APPENDIX 11
Memorandum submitted by Mr T Martin Blaiklock
The focus of my interest in this Inquiry lies
in the financial aspects, specifically Item 1:—
"What level of funding will need to be directed
at transport improvements? Will the Government's Spending Agreement
with the Mayor provide adequate funding? What role will the private
sector play in delivering infrastructure? Will funding be diverted
from other transport projects".
Any assessment of the funding requirements for
London 2012 and of the impact of such funding requires data in
sufficient detail to make a reasoned assessment.
When plans were first initiated in 1997 by the
British Olympic Association ("BOA") for London's bid
for the 2012 Olympics, an independent cost-benefit analysis report
was commissioned as to the viability of such a bid. Such analysis
was, amongst other things, to examine in detail the transport
infrastructure needs for implementing the Games.
In December 2000, a 400 page Report, prepared
by Arup's, was delivered to Government ministers, and subsequently
to the Mayor/Greater London Authority and Opposition spokespersons.
Only a 20 page Summary of this Report was placed in the public
domain. The Report itself was not.
The Summary was unfortunately totally inadequate
for any reasoned assessment to be made as to whether the London
2012 bid was viable or not. For a start such Summary made minimal
explanations as to the basis of the assumptions made underlying
the analysis. In 2002-3 the CMS Committee made this point as the
first item of their conclusions to their Inquiry (ref HC 268,
2002-3) at the time.
In February 2003, I contacted the BOA to obtain
a full copy of the Arup Report with no success. From time to time
I attempted again to obtain a copy through GLA, Parliament, etc
No such luck!
When the Committee's current Inquiry was announced
in July 2005, I tried once more. By this time London and the UK
Government were committed to support, and had won, the bid for
London 2012. BOA passed me on to the London 2012 Organisation,
with whom I have had direct contact recently. To date they have
refused access to the full Arup Report (or indeed any other detailed
financial/economic assessment of the London bid).
I also approached in July 2005 DCMS for access
to such document under the Freedom of Information Act. They have
recently responded (Sept 5) that they had not yet decided whether
it was in the public interest to release such information! (I
should hear their conclusion within 20 days, but I am not hopeful!
The blank cheque remains blank!).
Unfortunately, the Arup Report is not the only
essential document on London 2012, which has not been placed in
the public domain (see below).
Hence, one has only had the information given
in the London 2012 bid documents as any guide to the economic
and financial viability of the bid, and the cash-flows therein
(ref Table 6.6.3) are very rudimentary and conceptually confused.
I summarise my comments below:
— The general structure of costs seems
to be:
[given in 2004 values]
| LOCOG Operational Budget:
| = £1,500 million |
LOCOG Est Revenues: |
|
IOC [TV, etc] | = £560 million
|
Sponsors & official suppliers
| = £450 million |
Tickets | = £300 million
|
Licensing | = £60 million
|
Total | = £1,370 million
|
Operational Shortfall | = £130 million
|
| |
NOTE: London 2012 confidently expects to make a surplus in
excess of £100mn nevertheless. How the shortfall is bridged
is not clear.
| Non-LOCOG Investment: | |
New Venues | = £560 million
|
IBC/MPC construction | = £130 million
|
Olympic Transport Infrastructure
| = £380 million |
Enhanced Infrastructure in Olympic Park
| = £350 million |
Security, elite sports, contingencies, inflation
| = £955 million |
TOTAL | = £2,375 million
|
Lower Lea Valley Development: |
= £800 million |
TOTAL [Govt] | = £3,175 million
|
Plus: Athletes Village (private sector)
| = £650 million |
Plus : Other Infrastructure (road & rail)
| = £7,000 million |
["£400 million funded from Agreed Funding package"]
|
| |
[Data Source: London 2012 Finance Briefing Note : undated,
but post-bid]
— All the above figures are given in 2004 values.
Inflation for 2004-2012 will have to be added to these figures
to obtain the rough quantum of money that needs actually be raised.
Using the inflation data for the last 8 years (ref Table
2.9 in the bid) and applying this forward, as a reasonable assumption,
the cumulative inflation over 8 years amounts to around a 22%
increase. Added to this one must add finance charges and interest
during construction, etc. No comment is made on this issue in
the London 2012 documents.
