The budget for the London 2012 Olympic and Paralympic Games

Transcription

1 The budget for the Lodo 2012 Olympic ad Paralympic Games REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 612 Sessio July 2007

2 The Natioal Audit Office scrutiises public spedig o behalf of Parliamet. The Comptroller ad Auditor Geeral, Sir Joh Bour, is a Officer of the House of Commos. He is the head of the Natioal Audit Office, which employs some 850 staff. He, ad the Natioal Audit Office, are totally idepedet of Govermet. He certifies the accouts of all Govermet departmets ad a wide rage of other public sector bodies; ad he has statutory authority to report to Parliamet o the ecoomy, efficiecy ad effectiveess with which departmets ad other bodies have used their resources. Our work saves the taxpayer millios of pouds every year. At least 8 for every 1 spet ruig the Office.

3 The budget for the Lodo 2012 Olympic ad Paralympic Games LONDON: The Statioery Office Ordered by the House of Commos to be prited o 18 July 2007 REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 612 Sessio July 2007

4 This report has bee prepared uder Sectio 6 of the Natioal Audit Act 1983 for presetatio to the House of Commos i accordace with Sectio 9 of the Act. Joh Bour Comptroller ad Auditor Geeral Natioal Audit Office 18 July 2007 The Natioal Audit Office study team cosisted of: Laura Brackwell, Mark Garrety, Hugh O Farrell ad Gareth Tuck, uder the directio of Keith Hawkswell This report ca be foud o the Natioal Audit Office web site at For further iformatio about the Natioal Audit Office please cotact: Natioal Audit Office Press Office Buckigham Palace Road Victoria Lodo SW1W 9SP Tel: equiries@ao.gsi.gov.uk Natioal Audit Office 2007

5 contents SUMMARY 4 MAIN REPORT The categories of cost ad fudig associated 10 with the Games The basis for the budget at the time of Lodo s 13 bid to host the Games The budget for the Games 15 The basis for the revised cost estimates 19 APPENDICES 1 A summary of the developmet of the budget 28 for the Games 2 Study approach 30 3 The fudig ad cost estimates at the time 32 of Lodo s bid to host the Games i November The moey to be trasferred from the 34 Natioal Lottery Distributio Fud The mai areas of ucertaity that could affect 21 the budget The basis for the cotigecy provisio 23 The revised fudig package for the Games 24 Whether there is a clear baselie agaist which 27 delivery ca be moitored The frot cover photograph looks west across the site for the Lodo 2012 Olympic ad Paralympic Games Aquatic Cetre ear Stratford, East Lodo (Jue 2007, courtesy of the Olympic Delivery Authority)

6 SummARy 1 This is the secod i a series of Natioal Audit Office reports o the preparatios for hostig the Lodo 2012 Olympic ad Paralympic Games. It examies the developmet of the budget costs, provisios ad fudig for the veues ad ifrastructure required to host the Games ad related costs such as security. The developmet of the budget has bee led by the Departmet for Culture, Media ad Sport (the Departmet), with iput from the Olympic Delivery Authority ad the Treasury. A summary of the developmet of the budget over time is at Appedix 1. Overview 2 O 15 March 2007 the Secretary of State for Culture, Media ad Sport (the Secretary of State) aouced to Parliamet the budget for the Games ad ifrastructure associated with the Olympic Park ad other veues totallig billio (Figure 1). 1 3 Refereces to the budget for the Games ted to focus o those costs that are to be publicly fuded ad therefore exclude the stagig costs to be icurred by the 1 Hasard, 15 March 2007, Colums THE BuDGET FOR THE LONDON 2012 OLymPIc AND PARALymPIc GAmES

7 summary Summary text cotiued Lodo Orgaisig Committee of the Olympic Games ad Paralympic Games (LOCOG), which is iteded to be self-fiacig. 2 As required by the Iteratioal Olympic Committee, however, the Govermet is the ultimate guarator of fudig for the Games, icludig LOCOG s stagig costs. 4 At the time of Lodo s bid to host the Games the estimated gross cost of the Games was 4 billio comprisig billio core Olympic costs plus billio for ifrastructure o the Olympic Park. These costs were to be met by a public sector fudig package of billio for the core Olympic costs, billio Exchequer fudig for the ifrastructure, plus a aticipated 738 millio from the private sector. 5 The billio budget aouced i March 2007, which the Departmet for Culture, Media ad Sport has told us represets the upper limit o the fudig available for the Games from the public sector, is some billio higher tha the cost estimate at the time of the bid i gross terms (Figure 2 overleaf). Withi this overall icrease, the cost estimates (before deductio of aticipated private sector fudig) for those elemets which the Departmet defies as the core costs of the Olympics are 1.1 billio higher tha the estimates at the time of the bid (see Figure 6 o page 16). However, these core costs exclude programme cotigecy, tax, ad policig ad wider security. 1 The budget as aouced for the Games o 15 March 2007 Costs ad provisios 1 millio Public fudig available millio Olympic Delivery Authority (ODA) Olympic costs Olympic Delivery Authority Core Olympic costs Ifrastructure ad regeeratio costs associated with the Olympic Park ad other veues Cotigecy (excludig tax) 3 3,081 1, Exchequer Natioal Lottery 5,975 2,175 Total (et of tax) 5,254 Greater Lodo Authority 925 Other (No ODA) Olympic costs Lodo Developmet Agecy 250 Other provisios Policig ad wider security Tax (o ODA costs) Geeral programme cotigecy (icludig tax) 3 2,247 Grad total 9,325 9,325 Source: Departmet for Culture, Media ad Sport NOTES 1 The costs are et of 165 millio of private sector fudig (further details are provided i Figure 7 o page 17). 2 Other (No ODA) Olympic costs such as support for elite ad commuity sport to be met from public fudig. 3 The Departmet s itetio was that there would be a cotigecy of billio (as reflected i the Secretary of State s statemet of 15 March 2007). This cotigecy was iteded to cover potetial fiacial pressures o the costructio of veues ad ifrastructure, potetial icreases i the 600 millio costs of policig ad security ad cost icreases arisig from factors such as uforesee groud coditios, iflatio beyod exisitig provisio, or chages i legislatio. The Departmet iteded that a iitial amout of 500 millio of the cotigecy would be give to the Olympic Delivery Authority to eable it to maage early pressures. 2 The stagig of the Games is iteded to be self-fiacig with the exceptio of a fifty per cet cotributio i 2012 towards the costs of the Paralympics (a provisio of 66 millio was made i the March budget to cover this obligatio). The budget for the Lodo 2012 Olympic ad Paralympic Games 5

