Examination of Witnesses (Questions 160
- 179)
TUESDAY 4 DECEMBER 2007
LORD COE,
MR PAUL
DEIGHTON, MR
JOHN ARMITT
AND MR
DAVID HIGGINS
Q160 Chairman:
You said that you thought a significant proportion of the contingency
would be spent. The Permanent Secretary, as you will have seen,
suggested that actually the chances were that all of the contingency
will be spent. Do you think he was being unduly pessimistic?
Mr Higgins: I suppose for a project
of this size, scale and complexity with all the risks attached
to it that would be hopefully a conservative statement.
Q161 Chairman:
When that figure was set most people believed that it was set
at such a high level that whatever cost escalation took place,
nevertheless you would come in under budget. It now appears that
despite having set that figure at such a high level, you are going
to spend it all, if not exceed it.
Mr Higgins: No, that is not the
case. We have always said we think it is a realistic and prudent
budget and a prudent contingency. The biggest thing we can do
is to continue to deliver to milestone—
Q162 Chairman:
But if it is all going to be spent it is not that prudent a contingency?
Mr Higgins: We think it is a prudent
contingency.
Q163 Chairman:
Although the likelihood is that it is all going to be spent?
Mr Higgins: No, I have never said
that.
Q164 Chairman:
The Permanent Secretary has.
Mr Higgins: I think it is a conservative
statement. What we are saying is that it is a prudent contingency
at this stage in the project. Most importantly, we need to work
to a budget. We have been very clear in what I said at the same
committee that in the end we do not intend to go back to the funders
committee for further allocation of contingency for the next six
months; that is for certain.
Q165 Paul Farrelly:
When we were in Vancouver I think the general reaction from the
people organising the winter games there was that they would die
for a level of contingency that is now incorporated into our Olympics
budget. Mr Higgins, you said you are familiar with using levels
of contingency between 30 and 60% on a prudent basis in projects.
Could you write to the Committee afterwards, and perhaps Mr Armitt
you can give us your experience as well, and detail to us the
projects that you personally have been involved in that have had
a level of contingency above 50 and at 60%,[1]
because I think we would find that quite useful as a comparison?
Mr Higgins: Yes.
Mr Armitt: Can I just pick that
point up. At Network Rail we were spending on the infrastructure
and the renewals on the railway over two billion a year. Those
were broken down into a very large number of individual projects.
It would be quite normal for us at the early stage of development
and design of any of those projects to have a 60% contingency.
As the project develops and as you get more certainty about the
scope of works, the detail of design, so it goes down, and by
the time you let a contract to contractors you may well have reduced
the contingency to 25%. Your contingency is one which is based
on experience, it is based on what is a sensible amount to allow,
and all you are doing is saying: "We have very limited information
at the moment and we now have to price what that limited information
can tell us, but experience over many, many projects, over many
industries, indeed, would tell you that you should then add a
contingency which experience has shown is a sensible one to add.
Indeed, when Treasury was arguing that a larger contingency was
necessary, all Treasury was doing was looking at its experience
of many projects over different government departments over many
years and saying that that would be a sensible figure to allow.
I think, as David has already said, the 9.3 billion, or the 6.1
plus contingency of about two which we are dealing with, we believe,
is sensible in the circumstances. We have every confidence that
it is realistic and we treat it as the absolute maximum that we
have available to us to deliver the games, and the decisions we
make all the time are driven by how do we operate and deliver
this within the total sum of money, and I have no intention of
going over it. To say to me, "Do I guarantee that absolutely
it is not going to happen?", no, I could not do that, but
I would argue that from everything I have seen it is a realistic
assessment which has been made and one which we are determined
to work within.
Paul Farrelly: Clearly, if you want a
guarantee you go to Dixons or Comet.
Chairman: I think we have to move on.
Paul Farrelly: I think as part of the
letter it would be very useful for you to outline your experience
of using contingencies in Network Rail in that way and bringing
them down, because it would be wonderful to see those contingencies
not fully used up but brought down as we complete the preparation
for the games.[2]
Q166 Helen Southworth:
Can I move you on to some of the issues around construction, particularly
to find out whether the pool of available contractors and engineers
is going to be big enough for you to take a good negotiating position.
We have had comments from the Chief Executive of the Construction
Federation in The Times in November saying the market was
buoyant and that the firms can afford to cherry pick jobs; and
he has also described the Olympics as essentially a one-off project—he
is obviously very small in his field—and that long-term
opportunities are not there. We are rather interested to know
how you are going to get a good deal for the British public on
this.
Mr Armitt: He is quite right;
the construction sector is buoyant, the construction sector has
now been buoyant since about 1997, which is ten years, which is
quite unusual. The reality is that contractors will pick and choose
and therefore, as we have already seen, if it is something which
is very unusual, such as the Aquatics Centre, then you will have
less interest than you will in the roads and bridges. On the roads
and bridges and the broad infrastructure across the whole project,
which itself is worth far more than the aquatic centre, we have
had a lot of interest in and we have got bid lists which you would
treat as being normal of anything from four to six contractors.
