Executive Summary
National Audit Office Value for Money Report
- This is the second in a series of National Audit Office reports
on the preparations for hosting the London 2012 Olympic and
Paralympic Games. It examines the development of the budget costs,
provisions and funding for the venues and infrastructure required
to host the Games and related costs such as security. The
development of the budget has been led by the Department for
Culture, Media and Sport (the Department), with input from the
Olympic Delivery Authority and the Treasury. A summary of the
development of the budget over time is at Appendix 1.
Overview
- On 15 March 2007 the Secretary of State for Culture, Media and
Sport (the Secretary of State) announced to Parliament the budget
for the Games and infrastructure associated with the Olympic Park
and other venues totalling 9.325 billion (Figure 1).[Footnote 1]
Figure 1 ("The budget as announced for the Games on 15
March 2007") is unavailable in this version of the executive
summary.
- References to the budget for the Games tend to focus on those
costs that are to be publicly funded and therefore exclude the
staging costs to be incurred by the London Organising Committee of
the Olympic Games and Paralympic Games (LOCOG), which is intended
to be self-financing.[Footnote 2]
As required by the International Olympic Committee, however, the
Government is the ultimate guarantor of funding for the Games,
including LOCOGs staging costs.
- At the time of Londons bid to host the Games the estimated
gross cost of the Games was 4 billion comprising 2.992 billion core
Olympic costs plus 1.044 billion for infrastructure on the Olympic
Park. These costs were to be met by a public sector funding package
of 2.375 billion for the core Olympic costs, 1.044 billion
Exchequer funding for the infrastructure, plus an anticipated 738
million from the private sector.
- The 9.325 billion budget announced in March 2007, which the
Department for Culture, Media and Sport has told us represents the
upper limit on the funding available for the Games from the public
sector, is some 5.289 billion higher than the cost estimate at the
time of the bid in gross terms (Figure 2). Within this overall
increase, the cost estimates (before deduction of anticipated
private sector funding) for those elements which the Department
defines as the core costs of the Olympics are 1.1 billion higher
than the estimates at the time of the bid (see Figure 6 on page
16). However, these core costs exclude programme contingency, tax,
and policing and wider security.
Figure 2 ("The difference between the estimates at the time
of the bid and the March 2007 budget") is unavailable in this
version of the executive summary.
- This increase in cost estimates, along with a reduction in
anticipated private sector funding, means that public sector
funding for the Games has increased by 5.906 billion (Figure 2).
The costs to be covered by this increase in funding include 1.173
billion of tax[Footnote 3] which will ultimately flow
back to the Exchequer. On the basis that the Department has
confirmed to us that the tax liabilities associated with the Games
will be met entirely from Exchequer funding, this means that the
net increase in public sector funding should be 4.733 billion. The
funding increase of 5.906 billion includes contingency of 2.747
billion which the Department has made clear to us may not be used
in full.
- The main reasons for the difference between the cost estimates
at the time of the bid and the budget announced in March 2007
are:
- A new provision of 2.747 billion for programme contingency
(including 337 million of tax).
- A new provision of 836 million for tax, following the Treasurys
confirmation that the Olympic Delivery Authority would be liable to
VAT in the normal manner and unable to reclaim it (which, although
a real cost to the Games, will flow back to the Exchequer).
- A new estimate of 600 million for policing and wider security
(which remains subject to further oversight and scrutiny).
- An increase in the Olympic Delivery Authoritys programme
delivery budget from 16 million to 570 million (the original
estimate of 16 million at the time of the bid was based on the
costs of a small Urban Development Corporation and did not include
the costs of complex site logistics, or a delivery partner to
undertake programme and project management which the Department and
the Delivery Authority deem necessary for successful delivery of
the venues and infrastructure).
- A decrease in anticipated private sector funding from 738
million to 165 million. This excludes, however, the significant
increase in the estimated private sector contribution to the
Olympic Village which is outside of the budget. It also excludes
any receipts from future sales of land and property after the
Games, out of which the Government has since estimated, in June
2007, that 675 million would be available for repayment to the
National Lottery.
- From the outset of any programme or project it is vital to use
sound processes to establish a clear and accurate budget. The
budget should not only set out the costs involved and the funding
to meet these, but also the main benefits to be delivered, with a
clear statement of any underlying judgements and assumptions. It
enables stakeholders to plan and progress with confidence and
certainty, and establishes a baseline against which to assess
progress and performance. A programme of the scale, complexity and
profile of the 2012 Games gives rise to a high level of inherent
risk and uncertainty, and the need for significant judgements and
assumptions about future costs and benefits. This increases the
importance of adopting a rigorous and sound approach in
establishing a budget for the Games.