8 summary 2 The differece betwee the estimates at the time of the bid ad the March 2007 budget Estimate at the time of the bid ( millio) March 2007 budget ( millio) Differece ( millio) Net cost of the Games to be met from public sector fudig 3, , ,027 Expected private sector cotributio (573) Gross cost of the Games 4 4, , ,289 Public fudig available 3, , ,906 Source: Natioal Audit Office drawig o iformatio from the Departmet for Culture, Media ad Sport NOTES 1 See paragraph 34 o page The Departmet told us that, should the aticipated 165 millio private sector fudig ot materialise, this would be met from withi the cotigecy provisio (which is icluded withi the billio) or from a reductio i costs. Therefore, the gross ad et cost of the Games as stated here are the same, with the billio represetig the Departmet s upper limit o public fudig for the Games. 3 See paragraph 37 o page The figure for gross cost of the Games icludes the expected public sector cotributio to the cost of the Olympic Village, but does ot iclude the gross cost of the Village itself, which is expected to be largely fuded by the private sector. Similarly, the figure for expected private sector cotributio does ot iclude the expected cotributio to the cost of the Village. 6 This icrease i cost estimates, alog with a reductio i aticipated private sector fudig, meas that public sector fudig for the Games has icreased by billio (Figure 2). The costs to be covered by this icrease i fudig iclude billio of tax 3 which will ultimately flow back to the Exchequer. O the basis that the Departmet has cofirmed to us that the tax liabilities associated with the Games will be met etirely from Exchequer fudig, this meas that the et icrease i public sector fudig should be billio. The fudig icrease of billio icludes cotigecy of billio which the Departmet has made clear to us may ot be used i full. 7 The mai reasos for the differece betwee the cost estimates at the time of the bid ad the budget aouced i March 2007 are: A ew provisio of billio for programme cotigecy (icludig 337 millio of tax). A ew provisio of 836 millio for tax, followig the Treasury s cofirmatio that the Olympic Delivery Authority would be liable to VAT i the ormal maer ad uable to reclaim it (which, although a real cost to the Games, will flow back to the Exchequer). A ew estimate of 600 millio for policig ad wider security (which remais subject to further oversight ad scrutiy). A icrease i the Olympic Delivery Authority s programme delivery budget from 16 millio to 570 millio (the origial estimate of 16 millio at the time of the bid was based o the costs of a small Urba Developmet Corporatio ad did ot iclude the costs of complex site logistics, or a delivery parter to udertake programme ad project maagemet which the Departmet ad the Delivery Authority deem ecessary for successful delivery of the veues ad ifrastructure). A decrease i aticipated private sector fudig from 738 millio to 165 millio. This excludes, however, the sigificat icrease i the estimated private sector cotributio to the Olympic Village which is outside of the budget. It also excludes ay receipts from future sales of lad ad property after the Games, out of which the Govermet has sice estimated, i Jue 2007, that 675 millio would be available for repaymet to the Natioal Lottery. 8 From the outset of ay programme or project it is vital to use soud processes to establish a clear ad accurate budget. The budget should ot oly set out the costs ivolved ad the fudig to meet these, but also the mai beefits to be delivered, with a clear statemet of ay uderlyig judgemets ad assumptios. It eables stakeholders to pla ad progress with cofidece ad certaity, ad establishes a baselie agaist which to assess progress ad performace. A programme of the scale, complexity ad profile of the 2012 Games gives rise to a high level of iheret risk ad ucertaity, ad the eed for sigificat judgemets ad assumptios about future costs ad beefits. This icreases the importace of adoptig a rigorous ad soud approach i establishig a budget for the Games billio is the sum of 836 millio ad 337 millio as set out i otes 5 ad 6 to Figure 6 o page The budget for the Lodo 2012 Olympic ad Paralympic Games

