Select Committee on Culture, Media and Sport Sixth Report

 
 

 
2  Funding the Games

6. One of the most significant steps taken since the publication of our last Report on the 2012 Games was the announcement on 15 March 2007 of a final figure for the costs of the Games to the public. That figure, including contingency, is £9.325 billion. It breaks down as follows:

Table 1: Funding package for the London 2012 Games
   £m  £m  £m  
Total Funding Package     9,325  
Less Non ODA costs       
 Elite and Community sports  290    
 Paralympic Games  66    
 Look of London  32    
    388  
 Security  600    
 Security contingency  238    
    838  
Total Non ODA     (1,226)  
Total Available for ODA     8,099  
ODA Base costs inc VAT    5,590   
Contingency released    500   
Total ODA before unallocated contingency     6,090  
Contingency remaining     2,009  
Maximum funding available for ODA     8,099  

The costs of actually staging the Games do not appear in this Table: they are to be borne by the private sector and through sponsorship. We consider this element later in the Report.[3]

7. At the time that the bid to host the Games was submitted, the estimated cost to the public sector was approximately £3.4 billion:

  • £2.375 billion from a Public Sector Funding Package, to fund the work of the Olympic Delivery Authority (ODA), the statutory body responsible for building the permanent venues and infrastructure needed for the Games; and
  • £1.044 billion from the Exchequer for wider regeneration in the Lower Lea Valley.[4]

It was estimated that a further £738 million would be forthcoming from the private sector, as a contribution to the costs of facilities and infrastructure.[5]

8. The Annual Report on the London 2012 Olympic and Paralympic Games, published by the Department for Culture, Media and Sport in January 2008, cited reasons for the difference between the initial estimate of cost and the current budget of £9.325 billion. Those reasons, as described by the Department, are:

  • A new provision of £2.7 billion contingency to manage programme and unforeseen risks. This was over and above the project contingency included at the time of the bid;
  • an increase in core Olympic costs of £1.1 billion resulting primarily from the appointment of a delivery partner, additional inflation, and levering contribution to the cost of the Olympic Village;
  • a contribution for VAT and corporation tax. At the time of the bid it had been uncertain whether the ODA would be liable;
  • an indicative provision of £0.6 billion for policing and wider security included in the wake of the events of 7 July 2005; and
  • a reduction of around £600 million in the anticipated private funding directly available.[6]

9. The budget for the Games has been extensively analysed by the National Audit Office (NAO),[7] and the Committee of Public Accounts has published a Report largely based upon the NAO's findings.[8] It echoes criticisms which we made in our previous Report on the Games of the failure to include either programme contingency or VAT when drawing up estimates of the level of public funding needed. It also points out that the overall £9.325 billion budget excludes the costs of acquiring land for the Olympic Park, the costs of government departments working on Games preparations and legacy planning, and the costs of improving wider transport links. While we make general observations on the overall budget, in this Report we have given particular attention to its contingency element.

Contingency

10. £2.747 billion of the £9.325 billion funding package is designated as "programme contingency", namely funding to manage risks to the overall programme:

The potential risks identified by the ODA include programme delays (leading to extra costs of accelerated working), inflation at a higher rate than assumed, industrial action by members of the workforce directly related to the ODA programme, and default by third parties or private sector funders on funding commitments. A fuller list appears in the ODA's Programme Delivery Baseline Report, published in January 2008.[10]

11. The £2.747 billion figure does not, however, represent the total funding available to cover contingency costs: it excludes the contingency component built into each project budget. We asked the Department to supply figures for the contingency component within each project. The Department supplied a total figure current in December 2007, when the ODA's baseline budget was announced—£973 million, including VAT—but it declined to supply figures for the contingency provision within each individual project, on the grounds that individual project provisions were "likely to be fully required", were "considered an intrinsic element of the base budget of a project", and were therefore not separately identified.[11] Such figures must exist, however. The Director-General of the Government Olympic Executive indicated in oral evidence that, from memory, he believed that the contingency element of the Olympic Stadium project was £94 million: just under 20% of the total project cost of £496 million (including VAT).[12] This would represent a usual, prudent level of provision for a large individual project, but the existence of such contingencies in budgets clearly does not mean, with professional cost control, that they should always be spent.

12. The total contingency identified in one way or another is therefore £3.72 billion, made up of £2.747 billion in programme contingency and £973 million from provision within projects. Of the £2.747 billion programme contingency, £238 million is intended to cover security risks and is not available to the ODA. We therefore estimate that the maximum contingency on which the ODA can draw amounts to £3.482 billion: £2.509 billion in programme contingency plus £973 million in project contingency.

13. In our previous Report on the 2012 Games, we noted that there was discussion within Government and the Olympic Board about the size of the proposed programme contingency. The Treasury was understood to favour a figure of approximately 60%, in line with Green Book guidance.[13] On the other hand, the Mayor of London was on record as having stated that "there are no circumstances under which I'd agree to a contingency of that size".[14] We went on to question the rationale for allowing a programme contingency on top of project contingency, especially at the level advocated by the Treasury, and we expressed surprise that the Treasury appeared to be insisting upon a programme contingency of up to 60% when, in 2004, it had underwritten a bid to the International Olympic Committee which had made no such provision.

14. Now that a figure for programme contingency has been announced, we have sought comfort that the overall level of contingency is justified. The programme contingency available to the ODA—£2.509 billion[15]—is 45% of the ODA's base costs (£5.590 billion including VAT) and 31% of the total funds available to the ODA (£8.099 billion). If the contingency elements of individual projects are taken into account, and the maximum contingency payable by the ODA is reckoned at £3.482 billion, overall contingency provision forms 62% of the ODA's base costs. We would like to see a fuller explanation from Government of why the contingency level has been set so high, with reference to the costs of previous Olympic Games and comparable large construction projects. We note that the sum announced as contingency for construction of venues for the Vancouver Winter Games in 2010, admittedly a smaller feat of organisation, is $ Can 55.3 million compared to base costs of $ Can 531.5 million: just over 10%.[16]

15. Most, but not all, of the programme contingency will come from the Exchequer contribution to the Games budget. We note the policy of the Olympic Lottery Distributor (OLD) that, when making a "lifetime grant",[17] it would hold back a sum which would be available should the ODA seek further funding. In effect, this would be a Lottery share of the overall programme contingency. We note that the Olympic Lottery Distributor's intention that that proportion should be approximately 20%.[18] Any decision on how to dispose of any such funds which remained unspent when the Olympic Lottery Distributor was wound up after the Games would be for Parliament to make, although it would need to take account of the constraints imposed by the status of those funds as Lottery funds.[19]

16. £500 million of the programme contingency has already been authorised for release to the ODA for the following purposes:

Table 2: Breakdown of contingency authorised for release
 Released Contingency  
Site preparation and Infrastructure  177 
Venues  100 
Transport  21 
Other Parkwide projects  208 
IBC/MPC, Olympic Village, Programme Delivery and Taxation  (6) 
Total  500 

Source: HC Debates 10 December 2007, col. 9WS. Figures are for £000.