— As to actual funding sources for the event, little
is said in the bid except with respect to the guarantees made
available to support the costs.
The Chancellor of the Exchequer/Government has agreed that
they will: (a) be the ultimate guarantor of the infrastructure
and venues cost for both the Olympic and Paralympic Games; and
(b) ensure that the funds will be made available to meet these
costs (ie £2,375 million, see above).
In addition, the Government is to introduce legislation for
£1,500 million of lottery money to be used to support the
games [what happens to the charities, etc. currently benefiting
from the lottery, nothing is said].
The Mayor of London has also guaranteed up to £625 million
and the London Development Agency £250 million towards the
Games.
What is lacking in this scenario is a firm, "bankable"
funding plan for all the expected costs of arranging this event,
duly supported by some of the guarantees as mentioned above. As
it is, it is comical to observe such a major public investment
as the Games relying significantly upon gambling (ie lottery)
revenues for funding, and the "blank cheque" nature
of the guarantees seemingly issued against such poor project data.
— In a number of places in the bid, reference is
made to the "Guarantees File". This document is not—I
understand from London2012—in the public domain. Why not,
might I ask? What actually, in value terms, has been guaranteed
and under what conditions? The Government/Mayor/LDA commitments
made represent a "blank cheque" to the Games' organizers
and an unquantifiable burden on the taxpayer. It also makes any
reasoned analysis of the funding issues of the Games incomplete.
In my view, this is an unacceptable way to manage major public
investments. [cf the new Wembley Stadium saga of mis-management
and over-spending (ref HC 299 (2002-3) & HC 254 (2003-4)].
— The Arup Report is understood to be the main data
source as to the transport infrastructure requirements of the
Games. Sadly, as mentioned earlier, it is unavailable for examination.
However, this Report was undertaken pre-Dec 2000. In early
2003, HM Treasury brought out a new edition of the Green Book,
which changed the discount rates to be used for project analysis,
as well as introduced the concept of "Optimism Bias".
From the information available, it would seem that the cost
estimates under the bid have ignored HM Treasury guidelines. This
might have been acceptable for bids to the IOC, but with respect
to how we, in the UK, assess such public investments it must be
expected (by UK taxpayers) that the evaluation procedures adopted
follow UK Government rules, not someone else's, eg IOC, guidelines.
In particular, it is noted that the contingencies put into
the cost estimates were around 5% (ref London 2012 Finance Briefing
Paper). The minimum "contingency" under Treasury Green
Book guidelines is an Optimum Bias of 24%, going up to 50-60%
for complex undertakings, which the Games are. One might expect,
therefore, to see significant cost over-runs on the Olympic investments
to be made than have hitherto been identified, and this is without
making any allowance for higher inflation of construction costs
compared to RPI.
[Note: it is interesting to spot that some allowance was
made for inflation in the Briefing Note cost estimates! Given
these costs were represented in "real terms", this is
a conceptual nonsense and gives one little confidence in the analytical
rigour of the bid and its supporting documents].
— Finally, it is understood that much of the £7
billion of "other Infrastructure" has already been funded
under the LUL PPP investment program. In this context it has been
noted that the Infraco's under the LUL PPP have been lagging behind
in their investment program (ref GLA Report, June 2005). The London
2012 bid analysis takes no account of the cumulative impact of
such delays, ie there seems no provision for a "Plan B".
Additionally, the "Spending Agreement" with the
Mayor is also not available for analysis or to provide clarifications
on this issue.
CONCLUSION
Notwithstanding the political, PR and public success of winning
the London 2012 games and the many £ millions that have been
spent to date achieving this position, it is sad to comment that
the financial planning associated with the bid fall far short
of what is "bankable" and acceptable for a public project
in the UK. Cost over-runs and over-stretching of resources seems
inevitable.
The lack of publicly available data and analysis of the basis
on which decisions were made and Government/Mayor/LDA guarantees
given raises additional concerns (and suspicions).
It is also salutary to note that the politicians and many
of the public figures associated with the bid, who have taken
these decisions on behalf of the public to support London 2012
today, will not be in power or around to answer for their optimism
and enthusiasm in 2012.
One might ask whether it is right to burden future taxpayers
with such costs in the absence of a transparent decision-making
process in the first place.
September 2005
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