9 summary 9 Agaist this backgroud, our overall coclusio is that the budget aouced by the Secretary of State i March 2007 represets a sigificat step forward i puttig the Games o a soud fiacial footig ad should help those ivolved i deliverig the Olympic programme to move forward with greater cofidece. The budget process followed sice Lodo was chose to host the Games has bee thorough, ad the judgemets ad assumptios made by the Departmet ad the Olympic Delivery Authority have bee iformed by detailed aalysis ad expert advice. Sigificat areas of ucertaity remai such as the fialisatio of detailed desig specificatios, the legacy beefits to be delivered, how potetial suppliers will respod to ivitatios to bid for work, ad the impact of iflatio i costructio prices, as reflected i the high level of cotigecy that has bee provided for. The Departmet ad the Delivery Authority have cotiued to develop detailed project plas, budgets ad cash flow aalysis as a basis for cost cotrol ad fiacial maagemet. Mai fidigs 10 Our mai fidigs are as follows. The Departmet started work to develop cost ad fudig estimates for the Games i 2002, commissioig discrete pieces of work from Arup i 2002, from PricewaterhouseCoopers LLP i 2003 ad 2004, ad from Parterships UK i 2004, prior to the submissio i November 2004 of Lodo s bid to host the Games. All made clear i their advice to the Departmet that sigificat ucertaities existed ad that further work was required to develop robust budget figures, ad this work was based o plas that have subsequetly chaged sigificatly. Although the Departmet aticipated that the public sector fudig package that it had put i place would be sufficiet, the Secretary of State for Culture, Media ad Sport had also highlighted that there would be a eed to take stock of the cost estimates should Lodo s bid be successful. The budget aouced i March 2007 was the result of a good deal of work durig the course of a iterative process over some 17 moths. Developmet of the budget was iformed by advice from KPMG LLP ad a umber of other cosultats with expertise i costig major projects. The cost estimates for the veues ad ifrastructure were built up usig idustry bechmarks ad iformatio from potetial cotractors ad suppliers, ad iclude allowaces for ucertaity over desig specificatios which have ot yet bee fialised. The budget icludes a umber of ew categories for costs ad provisios which accout for the bulk of the icrease i costs from the time of the bid. The mai areas of ucertaity that remai iclude the impact of costructio price iflatio, the respose of cotractors to the Olympic Delivery Authority s ivitatios to bid for work ad the terms of cotracts subsequetly agreed, ad the level of fudig that ca be secured from the private sector for buildig the Olympic Park. 4 I view of the ucertaities ad the tedecy for the costs of major projects to be uder-estimated, the budget for the Games ow icludes a programme cotigecy of billio. The estimate of cotigecy was aggregated from broad assessmets o each part of the programme, with referece to Treasury guidace ad the experiece of other Games. The Olympic Delivery Authority is to refie the estimate of cotigecy as idividual projects go forward, by carryig out a more detailed assessmet iformed by quatitative risk aalysis. The revised fudig package aouced by the Secretary of State i March 2007 is sufficiet to cover the estimated costs of the Games ad the cotigecy provisio i full, so log as the assumptios o which it is based hold good. This is a most importat proviso. Exchequer fudig ow accouts for billio (early two thirds of the total), of which billio is to be secured through forthcomig Spedig Reviews. The Natioal Lottery is expected to cotribute billio, the Greater Lodo Authority 925 millio ad the Lodo Developmet Agecy 250 millio. The expected fudig from the Natioal Lottery has icreased by 675 millio. This meas that the total Natioal Lottery cotributio of billio ow icludes over 1 billio which will be take directly from the proceeds raised for the other o-olympic good causes. The desigated Olympic lottery games, expected to cotribute some 750 millio towards the total billio lottery cotributio, will also divert sales from maistream lottery games. This is to be offset, as stated i the Secretary of State s budget aoucemet, by providig the other good causes with a share i the expected profits from the sale of lad i the Olympic Park after As the owership of the lad rests with the Lodo Developmet Agecy, profits arisig from lad sales are ot icluded i the Olympic Delivery Authority s budget. The profits will be shared with the Govermet, which i Jue 2007 expected to recoup for the lottery a estimated 675 millio. 4 This does ot iclude LOCOG s sposorship icome from the private sector to help meet the costs of stagig the Games. The budget for the Lodo 2012 Olympic ad Paralympic Games 7

10 summary At the time of the aoucemet of the Games budget i March 2007 work to complete a cash flow forecast to show the timig ad amout of expected future calls o fuds had ot bee completed. While the Olympic Delivery Authority has a assessmet of whe spedig will occur agaist the programme, followig the Games budget aoucemet o 15 March the Departmet is developig a cash flow forecast to show the timig ad amout of expected future calls o fuds. Goig forward it is likely that cash-flow requiremets will vary year o year requirig effective ad rapid decisio makig, ad flexibility, o the part of fuders. I tur fuders will eed regular, timely ad accurate updated cash-flow forecasts from the Departmet ad the Delivery Authority. Recommedatios 11 As we set out i our first report o the preparatios for Lodo 2012, the requiremet for the budget to be clearly determied ad effectively maaged is oe of the key areas of risk that eed to be maaged for successful delivery of the Games. The Departmet ad the Olympic Delivery Authority are takig actio i may areas ad, ow the top level budget has bee fialised, their focus is o fialisig the detailed plas eeded to support the delivery of the Olympic programme, icludig a full detailed project pla over the whole life of the programme. 12 The box opposite sets out what we see at preset as the key actios required to maage risk i relatio to the budget for the Games. It is, however, importat to recogise that the Games budget is just that a budget ot a target. Whilst effective risk maagemet is essetial, it is also importat to seek opportuities where possible to maage withi the available resources icludig the cotigecy if used, for example, by providig, where appropriate, suitable icetives for suppliers to come withi the target cost for idividual projects. 13 Withi the actios required to maage risk, ad ackowledgig that the Departmet ad the Delivery Authority have bee doig further work i these areas, we have idetified three aspects which require particular attetio ow. Producig a clear statemet of the key deliverables that are expected i retur for the public fudig of 9 billio, makig clear the time, cost ad quality assumptios. A statemet of this kid would provide a basis for accoutability to Parliamet ad the public by spellig out what is to be delivered, i terms of both the Olympic veues ad ifrastructure ad the wider beefits. The outputs ad outcomes should be specific ad where possible quatified so it will be clear whether they have bee achieved (for example, veue specificatios ad legacy beefits). Ad makig clear the uderlyig assumptios meas that ay chages i cost or quality to achieve delivery should be trasparet. Producig more robust estimates of cotigecy. I lie with Treasury guidace, provisio has ow bee made for programme cotigecy which has icreased the budget for the Games by billio. The Olympic Delivery Authority ow eeds to take forward the work it has begu to refie the estimate of cotigecy so it better reflects the specific risks associated with particular elemets of the programme. By more realistically reflectig the risk of additioal costs, a risk based cotigecy should provide a better basis for effective cost cotrol. Developig a cash flow aalysis. As well as the total amout of fudig, the timig of fudig is also vital so the Olympic Delivery Authority has moey available ad is ot delayed i takig forward its delivery programme. Work is uderway to develop a detailed project pla which will profile the Olympic Delivery Authority s expediture (i.e. fudig eed) over the comig years. I the same way, the timig of the various sources of fudig eeds to be worked through ad actio take i good time where the Olympic Delivery Authority s demad for fuds is projected to exceed the supply. The Departmet is curretly preparig a cash flow forecast, based o the Delivery Authority s draft detailed budget, to show the timig ad amout of expected calls o fuds. 8 The budget for the Lodo 2012 Olympic ad Paralympic Games