The ODA told us that this funding was needed to provide "an adequate cover contingency base" within certain projects so that contracts for those projects could be let.[20]

17. The Minister for the Olympics assured us that, for a project of such a scale and bearing such a risk, a 60% ODA-wide programme contingency was "judged, in accordance with industry standards and industry modelling, as being contingency at the right level".[21] When we questioned the ODA on contingency provision shortly before the ODA's baseline budget was announced, the Chief Executive of the ODA told us that contingencies "on all sustained projects that the Government puts up for approval" ranged from 30% to 60%.[22] Bearing in mind the ODA Chairman's previous experience as Chief Executive of Network Rail, we asked the Chairman and Chief Executive of the ODA for examples of other public sector projects or programmes which had included an allocation for programme contingency of 50% or 60%. Mr Armitt, Chairman of the ODA, told us that he had worked on two major infrastructure projects—the Channel Tunnel Rail Link and the West Coast mainline upgrade—that had reflected such an approach to the management of project risk. In both cases, the level of contingency set at inception of the project had been in the region of 50%—60%. Subsequent project development, together with the development of more detailed designs, had provided a greater certainty of the scope of work, enabling the overall level of contingency to be reduced to between 15% and 20%.[23] On that basis, just for comparison, managing actual spending of contingency down to that level for the Olympic Games would mean a reduction in the headline budget of £2.3 - £2.6 billion. Given the early £500 million call on the programme contingency, an outcome on such a scale already seems unlikely, but the figures do demonstrate the enormous sums involved, which would otherwise be available to the public purse or for good causes around the country.

18. Given that certain costs are already exceeding budgets, at a comparatively early stage of the programme,[24] it seems prudent to assume that further calls on contingency are likely to be made. Mr Coleman told us that the Mayor of London, who has consistently been opposed to the setting of a programme contingency as high as 60%, "does not want to see anything like that full level of contingency spent or utilised".[25] The Chief Executive of the ODA told us that the ODA expected "a substantial part of the contingency to be spent", given the complexity of the project and the fixed deadline for completion.[26] However, the Minister for the Olympics told us that an assessment of the contingency requirement had concluded that there was "an 80% probability" that the full contingency would not be required.[27] In evidence to the Committee of Public Accounts on 14 November 2007, the Permanent Secretary at the Department for Culture, Media and Sport said that "the only safe assumption is to expect it all to be spent".[28] This statement has been widely misinterpreted as indicating that the whole contingency would be spent.

19. The total sum available to the ODA in programme contingency is so large—greater indeed than the amount to be raised from the Public Sector Funding Package originally intended to cover those core costs of the Games to be met by the ODA—that there is understandably an expectation that it should be a ceiling, with no question of any further sums being made available. The Chairman of the ODA said that the ODA had every confidence that the sum available to it as contingency was "realistic", and he maintained that it was treated as "the absolute maximum". He was, however, unable to guarantee it.[29]

20. Any request by the ODA for funding over and above the sums already agreed would indicate a major failure of cost control. Indeed, we hope that it will not be necessary to draw upon the full programme contingency. We recommend that a substantial proportion of the programme contingency should be regarded as untouchable before 2011.

21. We asked the Minister for the Olympics whether, if any contingency remained unspent, it might be repaid to the Lottery. The Minister replied that "there was a fair way of doing this", which was "return proportionate to contribution".[30] However, we believe that there is a strong case for favouring the Lottery in the allocation of unspent contingency. We recommend that unspent contingency in the Olympic Lottery Distribution Fund should be transferred to the National Lottery Distribution Fund for the benefit of non-Olympic Lottery distributors. We also recommend that the National Lottery Distribution Fund should be the primary beneficiary of any sums within Government departments' budgets earmarked for contingency but not spent. Such an approach would help compensate the Lottery for its original contribution and the long wait which would otherwise occur before it could benefit from the disposal of assets following the Games. It would also lead to the nations and regions sharing, hopefully, in a real 'Olympics dividend' in terms of funding for facilities and good causes. It might also better focus minds on cost control and the implications of spending all the contingency.

Authority for release of contingency

22. There has not been absolute clarity about the authority required for release of programme contingency. The Department for Culture, Media and Sport, in its response to our previous Report on preparations for the Games, said that it was "prudent that a programme contingency should be held within Government under very tight conditions".[31] A Written Answer in November 2007 stated that "contingency funding will only be called upon where it is absolutely necessary, as agreed by the Ministerial Funders' Group".[32] The Chief Executive of the ODA confirmed this in December 2007.[33] However, the Director General of the Government Olympic Executive told us in January 2008 that there were three levels of contingency, each with a differing authority for release:

  • £973 million is regarded as project contingency and does not form part of the programme contingency allowance. The authority to analyse the risk and release the cash is "determined by the ODA Project Director and Change Board and his project managers";
  • A further tier—amounting to £968 million—is controlled by the Government Olympic Executive and the [ODA] Project Board;
  • For the top tier of contingency, amounting to "about £1 billion", release is authorised by the Ministerial Funders' Group, established specifically to manage contingency for the ODA programme-wide risks.[34]

The two latter tiers, together with the £500 million already authorised for release by the Ministerial Funders' Group,[35] make up the £2.509 billion total programme contingency available to the ODA.

