House of Commons - Culture, Media and Sport

Select Committee on Culture, Media and Sport Third Report

IV BIDDING FOR THE OLYMPICS

4. The potential for significant benefits to flow from hosting the Olympic and Paralympic Games was the subject of much of our evidence. Sir Steven Redgrave, Vice-President of the BOA, and Olympic gold medallist said "it is not just the legacy that is left from the material things that the Games will deliver ... If we deliver a successful Games then people will be interested in being involved in those sports."[11] The British Paralympic Association wrote that "a London bid will enhance the growing reputation of Great Britain's élite disabled athletes and firmly demonstrate HM Government's commitment to their sporting success. The present administration's current commitment to sport and the legacy it leaves through social inclusion, health, education and facilities can have few clearer illustrations than in supporting a Paralympic Games in London. The benefits that would accrue to Great Britain's disabled people through the demonstration of national commitment to their sports would be immense and tangible."[12]

5. The BOA's evidence sets out a great number of areas that would benefit from staging an Olympic Games: a feel good factor across the nation as a whole; increased élite sporting performance, grassroots participation and facilities; the reduction of youth crime; the promotion of education[13]; a new culture of volunteerism; social inclusion; regeneration in the form of new housing and better transport infrastructure; employment (with about 9,000 new jobs, of which 3,000 would be in the local economy); tourism and the convention industry; UK investment and exports; and all British cities through the preparation and training camps for overseas teams as well as the football and sailing competitions.[14]

6. Representatives from the London boroughs of Hackney, Newham, Tower Hamlets and Waltham Forest made a variety of points on the impact of the Games. Mr Max Caller, Chief Executive of Hackney, and Mr Simon White, Chief Executive of Waltham Forest, argued that the pressure and profile of the Olympic Games could act as a catalyst for action on moribund regeneration plans, especially transport infrastructure, where issues "keep turning up and they keep on never getting a decision."[15] Mr Norman Turner, Director of Culture and Community at Newham, pointed to an array of positive social and health gains that might be extracted and sustained from the culture clash between 11,000 of the world's best athletes performing in areas with some of the country's worst rates of mortality and coronary heart disease.[16] Mr Ray Gerlach, Corporate Director of Customer Services at Tower Hamlets, also referred to the opportunity to celebrate the cultural diversity of the borough as well as to shift the centre of gravity in London a little "so that the East End did not just see this as a one-off ... and then disappear; we are looking beyond the Games".[17]

7. We received three memoranda from local community groups which disagreed with the concerted local authority stance. The Southern Lea Valley Federation and the Hackney Environment Forum and the New Lammas Lands Defence Committee argued vigorously against siting the Olympics in the Lee Valley as they regarded the area, not just as 'derelict land needing restoration', but rather a 'tranquil and precious green lung' close to central London.[18] The importance of consultation with, and involvement of, the local community in a project of this nature should not be under-estimated no matter how enthusiastic are the relevant local authorities. Experience in Manchester with regard to the Commonwealth Games bears this out.

8. We would disagree with very little that we heard or read in regard to the potential for benefits from hosting the Olympic and Paralympic Games. Indeed our predecessor Committee concluded in 1998 that "International sporting events can bring considerable gains to a nation. They can promote economic and social development and bring a 'feel good factor' to the host country. There is no doubt that seeking to stage events is worthwhile. Indeed, this country cannot afford not to attract and stage international sporting events."[19] The fact remains that a substantial amount of these benefits will rest on public expenditure on an extremely large scale.

Preparing to bid

THE GOVERNMENT'S APPROACH TO COSTS

9. The Government's approach appears to be twofold: seeking to pin down costs and reduce the range of uncertainty on estimates to a minimum; and making a judgement about the affordability of the identified spend, and the implications of its under-writing of the project risks in relation to its other priorities for sport and other policy areas. This attitude seems entirely appropriate for this stage of the project. So long as Ministers can manage a racing gear-change to full-on enthusiasm and commitment in the event of support for a bid being agreed in Cabinet, the Government can—and indeed must—be as hard-nosed and sharp-eyed in crawling over the estimated figures as it likes. However, we can say little about the Government's actual performance and implementation of this approach at this stage because of the lack of transparency over the detail, as we have discussed above.

