug an expected gap in private finance.

Proposed Olympic Stadium for 2012 Olympic Games, Stratford, east London, England.
AP
Proposed Olympic Stadium for 2012 Olympic Games, Stratford, east London, England.

Despite the global financial meltdown preparations for the Games appear to be on track for their 2012 deadline, having passed the latest round of inspections by the International Olympic Committee (IOC).

The committee gave the London Organizing Committee of the Olympic Games (LOCOG) a glowing report following a site visit at the end of April, easing fears that the ongoing recession could derail the event.

“We have been greatly impressed by the good progress that London 2012 has made since our visit last year,” Commission Chairman Denis Oswald said after the inspection.

“When I visited the Olympic Stadium last year, the foundations were just being laid. Today the main structure has risen from the ground and the roof is already going on,” Oswald said.

Economic Clouds

The report acts as a halfway report card for the preparations, but the remaining three years left before the games begin could be hampered by the impact of the current credit crisis. Whether the economic conditions drag on the rest of the project or not remains to be seen.

If the current level of progress can be maintained over the next two years then the project will “essentially be finished,” John Armitt, chairman of the Olympic Delivery Authority, told CNBC.

Countdown to London 2012 -- A CNBC Special Report
Countdown to London 2012 -- A CNBC Special Report

The economic fallout from the credit crisis hasn’t impacted the preparations too significantly, according to Armitt. But it came a little bit too late to benefit the project in terms of better prices, he added.

There have been some savings from falling commodity prices and lower inflation, but there is an increased risk of subcontractors getting into difficulty, he said.

The LOCOG appears to have sidestepped many potential fund raising issues by getting out of the blocks quickly to secure sponsors. A policy of wait-and-see could have resulted in a dearth of available cash for the committee.

"It was a very smart move to make an early start signing sponsors such as Lloyds TSB and EDF Energy when the economy was stronger. It would be very embarrassing and damaging for any of the major sponsors to have to back out now," Andy Sutherden, managing director of sports marketing and sponsorship at Hill & Knowlton UK, told CNBC.com

However, there could be potential problems for the games in securing further sponsorship from now on, Sutherden said.

“In a climate of financial prudence, companies have to be utterly convinced a LOCOG deal will deliver a healthy return on investment. The inevitable consequence is a slow-down in the decision making process, which may impact cash flow,” he said.

There’s also no guarantee that companies will get the much-converted “halo effect” from sponsoring sporting celebrities or major sporting event such as the Olympics, Mary-Ellen Field, director of Brand Finance, told CNBC.

East Enders

It is hoped that the London Olympics will bring a lasting benefit to the capital’s relatively deprived East end region, which is hosting the bulk of the events.

“These Olympics are a massive regeneration shot in the arm for this part of London … One of our objectives is to provide maximum opportunity for employment, particularly for the long-term unemployed,” Armitt told CNBC.

Armitt also said that many of the sports facilities could be adapted after the Olympics to broaden their use. The main stadium can be scaled back to reduce its capacity and the handball arena will be used for other sports after the games, he said.

But others disagree with building new facilities. Organizers of the games should opt for a “recession Olympics” with a “back-to-basics” approach, where existing sports facilities, such as Wembley stadium, should be utilized instead of building new ones, Elliot said.

Organizers should also follow the example set by the Barcelona games and invest in infrastructure instead of expensive sports facilities, he added.

Other critics have called for more of the works to be carried out by British citizens and for better employment conditions.

A group of workers protested outside the Olympic stadium in early May, demanding that more UK construction staff should be employed for the project. The protesters, who were represented by GMB and Unite union, also called for workers to be employed directly, not through job agencies.