23. We queried why the regime for authorising the release of contingency appeared to have changed. The Department for Culture, Media and Sport replied that the decision to permit the allocation of £968 million of programme contingency to be determined by the Government Olympic Executive—the second tier—was a decision of the Ministerial Funders' Group, which had thereby agreed to delegate authority and which had also determined the rules by which the funding would be allocated.[36] We accept the delegation of authority from the Ministerial Funders' Group to the Government Olympic Executive for the release of up to £968 million of programme contingency, but we believe that such a decision, concerning almost £1 billion of public money, should have been announced publicly rather than being left to this Committee to find out through correspondence.

ODA budget

24. Midway through this inquiry, shortly after we had taken oral evidence from LOCOG and the ODA, the Government published a Baseline Budget for the ODA.[37] This budget is broken down under five headings: site preparation and infrastructure; venues; transport; other Parkwide projects; and a miscellany which includes the cost of the International Broadcast Centre/Main Press Centre (IBC/MPC), the ODA's contribution to the cost of the Olympic Village, payments to the ODA's Delivery Partner, and corporation tax. All figures in the Baseline Budget are given both as gross costs and net of VAT. Landfill tax and the aggregates levy, however, are excluded. The budget assumes an inflation rate of 6% per annum for capital expenditure;[38] this compares to a forecast by New Civil Engineer magazine of 6.5% construction inflation in the period up to 2011, when construction of the 2012 Games venues is expected to be largely complete.[39]

25. In many cases, the figures provided are the first realistic indications of individual project costs. Some figures enable a direct comparison to be made with costs cited in the bid document. The Olympic Stadium, estimated at the time of the bid to cost US$450 million (equivalent to £280 million at 2004 prices)[40] now has a budget of £496 million, including £74 million in VAT. Infrastructure for the Olympic Park, described in the bid document as costing $2.1 billion/£1.31 billion, now has a budget of £1.94 billion, again including VAT.[41] The Chairman of the ODA maintained that the increase in the cost of the Olympic Stadium, from £280 million to £496 million, was in fact largely accounted for by inflation and the factoring-in of VAT.[42] He has also been reported in the press as saying that savings of £100 million were made in the process of arriving at the £496 million figure.[43] We note that the £496 million outturn figure includes the cost of conversion to legacy mode, understood to be approximately £25 million.[44] The Minister for the Olympics has declined an invitation to break down further the £496 million figure, on the grounds that the information is commercially confidential.[45]

26. At the time that we took oral evidence, updated individual cost estimates for other venues had not yet been disclosed. The reason given was that to do so would prejudice commercial negotiations currently under way. Since then, revised budgets have been announced for the Aquatics Centre (£303 million, including the costs of the land bridge which will form part of the roof) and the Velopark (£80 million).[46] These compare with estimates at 2004 prices in the Candidature File of £73 million and £29 million respectively, although the updated figures allow for inflation and VAT. We examine budgets and designs for venues in more detail in Section 3 of this Report.

27. Given the timescale of this inquiry and the limited information available, we have not analysed the ODA budget in detail. However, we are disappointed that it was not until December 2007 that realistic figures for the costs of individual projects were publicised and that some of the project costs disclosed so far are so much higher than those cited in the bid documents. We welcome, however, the effort which has now been made to place in the public domain as much detail of the ODA budget as is possible within the constraints imposed by the need to preserve commercial confidentiality. We also welcome undertakings made by the Minister for the Olympics and London to provide further information in confidence to Opposition Front Benches and to the Committee on ODA cashflow and on progress in negotiations on private sector investment in the Olympic Park. In our Report last year, however, we also called for the main terms of the agreement with the Delivery Partner to be made public. We are disappointed that the Government has either ignored this call or misunderstood what the Committee wanted. A significant part of the increase in costs is attributable to the engagement of the ODA's Delivery Partner CLM. They will clearly play a major role in cost control and it is important for confidence, therefore, that the basis of their remuneration and incentivisation is properly understood. We again call on the Government to share this information with the Committee, and likewise also with the Opposition Front Benches.

Conclusion on the overall budget

28. The upward revision of the costs to the public of hosting the 2012 Games announced in March 2007 was painful and attracted criticism from the public and in the media. It was, perhaps, not a surprise: the cynical view is that disparities between early estimates of costs and outturn costs for such an immense project are inevitable. We accept that an estimate prepared many years in advance of a major event, with limited opportunities to identify problems which will be costly to overcome, is likely to underestimate the final cost. However, revision of cost estimates on a scale as radical as that which we have seen in relation to the 2012 Games has been damaging to confidence in the management of the overall programme. It has also exposed the Government and Games organisers to the charge that the initial bid was kept artificially low in order to win public support.

29. However, if London is to stage the Games, it can only do so on a firm financial basis. The National Audit Office has concluded that the budget announced by the Secretary of State in March 2007 "represents a significant step forward in putting the Games on a sound financial footing" and "should help those involved in delivering the Olympic programme to move forward with greater confidence".[47] We welcome the National Audit Office's reassuring assessment of the present budget for the Games. Difficult decisions on the budget for the Games have been taken: these should now be supported. We believe that the priority now should be to ensure that the £9.325 billion funding package for the Games does not become a budget to be spent in its entirety. The mark of success in financial management of the Games will be to have kept expenditure to a level comfortably below the £9.325 billion ceiling.

Funding the Games

30. The initial Public Sector Funding Package for the Games, drawn up in 2003, was intended to generate £2.375 billion to cover the ODA's costs. It envisaged a contribution of £1.5 billion from the National Lottery, £0.25 billion from the London Development Agency, and £0.625 billion from the Council Tax precept on London residents. Half of the sum to be raised from the National Lottery (£750 million) was to accrue from sales of Olympic-themed Lottery tickets; a further £340 million was to be contributed by sports bodies which were already distributors of Lottery funds; and the remaining £410 million was to be obtained, if necessary, by diverting Lottery income from the National Lottery Distribution Fund. The Public Sector Funding Package was complemented by £1.044 billion of Exchequer funding, for "infrastructure projects to link the Olympic Park to the rest of the Lower Lea Valley".[48]

31. Under the initial Memorandum of Understanding published in June 2003, any shortfall of funding in relation to expenditure would be met through "a sharing agreement to be agreed as appropriate with the Mayor of London and through seeking additional National Lottery funding in amounts to be agreed at the time". That provision has been invoked, following the revision of the Games budget announced in March 2007 and the increase in costs to the public of £5.9 billion, for which no provision had been made. A mechanism for sharing the burden of these costs was drawn up and was set out in a Revised Memorandum of Understanding, published in June 2007. The impact on contributors is set out in the table below:

