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Sir John Bourn, head of the National Audit Office, reported to Parliament today on the way in which the Arts Council of England manage the risks during the construction phase of major capital projects funded by the National Lottery. He found that the Arts Council have, from the outset, adopted a pro-active approach to monitoring lottery projects and that they have progressively strengthened their monitoring arrangements and the way in which they respond when difficulties arise. However, he identified a number of areas for improvement, which the Arts Council accept and have acted, or are acting, upon.

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In the four years since the launch of the National Lottery, the Arts Council have awarded over 2,000 lottery grants under their capital programme at a total value of some £1 billion. The National Audit Office focused their examination on 15* major capital projects that accounted for £318 million (31 per cent by value) of grants made. These projects represent some of the most risky projects due to their size and complexity. They were all awarded grants before the Arts Council strengthened their assessment procedures.

As at October 1998, only eight of the 15 projects had been, or were scheduled to be, completed on time and five projects were running more than three months late. Twelve of the 15 projects were over budget, six by more than ten per cent. Eight of the 15 projects had applied for, and been granted, additional lottery funding because the Arts Council were satisfied that the remaining work was essential to the success of the project and would add value.

To further improve the way they monitor the progress during construction of major capital projects and respond to difficulties that arise, the National Audit Office recommend that the Arts Council should:

  • take more vigorous and timely action where their independent Building Monitors do not meet the standards required. The Arts Council employ independent Building Monitors (mostly project managers and quantity surveyors) to monitor, and provide information to the Arts Council on, the progress of individual projects and the Building Monitors have generally provided a good level of service. However, for three of the 15 projects examined, the amount, quality or timeliness of information provided by the Building Monitors was not fully satisfactory;
  • ensure they have access to adequate financial expertise. On three of the 15 projects examined, the Arts Council used a specialist internal team to advise them on the financial viability of projects. In two of these cases, the team’s reports failed to highlight, or understated, the significant financial problems facing the grant recipient. The Arts Council subsequently made more use of external advisers;
  • relax the timing of partnership funding requirements only if they are satisfied that the required partnership funding will be raised within a timescale that will not jeopardise the project or put lottery funds significantly at risk. The Arts Council normally fund 75 per cent of the total cost of a project and pay grant in proportion to the costs incurred at a particular point in time. The remaining costs are paid with ‘partnership funding’ raised by the grant recipient. In some cases, where they were satisfied that the full partnership funding could still be raised within an acceptable timescale, the Arts Council temporarily relaxed the timing requirement and paid more of the project costs up front to help grant recipients overcome cash flow difficulties. In two cases (the Royal Academy of Dramatic Art and Sadler’s Wells Theatre), it will be several years before the approved ratio of lottery grant to partnership funding is achieved. Until that time the risk will remain that the grant recipients will not be able to make good the shortfall in partnership funding;
  • consider relaxing or deferring special conditions only where they are satisfied that this will not add to the risks which those conditions were designed to cover. The Arts Council attach special conditions to lottery grants to cover specific risks, including the financing and management of the project. In two cases (the Royal Court Theatre and the Royal Opera House), the Arts Council decided to allow funding for these projects to continue, even though special conditions had not been fully fulfilled and some of the risks that they were designed to cover still existed. The Arts Council judged that adhering to the terms in which the special conditions in question were originally expressed was not feasible and might have jeopardised further progress on the projects; and
  • ensure that, where it appears that proceeding with a project will significantly increase the risk to lottery funds, they identify, and consider formally, all the available options, including suspending lottery payments to the project until the problems are resolved and satisfactory proposals have been developed for financing the project through to completion. Three of the projects we examined (the Royal Academy of Dramatic Art, the Royal Court Theatre and Sadler’s Wells Theatre) were experiencing serious financial difficulties. In each case, the Arts Council decided to allow work to continue, while seeking to ensure that the risks were contained and that the funding difficulties were resolved satisfactorily.


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