11 summary The requiremet for the budget to be clearly determied ad effectively maaged actio required to maage risk Makig clear what is to be delivered i retur for the budget a Producig a clear statemet of the key deliverables that are expected i retur for the agreed fudig package to provide a basis for assessig i due course whether they have bee delivered (paragraph 82). b As part of this, fialisig ad makig clear the legacy plas for the veues ad facilities that will remai after the Games to address oe of the remaiig areas of cost ucertaity (paragraphs 51 ad 83). Establishig a detailed baselie for maagig ad cotrollig the budget c Fialisig a detailed delivery pla showig whe costs are expected to be icurred ad the iterdepedecies betwee differet elemets of the Olympic programme. d Settig out the key assumptios that uderpi the cost estimates ad moitorig agaist these to provide early warig of potetial budget implicatios if the assumptios prove ot to be correct. e Beig clear about the scope of the budget for the Games ad where the boudaries lie betwee the Olympic Delivery Authority ad LOCOG (i particular the boudary betwee veue costructio ad fit-out), ad with other bodies, such as the Home Office, who will be spedig moey i support of the Games (paragraphs 55 ad 56). f Capturig data o the costs of the Games cosistetly ad i lie with the defiitios used i establishig the budget. g Commuicatig the detailed budget clearly to stakeholders ad delivery parters so they share a commo ad clear uderstadig of the available budget ad how it has bee determied. Maagig the cotigecy effectively h Makig the etire estimate of programme cotigecy more robust by uderpiig the estimate with a systematic aalysis of risk (paragraph 66). i Puttig i place arragemets for maagig the geeral programme cotigecy of billio (paragraph 67) ad establishig clear criteria for its use. Deliverig the fudig j k l Makig clear how ad whe the 6 billio of Exchequer fudig will be made available to the Olympic Delivery Authority (paragraphs 69 ad 75). Cofirmig how ad whe the 1.1 billio of fudig to be provided from 2009 from geeral Natioal Lottery proceeds will be made available to the Olympic Delivery Authority (paragraph 70). Fialisig a cash flow aalysis for the Olympic Delivery Authority, beig clear how the Authority s cash flow eeds will be met ad providig regular, timely ad accurate updated forecasts to eable effective decisio makig o the part of fuders (paragraphs 75 ad 76). m Clarifyig how requiremets for fudig ad release of the cotigecy will be apportioed across the various fuders. This will require clear ad quick decisio makig ad fiacial cotrol (paragraph 77). Exercisig effective oversight of LOCOG Exercisig effective govermet oversight of LOCOG, icludig review of the assumptios uderlyig its separate budget for the stagig of the Games, ad moitorig agaist these, as LOCOG s fiacial positio will determie directly the extet of ay call o the Govermet s uderwritig guaratee (paragraphs 57 ad 58). The budget for the Lodo 2012 Olympic ad Paralympic Games 9

12 main REPORT 14 This is the secod report by the Natioal Audit Office o the preparatios for hostig the Olympic ad Paralympic Games i Lodo i Deliverig ad fudig the Olympic programme ivolves may bodies, ad Figure 3 sets out key facts about the goverace ad delivery structures for the Games. 15 Our first report o the preparatios for the Games was published i February ad was a early look at the progress that had bee made to put i place the ecessary delivery ad fiacial arragemets sice Lodo was chose as the host city for 2012 i July The report set out the mai areas of risk that eed to be maaged for the successful delivery of the Games (Figure 4). Our work o Lodo 2012 is beig iformed by the experiece of other host cities, ad we have arraged with the Auditor Geeral i Chia to lear lessos from the Beijig Games i 2008 that could usefully be applied to Lodo. 16 Risk area 3 cocers the eed for the budget for the Games to be clearly determied ad effectively maaged. Our first report o the preparatios for the Games oted that we would be reviewig the work to establish the budget, with a view to reportig our fidigs whe the budget had bee fialised, ad the Secretary of State for Culture, Media ad Sport referred to this i her evidece to the Culture, Media ad Sport Committee o 21 November 2006 ad i her statemet to Parliamet o 15 March 2007 whe she aouced a revised budget for the Games. Followig that aoucemet, we have completed our work to review the developmet of the budget. Our approach is described i Appedix 2. We were assisted i our work by HVR Cosultig Services Limited. 17 This report is about the determiatio of the budget for the Games ad the aim of our work was to assess whether the process uderlyig the developmet of the budget was soud. We shall report i the future o the maagemet of the budget (the secod part of risk area 3) ad our future work will also focus o how well the moey beig spet o the Games is beig used. The categories of cost ad fudig associated with the Games Costs 18 As explaied i Figure 5 o page 12, there are potetially four categories of costs associated with the Games olympic costs, ifrastructure ad regeeratio costs associated with the Olympic Park ad other veues, stagig costs ad wider costs which are covered by differet sources of fudig. The mai focus of this report is o the developmet of the budget for the Olympic Delivery Authority (which will icur most of the Olympic costs ad all of the regeeratio ad ifrastructure costs associated with the Olympic Park). Our first report o the Games 6 icluded details of LOCOG s budget for stagig the Games ad cosideratio of the wider costs. 19 At the time of our first report, the Departmet had described the four categories of cost slightly differetly, with spedig o ifrastructure projects i the Olympic Park split betwee Olympic ad o-olympic costs. (Some ifrastructure costs were labelled as o-olympic because it was assumed that they would have bee icurred as part of the plaed regeeratio of the Lower Lea Valley i East Lodo but were beig brought forward to facilitate delivery of the Games.) I aoucig the ew fudig arragemets i March 2007, the Secretary of State described all spedig o Olympic Park ifrastructure as Olympic ifrastructure ad regeeratio. 5 Preparatios for the Lodo 2012 Olympic ad Paralympic Games Risk assessmet ad maagemet (HC 252, Sessio ). 6 Preparatios for the Lodo 2012 Olympic ad Paralympic Games Risk assessmet ad maagemet (HC 252, Sessio ). 10 THE BuDGET FOR THE LONDON 2012 OLymPIc AND PARALymPIc GAmES