10. We believe there to be three key questions that the Government needs to answer before being able to commit itself to a bid (and any such commitment will be all the better, easier and the more convincing to the IOC for this work having been done), namely:

that the costs and risks are understood as far as is possible at this distance from the event, can be afforded, and are justified in comparison with other sporting and wider spending demands on Government;

that the challenges and implications of delivering the necessary facilities and infrastructure developments on time are understood and catered for; and

that any infrastructure legacies created will be free from on-going, possibly open-ended, subsidy necessary from the public sector.

11. The bedrock for the Government's analysis is the assessment of the costs and benefits of a London Olympics in East London undertaken by Arup between January and May 2002. Arup developed a "specimen" Games and undertook an estimate of the costs and revenues based on the information available. We were concerned by the term "specimen" with its hypothetical overtones. In fact the "specimen" identified by Arup is the culmination of all the relevant feasibility work going back to 1997; a "prototype" London Games might capture the meaning better. Mr Richard Sumray, representing the GLA, told us "the specimen proposal is not going to be exactly what the end result is, and, in fact, if you look at the history of bids, the end result is never quite what is even bid for. It is pretty well there or thereabouts and we believe that what Arup has come up with is actually sustainable and robust."[20] Of course the Mayor of London's department is so far committed to providing, at most, a tiny fraction of projected expenditure. Arup themselves were confident that the financial profile of the Games presented in their report could be improved upon in development[21]; but how late in the process that might be is not clear.

12. Arup describes its appraisal as a hybrid between a cash flow business plan and a conventional cost benefit analysis. Arup calculated "attributable costs and incomes for bidding, preparing and staging the Games, made provision for risk, and estimated the residual value of assets created", generating a total direct cash flow for a prospective organising committee and the public sector agencies involved.[22] Arup said that the resulting deficit must then be justified by additional benefits, both quantified and unquantified.[23] The Arup figures, including some quantifiable additional benefits are set out below.[24]

Bidding and staging	Expenditure	Income	Balance
Bid	13	7	- 6
Staging	779	864	85
Elite sport development programme	167	0	- 167
Capital investment in facilities	403	0	- 403
Land purchase (residual value)	325	431	106
Sub-total	1,687	1,302	- 385
Risk	109	0	- 109
Total	1,796	1,302	- 494
Wider benefits	Expenditure	Income	Balance
Additional tourism	103	280 to 610	+280 to +507
Other benefits	0	69	69
Grand total	1,899	1,651 to 1,981	- 145 to +82

13. The Government described the Arup conclusions as "a good baseline" and said that it had re-examined them as a basis for long-term public expenditure planning using three techniques: critical appraisal of risk and contingency; probability analysis; and benchmarking.[25] Adding the effect of inflation to produce outturn figures increased the figure for the cost of the Games by £1,762 million from Arup's total of £1,796 million to £3,558 million (and of course did the same for revenues: from Arup's £1,302 million to £2,450 million). Critical appraisal by the Department turned up a number of additional items and risks, adding a further £1,116 million to estimated costs and reducing estimated revenues by £400 million. The resulting total outturn cost was £4,674 million[26] with public subsidy set at £2,624 million by the DCMS. The table below sets out the changes in more detail.

DCMS's revised costs and revenues (outturn prices) £m[27]
Arup cost baseline	3,558
Increased allowance for construction contingency.	26
An extra 10 per cent on Arup's staging contingences reflecting a "general concern" about uncertainties in a complex 10 year project—in line with New York's 2012 bid assumptions )	225
The uprating of Arup's Sydney-based costs to reflect price parity between London and Sydney	70
An allowance for street dressing and cleaning to improve the Look of London based on spending in Manchester on the Commonwealth Games	40
The high-end estimate for additional investment in station capacity and service enhancement to enable transport requirements to be met	500
Allowance reflecting updated estimates for land acquisition from the London Development Agency	55
Allowance for a risk that suitable indoor competition venues and training centres in East London will not be available without further investment	50
Allowance for higher than estimated administration costs to attract the right number and quality of Games administrators	150
DCMS revised total costs	4,674
Arup revenue baseline	2,450
Allowance for a 16 per cent shortfall in revenue against estimates on the basis that Arup's assumptions about ticket prices and sales were relatively high.	400
DCMS revised total revenues	2,050
Arup public subsidy estimate	1,108
DCMS revised total public subsidy	2,624