Table 3: Effect of the 2007 Revised Memorandum of Understanding on contributions to the budget for the 2012 London Games
 Contribution under 2003 Memorandum of Understanding  Contribution under 2007 Revised Memorandum of Understanding  Increase  
Olympic Lottery tickets  £750 million  £750 million None  
Sports Lottery distributors  £340 million  £340 million None  
National Lottery (all distributors except for UK Sport)  £410 million (if necessary)  £1,085 million  £675 million 
Mayor of London  £625 million  £925 million £300 million  
London Development Agency  £250 million  £250 million None  
Government  £1.044 billion ("linking costs")  £5.975 billion  £4.931 billion 

Source: HC Debates, 27 June 2007, Written Ministerial Statement, col. 29WS

THE CONTRIBUTION FROM THE EXCHEQUER

32. The Exchequer, which had made no contribution to the Public Sector Funding Package and which (at the time that the bid to host the Games was submitted) was to provide funding only towards associated gains through wider regeneration, is now the major contributor, providing £5.975 billion towards the ODA's costs, security costs and local regeneration linked to the Games. The Government departments providing the funding are the Department for Culture, Media and Sport, the Department for Communities and Local Government and the Department for Transport.[49] £405 million was allocated during the 2005-08 Spending Review period; £3.623 billion has been allocated under the 2007 Comprehensive Spending Review for the years from 2008-09 to 2010-11; and the remaining £1.947 billion will come from the next Comprehensive Spending Review period.[50]

33. The effect of the increase in the contribution from the Exchequer is to bring about a fundamental change in the balance of funding, from a formula which placed proportionally large demands upon London Council Tax payers and buyers of Lottery tickets, to one which derives the bulk of funding from taxpayers throughout the country. The expectation that the whole country should share in the benefits of the Games is therefore heightened.

THE CONTRIBUTION FROM THE MAYOR OF LONDON

34. Under the revised Memorandum of Understanding, the Mayor of London will contribute a further £300 million. The Mayor had, however, publicly stated that he would not seek to impose any further burden on London council tax payers and that no further call on funds would be financed from receipts from transport fares in London.[51] We therefore asked a representative of the Mayor, Mr Neale Coleman, how it was intended that the extra £300 million would be raised. He indicated that it would be financed by the LDA in the short term through borrowing, the costs of which would be met over the long term from Government grant to the LDA and from capital receipts from land and property sales after the Games. Mr Coleman made it clear that the LDA would not be expecting additional grant aid to make up the shortfall: instead there would be consequences for LDA programmes, some of which would "not be able to be carried out" because the first call would be to meet the requirement for an extra £300 million for the Games.[52]

35. Given the very substantial contribution to the Games now being made through Exchequer funding, borne nationally, we believe that it is reasonable to require the Mayor of London to contribute a further £300 million in funding. We make no comment on the decision that the London Development Agency should meet the further requirement placed upon the Mayor; but we recommend that Government grant to the LDA should not be increased by £300 million simply to cover the outlay. Nor should the LDA have a priority call upon capital receipts from land and property sales after the Games to finance the £300 million.

THE CONTRIBUTION FROM THE LOTTERY

36. Of the £1.5 billion contribution from Lottery sources set out in the original Public Sector Funding Package, £750 million is to be raised from Olympic-themed Lottery games, with proceeds routed directly to the newly-created Olympic Lottery Distribution Fund for distribution by the Olympic Lottery Distributor. Camelot told us in November 2007 that sales of "dedicated" Olympic Lottery tickets had been strong and had exceeded targets in 2006-07 by over 10%. It warned, however, that targets for future years could become more challenging.[53]

37. Under the original Public Sector Funding Package, a further £340 million is to be contributed by sports Lottery distributors; and the remaining £410 million was to be diverted from the National Lottery Distribution Fund if required. The then Secretary of State confirmed in June 2006 that the £410 million would indeed be called upon.[54]

38. Following the review of costs initiated after the bid had been won, the then Secretary of State announced in March 2007 that the Lottery would contribute a further £675 million towards the new budget of £9.325 billion. The two Houses of Parliament agreed in January 2008 to secondary legislation under the Horserace Betting and Olympic Lottery Act 2004, enabling transfer of both the initial £410 million and the subsequent £675 million from the National Lottery Distribution Fund (NLDF) to the Olympic Lottery Distribution Fund (OLDF).[55] Under the transfer formula, each Lottery distributor, except UK Sport, will experience a proportionate reduction in income from the NLDF, as set out below:

Table 4: Impact upon Lottery distributors of transfer of funds to the Olympic Lottery Distribution Fund
Distributor  Contribution to £410 million included in original bid

£million  

Contribution to £675 million proposed in 2007

£million  

Total contribution

£million  

Annual contribution 2009-10 to 2011-12

£million  

Share of Lottery income 2006-07, for comparison

£million  

Arts Council England  49.6 62.9  112.5 30.3  143 
UK Film Council  9.6 12.2  21.8 5.9  24.5 
Arts Council of Northern Ireland  2.0 2.5  4.5 1.2  5.6 
Scottish Arts Council  5.5 7.0  12.5 3.4  15.5 
Scottish Screen  0.9 1.0  1.9 0.5  2.3 
Arts Council of Wales  3.5 4.5  8.0 2.2  10 
Big Lottery Fund  213.1 425.0  638.1 171.7  603 
Heritage Lottery Fund  71.0 90.2  161.2 43.4  201 
Sport England  44.0 56.0  100.0 26.9  117.2 
Sport Council of Northern Ireland  1.9 2.3  4.2 1.1  5.2 
Sport Scotland  5.7 7.3  13.0 3.5  16.3 
UK Sport  — —  — —  — 
Sports Council of Wales  3.2 4.1  7.3 1.9  
Total  410.0 675.0  1,085.0 292.0   

Source: National Lottery Distribution Fund Accounts for 2006-07, HC 158, Session 2007-08

Figures exclude investment income and are net of deductions to cover costs of operating the National Lottery Distribution Fund and the National Lottery Commission; figures for the Big Lottery Fund include figures for the Community Fund and the New Opportunities Fund. Annual contributions are to be made over five years, from 2008-09 to 2012-13; contributions in 2008-09 and in 2012-13 will be at a lower rate. Source: National Lottery Distribution Fund Account 2006-07, HC 158, Session 2007-08, pages 25 and 26