13 Mai Report 3 Key facts about the goverace ad delivery structures for the Games There are three pricipal Olympic Stakeholders i the delivery of the Games the Govermet, the Mayor of Lodo ad the British Olympic Associatio. A umber of other bodies are also ivolved i deliverig or fudig the Games (for example, the Olympic Lottery Distributor). The Olympics Miister (prior to July 2007 this post was held by the Secretary of State for Culture, Media ad Sport). Olympic matters are oversee by a Miisterial Committee (MISC 25). The Departmet for Culture, Media ad Sport is the lead govermet departmet for the Games. Withi the Departmet, the Govermet Olympic Executive has bee set up to maage the Govermet s iterest i the Games ad provide cross-govermet co-ordiatio. The Olympic Delivery Authority has bee set up to prepare the Olympic Park site, build the ew veues ad provide for their legacy use, ad deliver the Olympic Village, media facilities, ifrastructure ad trasport projects. The Authority is a o-departmetal public body, oversee by the Departmet for Culture, Media ad Sport. The Lodo Orgaisig Committee of the Olympic Games ad Paralympic Games (LOCOG) is resposible for the operatioal ad stagig aspects of the Games, ad is the liaiso poit for the Iteratioal Olympic Committee. LOCOG has bee established as a private sector compay limited by guaratee. It is accoutable to the Departmet for Culture, Media ad Sport, as well as its other key stakeholders, the British Olympic Associatio ad the Greater Lodo Authority, uder the terms of a Joit Veture Agreemet. The Olympic Board is resposible for co-ordiatig the Olympic programme as a whole. The Board comprises the Olympics Miister, the Mayor of Lodo, ad the Chairs of the British Olympic Associatio ad LOCOG. The Chair of the Olympic Delivery Authority atteds Board meetigs as a o votig member. The Board is supported by the Olympic Programme Support Uit, which provides a programme office ad secretariat fuctio. Source: Natioal Audit Office Fudig 20 The curret public sector fudig package, which fuds core Olympic costs (see Appedix 3), comprises cotributios from: 4 Mai areas of risk that eed to be maaged for successful delivery of the Games as set out i the Comptroller ad Auditor Geeral s first report Deliverig the Games agaist a immovable deadlie. The eed for strog goverace ad delivery structures give the multiplicity of orgaisatios ad groups ivolved i the Games. The requiremet for the budget to be clearly determied ad effectively maaged. Applyig effective procuremet practices. Plaig for a lastig legacy. The istallatio of effective progress moitorig ad risk maagemet arragemets. Source: Comptroller ad Auditor Geeral s report Preparatios for the Lodo 2012 Olympic ad Paralympic Games Risk assessmet ad maagemet (HC 252, Sessio ) the Natioal Lottery, which icludes the desigated Olympic lottery games, via the Olympic Lottery Distributor (although the Board of the Distributor ca decide to fud ay costs that it judges expediet ad ecessary to deliver the Games, whether specifically core Olympic costs icurred by the Olympic Delivery Authority or wider costs associated with the Games). the Greater Lodo Authority ad the Lodo Developmet Agecy (both of which are restricted to fudig Olympic costs i Lodo). Exchequer fudig has bee used to meet No-Olympic ifrastructure costs. 21 Uder the ew fudig arragemets, aouced by the Secretary of State i March 2007 (which will take effect from 1 April 2008), the Exchequer will also fud core Olympic costs. The release of Exchequer fuds remais at the discretio of the relevat fudig body. Figure 5 overleaf provides further details o the fudig arragemets. The budget for the Lodo 2012 Olympic ad Paralympic Games 11

14 Mai report 5 The costs associated with the Games Cost category Olympic costs Fudig source a Olympic Delivery Authority Core Olympic costs Expediture o buildig ew veues ad facilities, ad o their legacy coversio. Expediture o upgradig ad ehacig existig facilities (for example, such as those at Weymouth ad Eto Dorey). Expediture o trasport projects the Delivery Authority is cotributig to. Expediture o site security. Programme Maagemet, icludig staff, accommodatio, the cotract with the delivery parter ad o-site logistics. b Other Olympic costs (No ODA) The spedig by the sports lottery distributors o support for commuity ad elite sport. Public fudig towards the ruig costs of the Paralympic Games. Public fudig from the: Natioal Lottery, which icludes the desigated Olympic lottery games 1 Greater Lodo Authority Lodo Developmet Agecy Exchequer Some private fudig Look of Lodo costs (ivolvig improvemets to the streets i the viciity of the Olympic Park). Govermet guaratees Ifrastructure ad regeeratio associated with the Olympic Park ad other veues. Expediture by the Olympic Delivery Authority o ifrastructure i the Olympic Park, icludig preparig the groud to eable costructio of the veues ad creatio of a park for legacy use. Stagig costs Expediture by LOCOG o the operatioal ad stagig aspects of the Olympic ad Paralympic Games. Fudig to be raised by LOCOG, icludig icome from the Iteratioal Olympic Committee (for broadcastig rights etc.), ticket sales, sposorship ad official suppliers. Wider costs Capital ivestmet, for example to improve trasport liks i Lodo. Expediture by the Lodo Developmet Agecy to acquire the lad for the Olympic Park. Services to support the delivery of the Games, such as security, policig Lodo durig the evet ad providig health services i the local area. Expediture by the Departmet for Culture, Media ad Sport, other govermet departmets ad other public bodies o staff dedicated to Olympic related work. Source: Natioal Audit Office The capital ivestmet will be fuded by cotributios from the public ad private sectors. Other expediture is expected to be subject to the usual public spedig ad accoutability arragemets. NOTE 1 Natioal Lottery, which icludes the desigated Olympic lottery games, fudig distributed via the Olympic Lottery Distributor (OLD) ca i practice be used to fud ay specific elemet; the Board of the OLD has the discretio to fud ay costs that it deems ecessary or expediet ad where a demostrable eed exists. 12 The budget for the Lodo 2012 Olympic ad Paralympic Games