14. Arup disagreed with some of the Department's further work[28] but overall Arup emphasises that a full appraisal of the project must include an assessment of wider benefits as these will always be the deciding factor given the inevitability of a significant funding deficit.[29] Arup said that the potential public subsidy must be considered in the context of quantifiable benefits but also the range of nonquantifiable benefits which were identified in its report but not incorporated into its figures. Of course, "quantifiable" expenditure will turn out to be a precise sum. Wider benefits, even those described as quantifiable, are far less precise and much more subjective.

15. Despite this work on critical appraisal and the resulting estimate for total public subsidy of £2,264 million, the probability analysis undertaken led the Department to indicate, later in the same memorandum, that "the key figure is the assessment of a 90 per cent probability that the public subsidy would be no more than £2.1 billion".[30] We realise that very different appraisal techniques are being used to assess the project but we find the Department's apparent inconsistency peculiar.

16. The Secretary of State emphasised in oral evidence the risks involved in budgeting for the Games with reference to the experience of Sydney and Athens. She said that both had found their outturn to be about double their estimated costs.[31] We asked the DCMS what work had been undertaken to assess and avoid the failures of Sydney and Athens in predicting costs. The DCMS reported the New South Wales Auditor General's opinion that the assumptions within the Sydney bid were "superficial", with the work undertaken being primarily aimed at winning the competition to host the Games. We were amazed to see that Sydney's budget had excluded capital costs for facilities, infrastructure and security as well as post-Games costs such as redundancy payments and indirect costs. The estimated public sector contribution to the Sydney Games turned out to be about six times greater than the figure in its original bid. Similarly, Athens undertook no detailed cost benefit analysis for the 2004 bid but worked off the baseline provided by the figures for its unsuccessful 1996 bid.[32]

17. The Commonwealth Games in Kuala Lumpur, and the Sydney Olympic and Paralympic Games were said to have "raised the bar" for Manchester in 2002, which contributed to its budgeting difficulties. We were concerned lest there were any potential for a similar effect before 2012. The DCMS told us that the technical specifications for the Olympics were far more tightly defined than was the case for the Commonwealth Games and that a Beijing Olympics was likely to be very different in style to any London Games and thus unlikely to bear direct comparison.[33]

18. We hope to have explained the apparently ludicrous range for the estimated total costs of the Games, often quoted erroneously in the media, as anywhere between £1.8 billion (2002 net present values) up to £5 billion (2012 outturn costs plus the maximum risk provision). We do not criticise the Government for taking a cautious attitude to risk. The perceptions of the project in the media will be critical to its progress (despite vigorous campaigns to secure a positive outcome to this first stage in some quarters). An estimate, for example, of £2 billion where outturn soon looks like £3 billion, has the potential to inhibit progress, winnability and success in a way that an estimate of £5 billion, and a likely outcome of £4 billion, would not—despite the balance of absolute expenditure. We are confident that the Government has undertaken more and better appraisal than previous bidders in order to tackle the vagaries of estimating the costs for a huge and complicated project nine and a half years away from the final delivery date. We trust that the IOC will take note of the implications of all this effort in any future judgements it may make on a London bid. Crucially, we expect the Government to finalise, and reconcile, the various strands of its appraisal work and to be able to set out clearly and in detail what its conclusions are, their bases, and how they influenced its decision on whether to bid or not.

LEGACY

19. The heart of a modern Olympic bid appears to be the binary development of the main stadium and Olympic Village and their inter-relationship. UK Sport was adamant that a bid that did not contain a compact stadium and single village concept was doomed to fail, as it did not reflect the Olympic ideal of 'bringing the world together'.[34] Sir Steven Redgrave told us that coming together to live and compete in, more or less, a single location was what distinguished, for athletes, the Olympics from a series of world championships held in rough proximity.[35] Both John Scott from UK Sport and Sir Steven also referred to the practical, and ever more important, issue of maintaining a high level of security; something that is obviously easier with fewer perimeters.[36]

20. The Arup report contains no provision for village development as it is assumed that the construction would be undertaken by others for the legacy on a commercial basis and that therefore only the land cost/value is attributable to the Olympic budget.[37] We have no evidence that this proposal has been researched or market-tested beyond looking at what other Olympic hosts have done. Confidence over delivery of the village development in this form cannot therefore be assumed.