- Against this background, our overall conclusion is that the
budget announced by the Secretary of State in March 2007 represents
a significant step forward in putting the Games on a sound
financial footing and should help those involved in delivering the
Olympic programme to move forward with greater confidence. The
budget process followed since London was chosen to host the Games
has been thorough, and the judgements and assumptions made by the
Department and the Olympic Delivery Authority have been informed by
detailed analysis and expert advice. Significant areas of
uncertainty remain such as the finalisation of detailed design
specifications, the legacy benefits to be delivered, how potential
suppliers will respond to invitations to bid for work, and the
impact of inflation in construction prices, as reflected in the
high level of contingency that has been provided for. The
Department and the Delivery Authority have continued to develop
detailed project plans, budgets and cash flow analysis as a basis
for cost control and financial management.
Main findings
- Our main findings are as follows.
- The Department started work to develop cost and funding
estimates for the Games in 2002, commissioning discrete pieces of
work from Arup in 2002, from PricewaterhouseCoopers LLP in 2003 and
2004, and from Partnerships UK in 2004, prior to the submission in
November 2004 of Londons bid to host the Games. All made clear in
their advice to the Department that significant uncertainties
existed and that further work was required to develop robust budget
figures, and this work was based on plans that have subsequently
changed significantly. Although the Department anticipated that the
public sector funding package that it had put in place would be
sufficient, the Secretary of State for Culture, Media and Sport had
also highlighted that there would be a need to take stock of the
cost estimates should Londons bid be successful.
- The budget announced in March 2007 was the result of a good
deal of work during the course of an iterative process over some 17
months. Development of the budget was informed by advice from KPMG
LLP and a number of other consultants with expertise in costing
major projects. The cost estimates for the venues and
infrastructure were built up using industry benchmarks and
information from potential contractors and suppliers, and include
allowances for uncertainty over design specifications which have
not yet been finalised. The budget includes a number of new
categories for costs and provisions which account for the bulk of
the increase in costs from the time of the bid.
- The main areas of uncertainty that remain include the impact of
construction price inflation, the response of contractors to the
Olympic Delivery Authoritys invitations to bid for work and the
terms of contracts subsequently agreed, and the level of funding
that can be secured from the private sector for building the
Olympic Park.[Footnote 4] In view of the
uncertainties and the tendency for the costs of major projects to
be under-estimated, the budget for the Games now includes a
programme contingency of 2.747 billion. The estimate of contingency
was aggregated from broad assessments on each part of the
programme, with reference to Treasury guidance and the experience
of other Games. The Olympic Delivery Authority is to refine the
estimate of contingency as individual projects go forward, by
carrying out a more detailed assessment informed by quantitative
risk analysis.
- The revised funding package announced by the Secretary of State
in March 2007 is sufficient to cover the estimated costs of the
Games and the contingency provision in full, so long as the
assumptions on which it is based hold good. This is a most
important proviso. Exchequer funding now accounts for 5.975 billion
(nearly two thirds of the total), of which 5.570 billion is to be
secured through forthcoming Spending Reviews. The National Lottery
is expected to contribute 2.175 billion, the Greater London
Authority 925 million and the London Development Agency 250
million.
- The expected funding from the National Lottery has increased by
675 million. This means that the total National Lottery
contribution of 2.175 billion now includes over 1 billion which
will be taken directly from the proceeds raised for the other
non-Olympic good causes. The designated Olympic lottery games,
expected to contribute some 750 million towards the total 2.175
billion lottery contribution, will also divert sales from
mainstream lottery games. This is to be offset, as stated in the
Secretary of States budget announcement, by providing the other
good causes with a share in the expected profits from the sale of
land in the Olympic Park after 2012. As the ownership of the land
rests with the London Development Agency, profits arising from land
sales are not included in the Olympic Delivery Authoritys budget.
The profits will be shared with the Government, which in June 2007
expected to recoup for the lottery an estimated 675 million.
- At the time of the announcement of the Games budget in March
2007 work to complete a cash flow forecast to show the timing and
amount of expected future calls on funds had not been completed.
While the Olympic Delivery Authority has an assessment of when
spending will occur against the programme, following the Games
budget announcement on 15 March the Department is developing a cash
flow forecast to show the timing and amount of expected future
calls on funds. Going forward it is likely that cash-flow
requirements will vary year on year requiring effective and rapid
decision making, and flexibility, on the part of funders. In turn
funders will need regular, timely and accurate updated cash-flow
forecasts from the Department and the Delivery Authority.
Recommendations
- As we set out in our first report on the preparations for
London 2012, the requirement for the budget to be clearly
determined and effectively managed is one of the key areas of risk
that need to be managed for successful delivery of the Games. The
Department and the Olympic Delivery Authority are taking action in
many areas and, now the top level budget has been finalised, their
focus is on finalising the detailed plans needed to support the
delivery of the Olympic programme, including a full detailed
project plan over the whole life of the programme.
- The box below sets out what we see at present as the key
actions required to manage risk in relation to the budget for the
Games. It is, however, important to recognise that the Games budget
is just that a budget not a target. Whilst effective risk
management is essential, it is also important to seek opportunities
where possible to manage within the available resources including
the contingency if used, for example, by providing, where
appropriate, suitable incentives for suppliers to come within the
target cost for individual projects.