15 Mai report Guaratees 22 As required by the Iteratioal Olympic Committee, the Govermet is the ultimate guarator of fudig for the Games. O behalf of the Govermet, the Chacellor of the Exchequer guarateed that the Govermet will provide all the ecessary fiacial support to esure a successful Games. This icludes actig as the ultimate guarator of the costructio costs of the ifrastructure, veues ad facilities ecessary to hold the Games, ad bearig the costs of providig security, medical ad other govermet-related services for the Games. 7 It also covers meetig ay shortfall betwee LOCOG s costs ad reveues. 23 Give the Iteratioal Olympic Committee s requiremet for the Govermet to guaratee the Games fiacially, i December 2003 the Departmet for Culture, Media ad Sport reported to Parliamet a cotiget liability i the evet of Lodo wiig the bid to host the Games. 8 The basis for the budget at the time of Lodo s bid to host the Games 24 This sectio of the report looks at the work that wet o to develop cost ad fudig estimates ahead of Lodo s bid to host the Games. Early work before the decisio to bid was made (early 2002 to May 2003) 25 The first work o costs was doe i 2002 before the Govermet had decided whether it would support a Lodo bid to host the Games. The Departmet, the Greater Lodo Authority ad the British Olympic Associatio joitly commissioed Arup to assess the costs ad beefits of biddig for ad stagig the Games i Lodo. Arup s work, carried out over 16 weeks, produced a high level cost-beefit aalysis of a specime Games (excludig regeeratio) for appraisal purposes, based o outlie proposals for stagig the Games i Lodo which had bee developed by the British Olympic Associatio. Although Arup was ot asked to coduct a risk based probability assessmet, their estimates cotaied some provisio for risks associated with costructio costs. I May 2002 Arup reported that, o the basis of the iformatio available, the attributable Olympic costs of the physical ifrastructure ad the costs of stagig the specime Games would exceed the stagig ad lad disposal reveues by 494 millio 9 at 2002 prices (which the Departmet cosidered was equivalet to a public subsidy of 1.1 billio at outtur prices). 10, The Departmet, recogisig the extet of ucertaity at this stage, subsequetly commissioed PricewaterhouseCoopers LLP to produce a probability assessmet of the impact of risk ad ucertaity o the level of public subsidy required to host the Games. PricewaterhouseCoopers performed this work i Jauary At this stage the precise locatio of the Olympic Park i Lodo had ot bee fialised. PricewaterhouseCoopers cocluded that there was a 80 per cet chace that the expected public subsidy for the Games would fall betwee 1.1 billio ad 2.1 billio at cash outtur prices. Meawhile, i late 2002 the Departmet bega discussig optios for fudig the Games with other parts of govermet ad the Mayor of Lodo, iformed by the earlier ad ogoig work of cosultats o the amout of fudig likely to be required. 27 I Jauary 2003 the Departmet stated i its evidece to the Culture, Media ad Sport Select Committee that util it was able to achieve greater certaity it should allow for a higher potetial public subsidy of aroud 2.5 billio ad that there might always be exceptioal circumstaces which could make it eve higher. This figure drew o the baselie work of Arup, the subsequet probability assessmet of PricewaterhouseCoopers ad high-level iter-departmetal discussios. I May 2003 the Govermet aouced it would support a Lodo bid for the Games ad agreed a memoradum of uderstadig with the Mayor of Lodo which provided for a public sector fudig package of up to billio to meet the costs of the Games (see Appedix 3). Work to iform the bid for the Games (Jue 2003 to November 2004) 28 I May 2004 the Departmet commissioed PricewaterhouseCoopers LLP to produce a further report to idetify ad assess the potetial gross costs ad reveues related to the Games ad the regeeratio of the Stratford area of the Lower Lea Valley if Lodo were to host the Games. 12 PricewaterhouseCoopers work, carried out over 7 Letter from the Chacellor of the Exchequer to the Presidet of the Iteratioal Olympic Committee 10 Novermber Departmetal Miute of 2 December 2003 Reportig Cotiget Liabilities i the evet of Lodo wiig the bid for the 2012 Olympic ad Paralympic Games millio i et preset value terms (discouted at 6 per cet per aum). 10 The Culture, Media ad Sport Select Committee s report A Lodo Olympic Bid for 2012, memoradum submitted by the Departmet for Culture, Media ad Sport (Sessio , HC 268), Jauary Outtur prices take accout of the effects of iflatio to provide a more accurate estimate of what costs will be. 12 I lookig at gross costs PricewaterhouseCoopers was ot asked to cosider whether ay elemets of these would have bee icurred if the Games had ot bee held. The budget for the Lodo 2012 Olympic ad Paralympic Games 13

16 Mai report four weeks, was primarily based o estimates compiled by three key stakeholders Lodo 2012 Limited (the bid compay), the Lodo Developmet Agecy ad Trasport for Lodo. PricewaterhouseCoopers reported that the et costs associated with hostig the Games totalled some 4.5 billio i outtur prices ( 6.2 billio gross, less a estimated 1.7 billio of LOCOG reveues). The costs were sigificatly higher tha the estimates made i 2003 (see paragraph 24); i large part because of ew assumptios about iflatio, ad the wider scope of the estimate (for example, the iclusio of associated ifrastructure costs). After the report from PricewaterhouseCoopers the three stakeholders were asked by the departmet to look at their estimates with a view to idetifyig cost reductios ad it was these revised estimates from which the bid was costructed (see paragraph 30). 29 PricewaterhouseCoopers also carried out a probability aalysis ad cocluded that there was a 80 per cet chace that the fial costs would be withi plus or mius 10 per cet of its estimates. PricewaterhouseCoopers made clear, however, that great care eeded to be take i iterpretig the estimates preseted i its report, ad that importat risks ad ucertaities existed which eeded to be examied further. Amog other thigs, PricewaterhouseCoopers highlighted that: there were some importat but highly ucertai costs, otably those liked to security (the assessmet of which was outside of PricewaterhouseCoopers terms of referece); the estimates provided by the three stakeholders were based o differet assumptios ad had bee subject to costat chage throughout the period of the review; ad the lack of a clearly defied legacy pla made it difficult to provide a comprehesive picture of the expected costs ad beefits. 30 The Departmet also sought advice from Parterships UK 13 o the extet to which the costs of the Olympic facilities ad ifrastructure might be met by fiacig from the private sector. I Jue 2004 Parterships UK advised that opportuities for private fiace would be mostly limited to those elemets of ifrastructure that would cotiue to be used after the Games ad could therefore support a Private Fiace Iitiative arragemet. 14 Parterships UK s prelimiary view was there was potetial to secure private fiacig for the Games ad it provided a idicative estimate of billio (excludig ay fudig geerated from the icrease i lad values as a result of the Games). Later i 2004, the Departmet, followig discussio with relevat stakeholders about Parterships UK s idicative estimate, reduced this estimate to 738 millio. The 738 millio estimate of costs that might be met by fiacig from the private sector was the estimate i place whe Lodo s bid to host the Games was submitted i November Parterships UK had made clear, however, i 2004, that the iformatio to support a robust aalysis was ot yet available, i particular there was, at that stage, o legacy pla which it cosidered would be the mai driver for determiig the extet of private sector fudig. Parterships UK cocluded that further work was eeded to develop the potetial mechaisms for private fiacig ad to work up a robust proposal for the purposes of supportig Lodo s bid. Parterships UK provided further advice i Jue 2005 ad cocluded that there was little prospect of securig sigificat private sector fudig to deliver the Olympic Park, but that there remaied the potetial to secure private fiace (for example, through a Private Fiace Iitiative type arragemet) to support the delivery of the veues ad legacy. The cost estimates at the time of the bid (November 2004) 32 Followig the work by PricewaterhouseCoopers LLP o costs ad the work by Parterships UK o the potetial for private fiace, ad the agreemet of the public sector fudig package, the Departmet cotiued to develop the cost estimates for the Games, i cojuctio with other stakeholders, icludig the Treasury, the Greater Lodo Authority, the Lodo Developmet Agecy ad Lodo 2012 Limited. The work focused o idetifyig cost savigs, i particular o the ifrastructure elemets of the programme. Adjustmets were made to the cost estimates, which fed ito the Lodo 2012 Cadidate File which was preseted to the Iteratioal Olympic Committee i November Parterships UK is a joit veture betwee the govermet ad private sectors, which provides advice o usig parterships betwee the public ad private sectors to deliver ifrastructure reewal ad public services. 14 A Private Fiace Iitiative arragemet would ivolve a Uitary Charge paymet (the sum paid to a cotractor to cover the debt fiacig, maiteace ad operatig costs) as opposed to a et cotributio from a private source. 14 The budget for the Lodo 2012 Olympic ad Paralympic Games