The reason given for insulating UK Sport from the transfer is that "to seek a contribution from UK Sport would adversely affect their important task of preparing elite British athletes both for the Beijing Olympics in 2008 and London 2012".[56]

39. The total contribution from the Lottery to the 2012 Games, comprising revenues from sales of Olympic-themed Lottery tickets, contributions from sports Lottery distributors and transfers from the National Lottery Distribution Fund, is £2.175 billion. The Department for Culture, Media and Sport estimated, on the basis of projections current in January 2008, that the total contribution to the Games would represent less than 20% of expected Lottery income between 2005-06 and 2012-13.[57]

40. We noted in our previous Report the reservations held by various bodies within the voluntary, arts and heritage sectors about the impact of the diversion of funds from non-Olympic Lottery distributors to fund the Games, even if they acknowledge that the cause is a worthwhile one.[58] These reservations were aired in an Adjournment Debate in Westminster Hall on 6 June 2007[59] and again in the debates on the Order to transfer funds from the National Lottery Distribution Fund held on 15 January and 30 January 2008.[60] We also noted the reservations of non-Olympic sports inside London and of sports generally outside the capital, too, regarding the impact of less Lottery funding for facilities because of the costs of the Games. In oral evidence to the Committee, the Minister for the Olympics described "talk about arts projects suffering because of the Olympics" as "simply not borne out by the facts" and "rather overblown";[61] and, when announcing the revised budget for the Games in March 2007, she told the House that no existing voluntary sector Lottery-funded project need lose funding.[62]

41. Although little evidence was submitted to this inquiry suggesting that the Games had already had a significant impact on the amounts of funding passing to Lottery distributors, we are aware from ample anecdotal evidence that reservations remain about the impact of the transfer of funds to the 2012 Games upon Lottery-funded projects. We are also aware that the impact of the Games upon Lottery revenues available to good causes has, in some cases, discouraged potential bidders. A submission from The Alliance, an association representing local authorities in traditional industrial areas, claimed that Sport England had withdrawn funding from the National Watersports Centre in Nottingham "in favour of a new Olympic facility … in London".[63] The Chief Executive of Sport England told us, however, that she was not aware of any examples of programmes or bodies which had received less funding from Sport England because of a reduction in the amount of Lottery money available, although she acknowledged that the "significant diversion in funding due to the Olympics" had yet to affect Sport England's funding decisions.[64]

42. There is evidence that Lottery distributors are drawing down less from the National Lottery Distribution Fund. A total of £1.612 billion was drawn down in 2006-07, as opposed to £1.844 billion in 2005-06.[65] Sport England, in particular, drew down £121.4 million in 2006-07, compared to £202.1 million in 2005-06.[66] A reduction in the overall amount available to the National Lottery Distribution Fund was part of the reason; but there were others, including a transfer of certain responsibilities to UK Sport (reducing Sport England's funding requirements) and delays between committing funds and actually drawing them down.[67]

43. For a variety of reasons, amounts available to non-Olympic Lottery distributors are decreasing and can be expected to continue to decrease for the next few years. One factor is the volume of ticket sales. Overall sales of Lottery tickets fell slightly in 2006-07 to £4.91 billion, down from £5.01 billion in 2005-06.[68] UK Sport told us that it was suffering from a shortfall of about £3 million in late 2007, caused by a dip in Lottery income which it noted "does tend to happen towards the end" of a contract. UK Sport is optimistic that the announcement in August 2007 that Camelot will continue to operate the Lottery from 2009 will allow ticket sales to recover.[69]

44. Another reason for the reduction in amounts available to some Lottery distributors is the decline in income from interest on balances held on their behalf in the National Lottery Distribution Fund. A distributor's income from investment returns on its balance is now allocated amongst all distributors according to their percentage share of Lottery income, rather than accruing solely to the distributor holding the balance. The Heritage Lottery Fund has estimated that this change "will probably halve" its investment income.[70]

45. The Government has not denied that the introduction of Olympic-themed Lottery tickets, which generate revenues for the Olympic Lottery Distribution Fund, would have an impact on revenues to the good causes. We are not aware of any more recent estimate of the displacement impact since the figure of 5% was cited to us in November 2006 as the reduction in income for good causes attributable to diversion of sales.[71] Estimates have also been made of the proportion of Olympic Lottery ticket sales which substitute for (or "cannibalise") non-Olympic Lottery sales. An initial forecast by Camelot, cited in the Regulatory Impact Assessment for the Horserace Betting and Olympic Lottery Bill published in December 2003, suggested that the "cannibalisation" rate might be 59%. We note a more recent estimate by Camelot, in 2005, suggesting that "cannibalisation" would account for some £575 million of the £750 million sought: a rate of 77%.[72] This would suggest that only 23% of sales of Olympic Lottery tickets are "extra" sales with no diversionary effect.

46. The Government has taken some steps to cushion the impact of the fall in sums available to non-Olympic Lottery distributors. When the secondary legislation to transfer funds from the National Lottery Distribution Fund to the Olympic Lottery Distribution Fund was debated in this House on 15 January 2008, the then Secretary of State identified three distributors which would receive an increase in Grant-in-Aid over the next three years, to compensate for declining Lottery revenues: Arts Council England would receive an increase of 3.3%. above inflation over three years, Sport England would receive an increase of 2.1% above inflation, and English Heritage would receive an increase of £7 million in cash terms by 2010-11.[73]

47. The then Secretary of State also announced that the Treasury would examine the merits of a Gross Profits Tax Regime, under which taxation of revenue from Lottery ticket sales would be calculated on revenues net of prize money payments. According to the 2008 Budget Report, the Government will announce in the Pre-Budget Report later this year its plans on whether or not to move to a Gross Profits Tax regime.[74] Camelot, which recently commissioned a review of Lottery taxation from PricewaterhouseCoopers (PwC), has long advocated a move to such a tax structure for lottery ticket revenues. The PwC analysis concluded that a move to a gross profits tax regime would achieve an apparently miraculous feat of increasing returns both to the Exchequer and to the Lottery distributors.[75] In our Report in 2007 on the Games, we recommended that the Treasury should explore options for amending the tax regime applicable to the Lottery, whether on a temporary or on a permanent basis.[76] We therefore strongly welcome the Government's decision to examine the merits of a gross profits tax regime for Lottery revenues. The Treasury should abide by its commitment to announce conclusions in the Pre-Budget Report later this year and, if they are positive, should seek to introduce the necessary changes as soon as possible.