21. An East London Olympic bid needs an 80,000 seat athletics stadium but East London itself does not. The Government gave us evidence of the difficulties faced by a number of former hosts of the Games in relation to their legacy stadia.[38] We were concerned about the role of a new Wembley national stadium whose capability of hosting athletics, including the Olympics, was one very controversial strand in a web of dispute and contention during that project's development. The evolution of both projects, Wembley and an Olympic bid, is set out in supplementary memoranda from Sport England and from the BOA, reflecting their respective interests and priorities.[39] From these it is clear that there was, to say the least of it, some shortfall in strategic thinking across the two projects. London might well end up with a stadium at Wembley, specifically built with the capability to host the Olympics without legacy issues, and another in East London, actually built to host the Games, with an uncertain future. If this duplication were in fact to occur much of the responsibility would lie with the sporting bodies and agencies whose discussions with each other, and with Government, have led to this confusion.

22. It was unclear from the evidence we received whether the timetable for design and construction of an Olympic stadium in East London would fit with the timetable for decision on the bid set by the IOC. It is essential that the Government assure itself as to these schedules in order to avoid being left with significant work done in relation to a stadium for which it has no use.

23. The most serious and creative thought needs to be given to the long-term future of an East London stadium before a single word of the design brief is written. All options should be considered, from temporary construction and subsequent demolition, to a full range of alternative uses after the Games. Such uses could include sporting, retail, leisure or residential adaptation (and any combination thereof). We recognise, therefore, that there could be a creative legacy option developed in due course. However, we recommend that, for the purposes of the bottom line of the bid, the Olympic stadium be costed on the basis of construction and demolition.

24. First, however, the Government must satisfy itself that the fundamental proposals for a privately developed village and construction of any kind of stadium are in principle realisable and deliverable between 2005 and 2012.

CHOICES AND OPPORTUNITY COSTS

25. Clearly, the point of the financial and economic scrutiny was to assess the scope of the guarantee that the Government would have to give and the risks that all or some of this guarantee would be called upon. The Secretary of State told us that "we have to accept that at the end of the day the provider of last resort is the taxpayer and that is why we are looking at this...as being potentially a major public expenditure commitment that would have to be set alongside the commitment to building new hospitals, new schools and so forth, all the priorities that our Government was elected to deliver."[40] Tessa Jowell pointed to the opinion polling which showed the Olympics to have a higher priority amongst the general public than reducing taxes but came below schools, hospitals and pensions.[41] She said "if we decide to bid...we have decided because, in full understanding of the consequences, this is such a great thing for Britain; and if we do not bid it will be because we have decided after rigorous examination that the costs are just too great and other very precious priorities, not just of the Government but of people up and down the country, would have to suffer if we were to do this."[42]

26. Another choice was whether to pursue regeneration in East London, in part at least, by way of an Olympic Games. Tessa Jowell told us that the cost of directly delivering the estimated regenerative benefits of a Lee Valley Olympics, without actually bidding for and staging the Games, was estimated at £300 million.[43] The Secretary of State made the point that Barcelona and Beijing had been clear that they were going to use the Olympics to drive the regeneration (with commensurately higher 'Games' costs). She contrasted this with the position of East London where there was a plan and regeneration was going to take place "anyway".[44] As we have set out above, this is not the perception of the borough officers, who told us that a catalyst or accelerator was necessary: "for this bid to succeed, the day Government says, 'yes, we want to do it', is the day they have got to go forward on the transport infrastructure, or it will not be built."[45]