17 Mai report 33 The Cadidate File set out plaed capital ivestmet i veues ad facilities, Olympic Park ifrastructure, ad roads ad railways, totallig $15.8 billio ( 9.9 billio) 15, of which over two thirds (some $11 billio ( 6.9 billio)) related to trasport improvemets for which fudig was already committed at the time of the bid. The Cadidate File was approved by the members of MISC 25, the Miisterial Committee which oversees Olympic matters, ad by the Mayor of Lodo. 34 At the time of the bid, however, the et costs to be covered by the public sector fudig package were billio ( billio gross costs, icludig ifrastructure costs of billio, less the the 738 millio aticipated private sector fudig). Further details of the cost estimates at the time of the bid are set out i our first report o the preparatios for the Games 16 ad are summarised at Appedix 3. The budget for the Games 35 O 15 March 2007 the Secretary of State for Culture, Media ad Sport aouced to Parliamet the budget for the Games ad ifrastructure associated with the Olympic Park ad other veues. Her statemet was the culmiatio of a process to review the costs ad fudig for the Games which bega soo after Lodo was chose as the host city for 2012 o 6 July Costs 36 The Secretary of State s aoucemet icluded costs ad provisios for the Games ad ifrastructure associated with the Olympic Park ad other veues (et of estimated private sector cotributios of 165 millio) totallig billio (Figure 6 overleaf), providig a lifetime budget for the Olympic Delivery Authority of billio (i , its first year of operatio, the Olympic Delivery Authority s spedig totalled 210 millio). The budget also icludes ew provisios for tax (which, although a real cost to the Games, will flow back to the Exchequer) ad cotigecy. The budget aouced i March 2007 is some billio higher tha the cost estimate at the time of the bid i gross terms. The cost estimates (that is, before deductio of aticipated private sector fudig) for those elemets which the Departmet defies as the core costs of the Olympics are billio higher tha the estimates at the time of the bid. However, these core costs exclude programme cotigecy, tax, ad policig ad wider security. The mai reasos for differeces betwee the budget ad the cost estimate at the time of the bid are set out i Figure 7 o page As required by the Iteratioal Olympic Committee, the estimates i the Cadidate File were expressed i US dollars at 2004 prices. The costs were estimated i pouds sterlig ad coverted ito US dollars for the Cadidate File, usig a exchage rate of 1=$ Comptroller ad Auditor Geeral s report Preparatios for the Lodo 2012 Olympic ad Paralympic Games Risk assessmet ad maagemet (HC 252, Sessio ). The budget for the Lodo 2012 Olympic ad Paralympic Games 15

18 Mai report 6 The budget for the Games as aouced o 15 March 2007 costs1 ad provisios Costs ad provisios March 2007 budget Chage from the cost estimates at the time of the bid millio millio Olympic Delivery Authority Core Olympic costs Veues (icludig legacy coversio) 1,063 3 Trasport ifrastructure ad operatig costs Additioal iflatio allowace, cotributio to the Olympic Village ad Isurace 2 Programme Maagemet Site security Sub-Total 3,081 1,115 Ifrastructure ad regeeratio costs associated 1,673 (11) (11) with the Olympic Park ad other veues (to be icurred by the Olympic Delivery Authority). Cotigecy (excludig tax) Olympic Delivery Authority budget (et of tax 5,254 ad geeral programme cotigecy) Other Olympic (No ODA) costs (to be met from public fudig) Support for elite ad commuity sport 290 (10) Paralympics Look of Lodo costs 32 0 Sub-Total Other Provisios Tax (o ODA costs) Geeral programme cotigecy (icludig tax) 6 2,247 2,247 Sub-Total 3,083 3,083 Wider costs Policig ad wider security Total 7 9,325 5,289 Source: Natioal Audit Office aalysis of Departmet for Culture, Media ad Sport data NOTES 1 Costs are et of estimated private sector cotributios of 165 millio. 2 The split betwee Exchequer ad private sector fudig for the Olympic Village has ot bee agreed by the respective parties ad therefore remais commercially sesitive. Hece the figures for iflatio allowace, the Village ad isurace are aggregated. The gross cost of the Olympic Village is ot icluded i this budget. 3 A iitial assessmet at the time of the budget aoucemet of 500 millio to meet kow fiacial pressures o the costructio of the veues ad ifrastructure. The 500 millio excludes 88 millio VAT which is provided for i the figure for tax uder Other Provisios (see ote 5 below). 4 The Govermet s share (50 per cet) of the margial cost of stagig the 2012 Paralympics. The remaiig 50 per cet is met by the Orgaisig Committee (LOCOG) millio tax comprises: 736 millio VAT comprisig 17.5% of the billio costs of ifrastructure ad regeeratio ( 293 millio), 17.5% of billio of core Olympic costs ( 356 millio) largely comprisig the costs of veues, security, logistics ad delivery parter, ad 17.5% of the 500 millio cotigecy elemet ( 88 millio); ad A otioal sum of 100 millio coverig both Corporatio Tax (set agaist the potetial sale by the Olympic Delivery Authority of certai major veues i the Olympic Park) ad stamp duty o ay Delivery Authority acquisitios of lad. 6 The geeral programme cotigecy comprises: 1,910 millio cotigecy to reflect the risk of additioal costs arisig from factors such as uforesee groud coditios, iflatio beyod existig provisio ad chages i legislatio. Ad potetial icreases i the budgeted 600 millio costs of policig ad security; ad 337 millio VAT comprisig 17.5% of billio cotigecy (before 19 millio was trasferred to security ad wider policig which is VAT exempt). 7 The total cost estimate for the Games does ot iclude the gross cost of the Olympic Village, which is expected to be largely fuded by the private sector (but it does iclude the expected public sector cotributio towards the Village see ote 2 above). 16 The budget for the Lodo 2012 Olympic ad Paralympic Games