48. There remains the possibility that sales of Lottery tickets could decline and that the amounts passing to the Olympic Lottery Distribution Fund could decrease, threatening the ODA's cashflow. As we noted above, sales of tickets fell back from a peak in 2005-06; but Camelot remains confident that it can deliver its Olympic funding plan targets.[77] We note the opinion of the National Lottery Commission that returns to good causes are likely to increase by between £600 million and £1 billion over the 10-year period of the licence, based on constant levels of sales at £5 billion per annum.[78]

RECEIPTS FROM LAND SALES

49. The revised Memorandum of Understanding published in June 2007 includes provision for non-Olympic Lottery distributors to be compensated for funding transferred to the Games through a sharing of receipts from sales after the Games of land and property principally, but not exclusively, on the Olympic Park site. It set out a formula which would, if anticipated receipts from land sales were forthcoming, repay the National Lottery Distribution Fund the £675 million to be diverted to meet the increased call resulting from the increase in budget to £9.3 billion. It would not, however, repay the £410 million which was earmarked under the original Memorandum of Understanding. Nor would it repay the £340 million being contributed by sports Lottery distributors.

50. The London Development Agency (LDA) owns land within the Olympic Park and land acquired outside the Park for the purpose of relocating businesses from the Olympic Park site; and it will have the power to dispose of both. The LDA will have an initial claim upon funds raised, so as to recover costs incurred in acquiring land and in paying compensation. The Memorandum of Understanding states that these costs are not expected to exceed £650 million. In fact, the LDA's budget for land acquisition and disturbance compensation presently stands at £659.46 million.[79]

51. Beyond the initial payment to the LDA, proceeds will be split between the LDA, to repay costs associated with the remediation and disposal of land and buildings in the Olympic Park, and DCMS, which will act as a channel for reimbursement of the National Lottery Distribution Fund (NLDF). An initial tranche of £631 million will be allocated pro rata according to a formula which would lead to reimbursement of three-quarters of the funds due to the NLDF and one quarter of the remaining funds due to the LDA. A further £544 million will then be allocated according to a formula which would, if receipts from land sales allow, lead to reimbursement of the remaining quarter of the funds due to the NLDF and the remaining three-quarters of the funds due to the LDA. The treatment of any further surplus arising from land sales "will be determined separately at the time by agreement between the Government and the Mayor". The Revised Memorandum of Understanding does not provide for repayment to the LDA of its grant of £250 million to the ODA, included within the original Public Sector Funding Package.[80] It is important to observe that the Memorandum of Understanding does not provide for uprating of these amounts for general inflation. This is a significant omission, to which we return below.

52. We explored whether the role of LDA as both broker and beneficiary under the formula for sharing receipts from land sales is one which is in the interests of all parties, including Lottery distributors. Mr Coleman, speaking on behalf of the Mayor of London, told us that the profit share formula to be observed once an initial £650 million had been repaid to the LDA[81] would offer the LDA an incentive, as the LDA would only recover the bulk of its own costs incurred in the remediation and disposal of land and buildings in the Olympic Park once the Lottery had been reimbursed for most of the sums which it was due under the revised Memorandum of Understanding. He added that, if the Government were to reach the view that the LDA's approach to the land and property disposals was "inappropriate" and was to the disadvantage of the Lottery, it would find ways of "dealing with the situation", not least through future levels of Government grant to the LDA.[82]

53. There is no certainty that the amounts cited in the revised Memorandum of Understanding as being available for redistribution as a result of land sales will actually be forthcoming. There will be some flexibility to maximise returns: the Minister for the Olympics pointed out that the LDA would be able to sell land "in the most favourable circumstances", delaying sales if necessary until the market would permit the best possible return.[83] Mr Coleman confirmed to us a statement made by the Mayor of London in April 2007, that the period over which receipts from land sales were forecast would extend until 2030.[84] Clearly, if the Memorandum of Understanding does not provide for uprating of the figures involved in line with general price inflation, there will be a significant difference in the real value of a re-imbursement to the Lottery made, say, in 2013 immediately after the Games and one made in 2030. If the Memorandum of Understanding does not provide for uprating, whether accidentally or not, it should be revised to do so to preserve the real value of the commitment to reimburse the National Lottery Distribution Fund.

54. There was controversy, at the time of the oral evidence given by the Mayor's Office, about an apparent discrepancy between figures for receipts from land sales implied in the Revised Memorandum of Understanding (which imply that £1.8 billion or more may be raised) and a forecast of £800 million cited by the Mayor of London in a press conference in April 2007. Mr Coleman stressed that the figure £800 million figure quoted by the Mayor in 2007 was based upon "extremely prudent assumptions in terms of the density and quantum of development" on the Olympic Park site after the Games[85] as well as a cautious estimate of increases in land values—6%—equivalent to the lowest annual increase in any of the last ten years in the area. He said that estimates for returns on land sales ranged between £800 million figure and £3 billion, with the higher figure being calculated on the assumption that increases in land values would match the 19% annual average experienced over the past 20 years.[86] The Minister for the Olympics pointed out that the £1.8 billion figure implied in the Revised Memorandum of Understanding was based upon the midpoint of the range of expected rates of increase in land values.[87]

55. Some of these assumptions have been challenged by certain estate agents. Savills, for instance, was quoted in the Times on 15 January as saying that the idea that a 16% increase per annum might be achieved was "complete madness". Similar doubts were expressed by Spicerhaart.[88] The Mayor of London's Office nonetheless maintained that "it was by no means implausible" to suggest that receipts might reach and indeed exceed £1.8 billion.[89] Mr Coleman believed that it was "obvious there is a very strong likelihood that a figure way in excess of £800 million will be achieved", and he expressed confidence that the Lottery would be repaid in full.[90] The Minister for the Olympics shared his optimism.[91]

56. The revised Memorandum of Understanding is drafted in terms which suggest that there is no doubt that funds will be available to enable repayment: "the proceeds of Land and Property disposals shall be split[…]"; and, once the initial payment has been made to the LDA and the initial tranche has been split between the LDA and DCMS, a further "£169 million will be paid to DCMS" for redistribution to Lottery funders.[92]

57. We note the confidence shown by the Mayor of London's Office and by the Minister for the Olympics and London that £1.8 billion or more would be raised from the sale of land and property after the 2012 Games. However, the assessments underlying the forecasts of possible income were made at a time when the prospects for the property market looked very different. Despite the prolonged timeframe over which it is proposed that the value of land and property might be realised, and the freedom which it allows to maximise potential sales revenue, we have reasonable doubts about whether the confidence shown by the Mayor of London's Office and by the Minister for the Olympics is justified. We also believe that it would have been wiser to word the Revised Memorandum of Understanding in such a way as to recognise that there is a range of estimates of revenues from sales, rather than implying that the £1.8 billion—a sum which should be updated in line with inflation—will necessarily be raised in full.

