Examination of Witnesses (Questions 120
- 139)
TUESDAY 4 DECEMBER 2007
LORD COE,
MR PAUL
DEIGHTON, MR
JOHN ARMITT
AND MR
DAVID HIGGINS
Q120 Mr Hall:
What is the purpose of the contingency?
Mr Higgins: To manage risk.
Q121 Mr Hall:
Is that its sole purpose or is it just to cover up a very poor
estimate in the beginning?
Mr Higgins: No, contingencies
are set up by Treasury as best practice. They vary in range from
30% to 60% on all sustained projects that the Government puts
up for approval. You spend contingency to manage risk. Our biggest
risk by far is time on this project.
Q122 Mr Hall:
There has been quite a lot said about the contingency. The former
Secretary of State said it is around 2.8 billion. That is the
programme contingency: 2.47 billion. As part of that there is
a 500 million ODA contingency. What is the difference?
Mr Higgins: The 500 is part of
the 2.7.
Q123 Mr Hall:
If it is part of the original, why does it need to be allocated
separately?
Mr Higgins: Of the 2.7 the Secretary
of State in March of this year said that 500 would be allocated
to the ODA as part of her statement in March setting out the budget
for the ODA. So, the ODA's overall budget of just over six billion
includes that 500 million figure.
Q124 Mr Hall:
How much of the contingency have you drawn down so far?
Mr Higgins: Five hundred of the
2.7 has been allocated to the ODA, not spent and not committed.
Q125 Mr Hall:
So you have not spent a penny of it yet.
Mr Higgins: No, we have not spent
the contingency. That is right.
Q126 Mr Hall:
Of the overall figure, the 2.474 billion, how much access to that
have you got?
Mr Higgins: The 500 is what we
have access to.
Q127 Mr Hall:
Who authorises the spending of the rest of it then?
Mr Higgins: That is set up by
a committee which is chaired by the Chancellor.
Q128 Mr Hall:
We might look back on this hearing some time in the future. How
much of this 2.474 billion are we actually going to spend?
Mr Higgins: Sorry, the 2.7.
Q129 Mr Hall:
Sorry, the 2.747?
Mr Higgins: Half a billion probably.
Q130 Mr Hall:
By the time we get to 2012 how much of that contingency would
be spent?
Mr Higgins: We said all along,
we expect a substantial part of the contingency to be spent. A
project of this complexity, this many projects with a fixed deadline,
that is a reasonable figure to say. Clearly we want to minimise
the expenditure of the contingency.
Q131 Mr Hall:
Are you confident we will not be asked to provide anything over
and above the set level of this contingency?
Mr Higgins: We are planning to
work within the overall budget.
Q132 Mr Hall:
But are you confident?
Mr Higgins: As confident as we
can be. The biggest thing we can do is to hit milestones, which
we have hit today. If you look two years ago you would think the
biggest risks of the project would have been land consolidation,
burying the power lines, vacant possession, planning, and those
risks are much lower now but other risks emerge now that relate
to delivery.
Q133 Mr Hall:
One final question, Chairman. If the contingency is as you describe
it, why did you need a specific £500 million contingency
out of the overall contingency?
Mr Higgins: To address the early
cost pressures that were identified as contracts were being let
in the early stages.
Q134 Mr Hall:
You could have drawn that down from the original sum. If it is
there to meet contingencies, surely you should have been able
to draw that down if you needed it regardless?
Mr Higgins: No, the way that the
approvals work within government, if you let contracts such as
enabling works, or power lines, or roads and bridges, you need
to have a contingency set within that individual project, so you
cannot let a project without having an adequate contingency base
within the project. So it applied to the funders committee to
allocate a contingency to be put within those individual sections;
so early works, utilities, enabling works, bridges all have contingency
built within the individual projects now.
Q135 Paul Farrelly:
Just to clarify one point. We have got the programme contingency,
which might be called the kitchen sink contingency, and that lies
above individual project contingency, which is already built into
your budget?
Mr Higgins: Correct.
Q136 Paul Farrelly:
So what is the underlying level of contingency that you have got
in your budget before the programme contingency?
Mr Higgins: It clearly includes
the 500 allocated. The Secretary of State will be releasing within
the next few weeks greater details on our budgets, which will
clarify the break down of end use and various transport and operating
costs.
Q137 Paul Farrelly:
As you are working on this, can you tell us, underneath the programme
contingency what the total amount is that you have already in
your budget for contingency by individual projects?
Mr Higgins: It varies on each
project.
Q138 Paul Farrelly:
The total amount.
Mr Higgins: We have not—
Q139 Paul Farrelly:
Excluding the 2.7, including the 500 million.
Mr Higgins: What, today?
| 