ORGANISATION AND THE ROLE OF GOVERNMENT

27. For the effective delivery of a bid for, and the staging of, the Olympic Games, the management, decision-making and administrative mechanisms have to be absolutely right. The strategy and objectives have to be clear, as does the allocation of responsibilities. We do not believe that the Government can adopt a hands-off or arms-length approach. We were encouraged to hear from the Secretary of State that "If we decide we are going to go for it we will go hell-for-leather to win and all the commitment of Government will be deployed".[46] The DCMS submission said: "Work on the structure of the organisation required for both the bid and staging is being undertaken. This will examine, amongst other things, whether the organisation should be run centrally by the Government, should be at arm's length from Government or should be set up according to another model".[47]

28. We cannot insist strongly enough that, whatever new agencies are established, leading unequivocally from the centre should be a Minister, located in the Cabinet Office or even No. 10, and with an explicit cross-governmental remit and the power and personality to make things happen. This should be established from day one, 31 January 2003, and should include arrangements for liaison between that Minister and the Prime Minister as a matter of course. The leadership issue cannot be allowed to languish for one minute if a positive decision has been taken.

TRANSPORT

29. A key challenge of the Games is transport: within the Olympic zone; throughout the city; and the links with terminals for inbound overseas visitors. Getting everyone to the venues, between venues and away again in the context of a congested and busy city like London should not be under-estimated. The East London site was selected because of the conjunction of empty land and existing and planned transport infrastructure. Mr Jay Walder, of Transport for London, told us that the "site that has been selected benefits from four tube lines, two national rail lines and the Docklands Light Railway. That is a very, very significant transport capacity."[48] On transport, Arup said that London could cope with the 125,000 extra 'Games' commuters, even without Crossrail, if the network was managed to "an unprecedented degree".[49] Mr Walder said "the Olympic Games would add about one per cent to the daily transport flows that we deal with in London, a range that the system has to accommodate on a fairly regular basis. The real issue in terms of transport is...the concentration of activity in a very small area. That will likely necessitate some improvements...nowhere near the complexity of the other items that you have mentioned."[50]

30. We were concerned with conflicting views of the timescale for progress with Crossrail and its inter-relationship with staging the Olympics. There were so many versions of the place of Crossrail in providing communication to an East London Olympic venue that it is impossible to know which to believe. The Arup study looked at the Games both with and without Crossrail concluding that the link could not be relied upon.[51] In November 2002 the Mayor of London stated that "without Crossrail you would [not] want to run the risk of trying to move everybody around the city [for the Olympics]".[52] On 14 January he was quoted in the press as stating: "I am more confident than I have ever been that within a few months we will have the go-ahead for the development of Crossrail".[53] However, Crossrail itself does not expect to have prepared the application for statutory consent for Crossrail line 1 before November 2003; although it hopes that this is the start of a programme and timetable that will lead to completion of construction in 2011 (subject to obtaining powers, finance and procurement). On this schedule the Line 1 train service itself would be in place by May 2012, i.e. in time for the Games.[54] On the other hand Transport for London have ruled Crossrail out from their assessment of available transit links for a Games in 2012 and this view was endorsed by the Secretary of State.[55] We wonder which, if any, of these views is accurate?

31. With regard to the overall transport situation, the Secretary of State agreed with the thrust of both the Arup report and of Transport for London's evidence. She stated that the Government's position was that "transport is not an obstacle to a bid, and I think it is very important to be clear about that."[56] We are not convinced that this would be the view of many regular users of London's public transport networks or congested roads. It does not seem to have been the view, two days earlier, of the Minister for Sport, Rt Hon Richard Caborn MP, who was reported by UK Sport to have said "on the transportation, it's a major factor moving people around. We've been looking at a number of cities that have hosted the Olympics and that's the one thing they say to us 'get the transport right'. Everyone knows that there are major problems with moving people around in London, therefore that's got to be a serious consideration."[57] The Government must provide clarity on transport issues if announcing a decision to go forward with a bid, namely:

what capital projects are required for, or before, 2012;

what investment will be required in measures to improve levels of service;

the costs involved and the risks of their escalation (always greater when the pace of construction is being dictated by an external deadline);

the risks of non-delivery and related contingency plans and/or resources;

a strategy, in outline at least, for the "unprecedented" management of the London transport network (including demand management) recommended to cope with Olympic transport needs; and