58. We agree with the principle of reimbursing non-Olympic Lottery distributors for income which is to be lost to the Games. We have proposed earlier in this Report that non-Olympic Lottery distributors might be the primary beneficiaries of unspent contingency lying within Government departmental budgets. We also support the mechanism envisaged in the Revised Memorandum of Understanding for reimbursing non-Olympic Lottery distributors from the proceeds of land sales after the Games. We endorse the decision to structure repayments to the LDA and to DCMS (acting on behalf of Lottery distributors) in a way which provides some incentive for the LDA to repay in full the £675 million, in real terms uprated for inflation, diverted from Lottery distributors as a contribution to the revised budget for the Games announced in March 2007.

59. We note that, once payments to the LDA and to DCMS on behalf of Lottery funders under the formula set out in the revised Memorandum of Understanding have been completed, the use of any surplus will be determined at the time by agreement between the Government and the Mayor. We suggested to the Minister for the Olympics that the Lottery distributors should benefit from any surplus. She replied that "were it the case that land sales exceeded the figure that we expect, then of course it would be fair that a proportion of that were returned to the Lottery for national benefit".[93] We strongly believe that, if funds are available, the National Lottery Distribution Fund should be reimbursed for the £410 million contributed under the original Public Sector Funding Package. This should be seen as a restitution of funds to the Lottery distributors rather than share-out of a bounty. There is also a case for further payments to be made for the benefit of Lottery distributors, given that the attraction of Olympic-themed Lottery tickets has dented sales of tickets which would otherwise have benefited non-Olympic Lottery distributors.

LOCOG revenue

60. According to the Candidature File, 30% of LOCOG's total revenue requirement is to be raised through "local" sponsorship (as opposed to the worldwide sponsorship deals struck by the International Olympic Committee) and agreements with official suppliers.[94] LOCOG's total revenue requirement, in outturn prices, is expected to be £2 billion; the amount to be raised by LOCOG in sponsorship is now planned to be £650 million.[95] We noted in our previous report, in January 2007, that LOCOG and the Government were both confident that the target would be reached.[96]

61. LOCOG continues to make good progress in raising the sums required. Five "Tier One" sponsors - for which the contribution threshold is £40 million[97] - have been signed:

  • Lloyds TSB: banking and insurance partner;
  • EDF Energy —utilities partner and sustainability partner;
  • Adidas—sportswear partner;
  • British Airways—airline partner;
  • BT—telecoms partner.

One "Tier Two" sponsor—Deloitte—has also been signed. Deloitte will provide professional advisory services to LOCOG, including tax, human capital, management consulting, and financial support through secondments and advisory work.[98]

62. LOCOG's commercial team is currently in advanced stages of negotiation with potential Tier 1 sponsor partners in three other categories: clothing and homeware, automotive, and oil and gas. It stated that it was "on track to complete the majority of our Tier 1 partnerships in advance of Beijing".[99] No previous Organising Committee has made comparable progress: in fact, so far as LOCOG is aware, no previous Olympic Games organiser has ever had one contract signed before the preceding Games had taken place.[100] Business in Sport and Leisure, an umbrella body for the private sector sports and leisure industry, told us that it was "delighted" by LOCOG's success so far in securing sponsorship.[101] One of the consequences of the speedy progress is that sponsors of the London Games will have more time to get the most out of their investment than did sponsors of previous Games. Also, LOCOG's commercial team will be more able than its predecessors were to devote time after the preceding Games to securing partnership finance and deals on value in kind from Tier 2 and Tier 3 companies.[102]

63. We commend LOCOG for its success so far in securing sponsorship. As the Chief Executive said in evidence, raising the last £200 million is likely to be more difficult than raising the first £200 million;[103] but LOCOG has time on its side. We note that comparisons with amounts raised by the Beijing Organising Committee for the 2008 Games (which equate to approximately £750 million) are not meaningful, given the difference in the sizes of the two economies and the fact that most of the sponsoring companies for Beijing are state-owned and do not go through the same process of "persuasion" as do potential sponsors of the London Games.[104]


3   See paragraph 60 Back

4   See Memorandum of Understanding published as Annex A to the Government response to the Third Report of Session 2002-03 from the Culture, Media and Sport Committee, Cm 5867; see also written submission to the Committee's previous inquiry into the Games, published as HC 69-II of Session 2006-07, Ev 56 Back

5   The budget for the London 2012 Olympic and Paralympic Games, National Audit Office, HC 612, Session 2006-07, para 30 Back

6   Annual Report on the London 2012 Olympic and Paralympic Games, published by DCMS on 22 January 2008, page 19 Back

7   The budget for the London 2012 Olympic and Paralympic Games, National Audit Office, HC 612, Session 2006-07 Back

8   HC 85, Session 2007-08 Back

9   HC Deb, 10 December 2007, col. 10WS Back

10   Page 10: available from http://www.london2012.com/news/publications/index.php Back

11   Ev 147 Back

12   Q 464 Back

13   The Treasury Green Book provides guidance for Government bodies on economic appraisal of projects; see www.hm-treasury.gov.uk/greenbook. Back

14   Interview on BBC Radio 4 Today programme, 22 November 2006 Back

15   £500 million of this sum has already been allocated. Back

16  http://www.vancouver2010.com/en/OrganizingCommittee/AboutOrganizingCommittee/BusinessPlanGamesBudget/VenueDevelopmentBudget. Base cost figure may include individual project contingency figures, increasing the overall proportion of contingency within total expenditure. Back