19 Mai report 7 Mai reasos for the icrease i costs from the time of the bid to the budget aouced i March 2007 Olympic Delivery Authority programme maagemet costs icreased from 16 millio to 570 millio At the time of the bid, the Departmet based its estimate of the resources the the proposed delivery body (the Olympic Delivery Authority) would eed o the model of a urba developmet corporatio. The Olympic Delivery Authority is ow expected to require a sigificatly higher level of resources ad this, together with the eed to secure the ecessary expertise withi the timescales of the programme, has resulted i higher programme maagemet costs. The 570 millio programme maagemet costs (excludig VAT) comprise: 344 millio Delivery Authority staff costs ad Delivery Parter costs. The Delivery Parter (CLM) is egaged o a framework basis. Uder this arragemet there is o commitmet for ODA to use CLM ad it may use other project maagers or recruit directly. While they have agreed staffig requiremets ad base level costs to July 2008 there is o cotractual commitmet beyod this date. It is therefore ucertai what the divisio of costs betwee ODA ad CLM will be over the duratio of the programme. The average mothly umber of full time equivalet staff employed by the Delivery Authority durig the year to 31 March 2007 was millio for IT, ret, other property, commuicatios, ad other overheads, plus a relatively small amout for plaig developmet cotrol coverig the ruig of the Delivery Authority s plaig authority fuctio (icludig staff costs, local authority liaiso ad overheads). 94 millio for o-site logistics (icludig, for example, materials maagemet, temporary roads ad health facilities for aroud some 9,000 costructio workers). Tax costs ew provisio of 836 millio Comprisig 736 millio for VAT (icludig o the costs of veues ad ifrastructure, ad o ruig costs) ad a otioal sum of 100 millio for corporatio tax (as the Olympic Delivery Authority may i due course make a profit o the sale of assets) ad stamp duty lad tax. At the time of the bid, the tax status of the proposed Olympic Delivery Authority was udecided ad the cost estimates at the time of the bid therefore excluded provisio for tax. The Treasury cofirmed i March 2007 that the Olympic Delivery Authority would be liable to VAT i the ormal maer ad uable to reclaim it. While a cost to the Games, all tax paid by the Delivery Authority will be a future receipt to the Exchequer. Cotigecy ew provisio totallig billio The Departmet s itetio was that there would be a cotigecy of billio (as reflected i the Secretary of State s statemet of 15 March 2007). This cotigecy was iteded to cover potetial fiacial pressures o the costructio of veues ad ifrastructure, potetial icreases i the 600 millio costs of policig ad security ad cost icreases arisig from factors such as uforesee groud coditios, iflatio beyod existig provisio, or chages i legislatio coverig, for example, evirometal protectio or health ad safety. The Departmet iteded that a iitial amout of 500 millio of the cotigecy would be give to the Olympic Delivery Authority to eable it to maage early pressures ( 88 millio of VAT o this is icluded withi the 836 millio provisio for tax). The use of cotigecy is subject to approval by the Fuders Committee. At its first meetig o 21 Jue 2007 the Committee agreed to the immediate release of 360 millio of cotigecy to the Olympic Delivery Authority. Cotigecy is covered further i paragraphs 60 to 67. Policig ad wider security costs ew estimate of 600 millio For policig ad wider security, reflectig the iteratioal ad atioal security situatio, icludig the terrorist attacks i Lodo o 7 July 2005 (but excludig o-site security durig costructio of the veues ad ifrastructure which is the resposibility of the Olympic Delivery Authority, ad i-veue security which is the resposibility of LOCOG). The Secretary of State, whe aoucig the budget, stated that the 600 millio figure would be subject to cotiued oversight ad scrutiy by the relevat Cabiet Committee, the Home Secretary ad the Olympic Security Directorate. 1 At that time the work o security estimates remaied ogoig. The Home Office, which is resposible for co-ordiatig wider security plaig, has also commissioed further work i this area ad it ad the other affected departmets (icludig those with resposibility for the emergecy services) are cosiderig the fudig implicatios. Private sector fudig reduced from 738 millio to 165 millio (excludig the Olympic Village) The Departmet asked Parterships UK to update its earlier work o the potetial for securig private fudig for the Olympic Park ad legacy (see paragraph 30 to 31) i the light of developmets to the Olympic plas. I Jue 2005 Parterships UK advised that, with the exceptio of the Olympic Village, there was little prospect of beig able to use sigificat private sector fudig to deliver the Olympic Park due to the tight timetable (Parterships UK for example, advised that the establishmet of a Private Public Partership typically takes 30 moths) ad a lack of clearly idetifiable reveue streams. I the light of this advice, the Departmet reduced the estimate of private fudig that could be secured. This estimate of private sector fudig does ot iclude the expected private sector cotributio to the Olympic Village, which is expected to be largely fuded by the private sector (see paragraph 53). Source: Natioal Audit Office, drawig o iformatio from the Departmet for Culture, Media ad Sport NOTE 1 The Olympic Security Directorate is a multi-agecy group led by the Assistat Commissioer of the Metropolita Police. It comprises members from regioal police forces ad the emergecy services. The budget for the Lodo 2012 Olympic ad Paralympic Games 17