- Within the actions required to manage risk, and acknowledging
that the Department and the Delivery Authority have been doing
further work in these areas, we have identified three aspects which
require particular attention now.
- Producing a clear statement of the key deliverables
that are expected in return for the public funding of 9 billion,
making clear the time, cost and quality assumptions. A
statement of this kind would provide a basis for accountability to
Parliament and the public by spelling out what is to be delivered,
in terms of both the Olympic venues and infrastructure and the
wider benefits. The outputs and outcomes should be specific and
where possible quantified so it will be clear whether they have
been achieved (for example, venue specifications and legacy
benefits). And making clear the underlying assumptions means that
any changes in cost or quality to achieve delivery should be
transparent.
- Producing more robust estimates of
contingency. In line with Treasury guidance, provision has
now been made for programme contingency which has increased the
budget for the Games by 2.747 billion. The Olympic Delivery
Authority now needs to take forward the work it has begun to refine
the estimate of contingency so it better reflects the specific
risks associated with particular elements of the programme. By more
realistically reflecting the risk of additional costs, a risk based
contingency should provide a better basis for effective cost
control.
- Developing a cash flow analysis. As well as
the total amount of funding, the timing of funding is also vital so
the Olympic Delivery Authority has money available and is not
delayed in taking forward its delivery programme. Work is underway
to develop a detailed project plan which will profile the Olympic
Delivery Authoritys expenditure (i.e. funding need) over the coming
years. In the same way, the timing of the various sources of
funding needs to be worked through and action taken in good time
where the Olympic Delivery Authoritys demand for funds is projected
to exceed the supply. The Department is currently preparing a cash
flow forecast, based on the Delivery Authoritys draft detailed
budget, to show the timing and amount of expected calls on
funds.
The requirement for the budget to be clearly determined
and effectively managed action required to manage risk
Making clear what is to be delivered in return for the
budget
- Producing a clear
statement of the key deliverables that are expected in return for
the agreed funding package to provide a basis for assessing in due
course whether they have been delivered (paragraph 82).
- As part of this,
finalising and making clear the legacy plans for the venues and
facilities that will remain after the Games to address one of the
remaining areas of cost uncertainty (paragraphs 51 and 83).
Establishing a detailed baseline for managing and controlling the
budget
- Finalising a detailed
delivery plan showing when costs are expected to be incurred and
the interdependencies between different elements of the Olympic
programme.
- Setting out the key
assumptions that underpin the cost estimates and monitoring against
these to provide early warning of potential budget implications if
the assumptions prove not to be correct.
- Being clear about the
scope of the budget for the Games and where the boundaries lie
between the Olympic Delivery Authority and LOcOG (in particular the
boundary between venue construction and fit-out), and with other
bodies, such as the Home Office, who will be spending money in
support of the Games (paragraphs 55 and 56).
- Capturing data on the
costs of the Games consistently and in line with the definitions
used in establishing the budget.
- Communicating the detailed
budget clearly to stakeholders and delivery partners so they share
a common and clear understanding of the available budget and how it
has been determined.
Managing the contingency effectively
- Making the entire estimate
of programme contingency more robust by underpinning the estimate
with a systematic analysis of risk (paragraph 66).
- Putting in place
arrangements for managing the general programme contingency of
2.247 billion (paragraph 67) and establishing clear criteria for
its use.
Delivering the funding
- Making clear how and when
the 6 billion of Exchequer funding will be made available to the
Olympic Delivery Authority (paragraphs 69 and 75).
- Confirming how and when
the 1.1 billion of funding to be provided from 2009 from general
National Lottery proceeds will be made available to the Olympic
Delivery Authority (paragraph 70).
- Finalising a cash flow
analysis for the Olympic Delivery Authority, being clear how the
Authoritys cash flow needs will be met and providing regular,
timely and accurate updated forecasts to enable effective decision
making on the part of funders (paragraphs 75 and 76).
- clarifying how
requirements for funding and release of the contingency will be
apportioned across the various funders. This will require clear and
quick decision making and financial control (paragraph 77).
Exercising effective oversight of LOCOG
- Exercising effective
government oversight of LOcOG, including review of the assumptions
underlying its separate budget for the staging of the Games, and
monitoring against these, as LOcOGs financial position will
determine directly the extent of any call on the Governments
underwriting guarantee (paragraphs 57 and 58).
- [back from footnote 1] Hansard, 15
March 2007, Columns 450-452.
- [back from footnote 2] The staging of
the Games is intended to be self-financing with the exception of a
fifty per cent contribution in 2012 towards the costs of the
Paralympics (a provision of 66 million was made in the March budget
to cover this obligation).
- [back from footnote 3] 1.173 billion is
the sum of 836 million and 337 million as set out in notes 5 and 6
to Figure 6 on page 16.
- [back from footnote 4] This does not
include LOCOGs sponsorship income from the private sector to help
meet the costs of staging the Games.