17   The vehicle for paying the bulk of the Lottery contribution to the ODA. The Olympic Lottery Distributor announced on 29 February 2008 that it had authorised payment of such a grant, worth £1.431 billion. Back

18   HC Deb 12 November 2007, col. 67W Back

19   Ev 162 Back

20   Q 134 Back

21   Q 459 Back

22   Q 121 Back

23   Ev 63 Back

24   See paragraph 25 Back

25   Q 267 Back

26   Q 130 Back

27   Q 459 Back

28   Evidence taken before the Committee of Public Accounts on 14 November 2007, Q 133, to be published as HC 85, Session 2007-08 Back

29   Q 165 Back

30   Q 472 Back

31   Government response to the Second Report of Session 2006-07 from the Culture, Media and Sport Committee, London 2012 Olympic Games and Paralympic Games: funding and legacy, Cm 7071, page 7  Back

32   HC Deb 12 November 2007, col. 67W. The membership of the Ministerial Funders' Group is as follows: Chancellor of the Exchequer (Chair), Minister for the Olympics and London, Secretaries of State for Culture, Media and Sport, for Communities and Local Government, and for Transport, the Mayor of London, the ODA, the Chief Secretary to the Treasury and the Paymaster-General. See ODA Programme Delivery Baseline Report, January 2008, page 4 Back

33   Q 127 Back

34   Q 461. For purpose of Ministerial Funders Group see London 2012 Olympic and Paralympic Games Annual Report, published by DCMS in January 2008, page 32 Back

35   HC Deb, 10 December 2007, col. 19 Back

36   Ev 146 Back

37   HC Deb 10 December 2007, col. 9WS Back

38   ODA Programme Delivery Baseline Report, page 9 Back

39   Estimate cited in the memorandum from the Institution of Civil Engineers, Ev 160 Back

40   Calculated at an exchange rate of £1 = $1.6 Back

41   HC Deb 10 December 2007, col. 10WS Back

42   Q 199 Back

43   Daily Telegraph 13 December 2007 Back

44   Q 202 and 205 Back

45   HC Deb, 12 November 2007, col. 67W Back

46   ODA Press Release 8 April 2008 Back

47   The budget for the London 2012 Olympic and Paralympic Games, National Audit Office, HC 612 (Session 2006-07), paragraph 9 Back

48   Evidence given on 21 November 2006 by the former Secretary of State for Culture, Media and Sport, Q 175, HC 69-II, Session 2006-07 Back

49   London 2012 Olympic Games and Paralympic Games Annual Report, published by DCMS, page 20 Back

50   Ev 121 Back

51   Ev 76 Back

52   Q 262-4 Back

53   Ev 153 Back

54   DCMS Press Release 087/06, 21 June 2006 Back

55   The Draft Payments into the Olympic Lottery Distribution Fund etc. Order 2007, debated in the Commons 15 January 2008; Lords 30 January 2008 Back

56   Explanatory memorandum to the Draft Payments into the Olympic Lottery Distribution Fund etc. Order 2007, available at http://www.opsi.gov.uk/si/dsis2007 Back

57   HC Debates, 14 January 2008, col. 821W Back

58   London 2012 Olympic Games and Paralympic Games: funding and legacy, Second Report of Session 2006-07, HC 69-I, paragraph 80 Back

59   HC Deb 6 June 2007, col. 100WH Back

60   HC Deb 15 January 2008 col.809; HL Deb 30 January 2008, col. 640 Back

61   Q 443 Back

62   HC Deb, 15 March 2007, col.452 Back

63   Ev 157 Back

64   Q 353 Back

65   National Lottery Distribution Fund Account 2006-07, HC 158, Session 2007-08, page 5 Back

66   England Sports Council Annual Report and Accounts 2006-07, HC 818 (Session 2006-07), page 88. Sport England ascribed only £20 milllion of the decrease to a decline in amounts available to the National Lottery Distribution Fund: see Q 349 Back

67   Q 349 Back

68   Ev 154 Back

69   QQ 74 and 75 Back

70   Heritage Lottery Fund Lottery Distribution Account for the year ended 31 March 2007, HC 709, Session 2006-07, page 6 Back

71   Q 187, oral evidence given on 21 November 2006, HC 69-II, Session 2006-07 Back

72   The budget for the London 2012 Olympic Games and Paralympic Games, National Audit Office, HC 612, Session 2006-07, para 72 Back

73   HC Deb 15 January 2008, col. 812-3 Back

74   Financial Statement and Budget Report 2008, HC 388, Session 2007-08, paragraph 4.45 Back

75   Ev 155 Back

76   HC 69-I, Session 2006-07, paragraph 90 Back

77   Ev 156 Back

78   HC Deb, 15 January 2008, col. 814 Back

79   Ev 89 Back

80   See Written Ministerial Statement, 27 June 2007, col. 29WS Back

81   In order to cover costs of land acquisition and "disturbance compensation payments": see Revised Memorandum of Understanding, paragraph 10 Back

82   Q 298 Back

83   Q 447 Back

84   Q 291 Back

85   Namely 50% affordable housing (70% of which would be social rented housing), and no payment of social housing grant. Back

86   Q 291 Back

87   Q 432 Back

88   Times 15 January 2008 Back

89   Q 292 Back

90   Q 291 and Q 300 Back

91   Q 440-1 Back

92   Revised Memorandum of Understanding, 27 June 2007 Back

93   Q 443 Back

94   Candidature File Table 6.6.1. Figures in the Candidature File were at 2004 prices. Back

95   Q 92 Back

96   London 2012 Olympic Games and Paralympic Games: funding and legacy, Second Report of Session 2006-07, HC 69, paragraphs 35 and 36 Back

97   Q 94. The threshold entry price for Tier Two sponsors is £20 million; for Tier Three sponsors, most of whom will be suppliers of goods and services in kind, the expected contribution will be in the £10 million to £20 million bracket: see Mr Deighton Q 96. Back

98   London 2012 Press Release 4 December 2007 Back

99   Ev 41 Back

100   Q 109 Back

101   Ev 149 Back

102   Ev 42 and Q 109 Back

103   Q 109 Back

104   Mr Deighton Q 97 Back


 

 
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