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Select Committee on Public Accounts Fiftieth Report

4 Managing within the budget for the Games

17. In March 2007, the Minister for the Olympics announced that the budget for the Games would be £9,325 million,[35] some £5,289 million more than the estimate at the time of the bid to host the Games.[36] In our April 2008 Report on the budget for the Games we concluded that foreseeable requirements for public sector funding were excluded from the estimates at the time of the bid to host the Games, giving an unrealistic picture of the expected costs.[37]

18. The Government's response to the Committee's Report did not accept the Committee's conclusion, arguing that the estimates at the bid stage were based on the best available expert advice at the time.[38] The responses contained in the Treasury Minute and our further comments are set out in Figure 3.

Figure 3: Committee comments on the Government's response to the Committee of Public Accounts 14th Report 2007-08

TREASURY MINUTE RESPONSE	COMMITTEE'S COMMENTS
At bid stage the full form of the delivery body (now the Olympic Delivery Authority) was unknown, as was its tax status.	Although the tax status of the delivery body was a 'known unknown' at the time of the bid, no provision for potential tax liability was included in the cost estimates at that time.
The projections about private sector income from Partnerships UK were considered robust.	As we have previously reported, Partnerships UK made clear in 2004 that the information to support a robust analysis of the potential for private financing was not available.
The bid included provision for around £473 million of project contingency, an amount that the Government considered at the time to be appropriate.	The project level contingency was principally to allow for uncertainties on individual projects. As we have previously reported, the largest single increase in the March 2007 budget was £2,747 million for programme contingency. The programme level contingency is designed to cover programme wide risks such as the interdependency of Olympic projects, the impact of unforeseen ground conditions, changes to legislation, and the availability of materials— generic risks which were entirely foreseeable at the time of the bid.[39]
The bid estimate included £190 million for security but this was before the events of 7 July 2005.	The £190 million was for on-site security during construction, now revised to £354 million, rather than for the separate costs of policing and wider security for which the March 2007 budget included provision based on a preliminary estimate of £600 million. The separate cost of policing and wider security was a 'known unknown' at the time of the bid, but no cost provision was included at that time.

Sources: The sources supporting the Committee's further comments are: Committee of Public Accounts, Fourteenth Report of Session 2007-08, The budget for the London 2012 Olympic and Paralympic Games, HC 85: and the C&AG's previous report, The budget for the London 2012 Olympic and Paralympic Games, HC 612, Session 2006-07

19. The largest part of the March 2007 budget was the £6,090 million for the Olympic Delivery Authority's work to deliver the venues and associated infrastructure for the Games. The budget included a £2,747 million provision for programme contingency, of which £2,009 million remains potentially available to the Olympic Delivery Authority (Figure 4). As LOCOG is intended to be self-financing, its costs are outside the budget for the Games. The Government is, however, the guarantor of funding for the Games, which includes meeting any ultimate shortfall between LOCOG's costs and revenues.[40]

Figure 4: The funds potentially available to the Olympic Delivery Authority

		£m
ODA budget March 2007			6,090
Total programme contingency provision announced in March 2007		2,747
Less
Programme contingency made available to the Olympic Delivery Authority (within the March 2007 ODA budget of £6,090 million) (Note)	500
Programme contingency funds set aside for policing and wider security (non-Olympic Delivery Authority costs)	238
		(738)
Remaining programme contingency potentially available for the ODA			2,009
Maximum funding available to the ODA			8,099

Note: The Ministerial Funders' Group agreed allocation to the Olympic Delivery Authority in two tranches, £340 million in June 2007 and £160 million in November 2007.

Source: Comptroller and Auditor General's Report HC 490 Session 2007-2008

20. In its November 2007 Programme Baseline Report, the Olympic Delivery Authority forecast that it would spend £7,095 million, including anticipated use of £1,005 million of the unallocated contingency. The remaining £1,004 million of contingency (the Funders' Group Contingency) is to cover residual risks. An assumption underlying the Baseline estimate was that £853 million would be saved from scope reductions and efficiency savings. To that end, the Delivery Authority plans to reduce the number of temporary venues and, where possible, make use of existing venues. The Department sees focusing the spending on permanent facilities as a way of making sure legacy benefits are delivered.[41]

21. By March 2008, the Olympic Delivery Authority's forecast costs had increased by £16 million to £7,111 million. Decreases in some areas, including £47 million for site preparation and infrastructure, were offset by increases in others. The largest increase was £106 million for venues, including £29 million for the Main Stadium (now £525 million) and £33 million for the Aquatics Centre (now £247 million).[42]

22. The loss of competitive tension in the procurement processes for both the Main Stadium and the Aquatics Centre has contributed to the cost increases.[43] The Government's June 2008 response[44] to the Committee's report on the budget for the Games[45] stated that, with the exception of the contract for the Main Stadium, all main contracts to date have had multiple bidders and effective competition. The Comptroller and Auditor General's report shows that in fact the Olympic Delivery Authority had received fewer than three tenders for nine of the 37 main procurements it had completed.[46]

23. The Department gave the Committee its unequivocal assurance that it would stay within the £9,325 million budget for the Games, despite the uncertainties in the programme.[47] A difficulty the Olympic Delivery Authority faces is the increased risk of insolvency amongst the businesses with which it is dealing, together with inflationary pressures on the costs of energy and some materials such as reinforced steel. There are also uncertainties about legacy plans, the costs of policing and wider security, and the Olympic Village (see paragraphs 5, 7 and 15). The Delivery Authority acknowledged that it could need to use the Funders' Group contingency to meet such costs.[48] The Department is satisfied that the remaining contingency provisions are sufficient to cover the risks.[49]

24. The budget for the Games is to be funded by Central Government (£5,975 million), the Greater London Authority (£925 million), the London Development Agency (£250 million) and the National Lottery (£2,175 million).[50] The Department's aim is to repay £675 million to the National Lottery, based on a June 2007 agreement between the Government and the Mayor of London. The intention is to raise the money from a share of profits generated by the increase in land and property values in the Olympic Park. To repay £675 million to the Lottery, sale receipts will need to reach £1,800 million.[51]

25. In its June 2008 response[52] to the Committee's report on the budget for the Games,[53] the Government stated that it had a high level of confidence that, in view of the time horizon involved, recovery of £675 million for the National Lottery could be achieved. The recovery of the £675 million for the National Lottery would require an average annual increase in land values of around 20%. In its evidence to the Committee at the end of June, however, the Department acknowledged that it had not reviewed the assumptions underlying future sales values in the light of the current property market.[54]