This is after you have selected from the ones who demonstrate
interest. So our experience at the moment would suggest that we
are getting a very high level of interest in the vast majority
of the projects we are letting. I would be the first to accept
and expect, but if you have got something which is very unusual
then that will attract fewer contractors because in a buoyant
market they would say, "That is not one for us", but
in overall terms it is going well, we are seeing a lot of interest
from both the designers, which are just as important as the contractors.
Q167 Helen Southworth:
So you are getting a better response in some ways to the infrastructure
issues rather than the special components?
Mr Armitt: Yes, as I say, if you
take something—. The vast bulk of what we are doing on the
games is not in specialised buildings such as the one which gets
all the publicity, which is the aquatic centre. That is an iconic
and unusual building and, therefore, there will be a limited number
of major contractors who would show an interest in that and we
had three who bid for that. When it comes to the works across
the rest of the site, which, as I say, in volume terms comes to
more than the venues, the venue expenditure is less than is spent
on the park and the regeneration and the infrastructure which
is going in, all of which provides for massive legacy for this
part of London. The venues are a smaller part of that and, therefore,
of slightly less concern in terms of the number of bidders that
we get.
Q168 Helen Southworth:
Can I ask you about the site survey work, the kind of dull infrastructure
stuff? We were told last autumn that only 50% of the site survey
works had been undertaken. In March we have been told that 75%
of the area has undergone site investigation. How confident are
you that there are not going to be any unpleasant things underground
that you are going to find as you go along?
Mr Armitt: Clearly, as each investigation
takes place and does not reveal anything, more and more confident.
We are now over 90% on the inspections, so we are a lot more confident
today than we were last year.
Q169 Helen Southworth:
Ninety per cent means that you can guarantee at this stage?
Mr Armitt: Of the planned bore
holes which we intended to carry out 90% have been carried out
and, therefore, that gives us high level of certainty. That does
not guarantee, again, anything. From my own previous experience,
I have had all the bore holes and then somewhere in between the
bore holes you find something unexpected, but, clearly, the more
bore holes you do the greater you reduce that risk, and coming
back to how you manage your contingency and mitigate the risks
that you face, the more exploratory work you do up front, the
more in control you are and, therefore, the fewer unexpected problems,
and so far we have done well.
Q170 Helen Southworth:
How have you prioritised the site in terms of volume investigating?
Mr Armitt: From previous experience,
from previous knowledge which you can obtain as to what industries
were working in which particular parts of the site, what was going
on over there. There are a lot of records that you consult. Those
records tell you what was going on. Those tell you where you are
likely to potentially find the more hazardous materials, in the
same way as the archaeological background will tell you where
to go and dig from an archaeological point of view.
Q171 Helen Southworth:
Have you had access to the highest priority areas of the site
in those terms?
Mr Armitt: Yes.
Q172 Helen Southworth:
We have talked around the legacy issues of the buildings, but
one of the things that we have experienced as we have been looking
round different sites is whether enough work was done before design
as to what would be the end project, and we do have very considerable
concerns around that on two issues. One is on cost overruns that
you inevitably get when people start designing as they go rather
than designing before, which is just a waste of money, and the
other is on what we believe to be a responsibility, not just to
deliver an Olympic Games, which is extremely important, but to
also make sure that we are using public funds in the best possible
way so that we can actually get a return. We had some questions
before about what returns you are expecting to pay back into the
Lottery funds and other funds. You did not seem awfully confident
that you were going to be able to deliver on that. Is that not
an essential part of your planned outcomes?
Mr Armitt: If you take the sporting
venues, then the legacy use of any sporting venue is something
which is discussed in detail by ourselves with LOCOG, with the
various sporting bodies, with the local authorities, who will
have a view as to what they think is going to be most useful in
their particular constituency following the games, and that causes
us to say that we will design this particular venue recognising
those are the sports which we are being advised by everybody are
the most likely to take place in there in the future, that is
the scale of the seating which they expect in the future, that
is the degree of car parking which they think is going to be suitable
in the future. All of that takes place and influences the design
which we carry out for the venues. If you take the International
Broadcasting Centre, which is essentially a very large space for
a massive 20,000 journalists to operate from to put the Olympics
around the world, that is a very significant opportunity on the
edge of Hackney, close to the games, and again we are looking
still at two short-listed bidders who have slightly different
views of how their building could be translated after the games
into future use. What you do not do today is decide with anybody,
and, indeed, the local authorities would not wish to decide today,
precisely how that building was going to be used in 2013-2014.
What you do is say: what is the nature of the use and which of
the two bidders is likely to give more flexibility for the LDA
and the local authorities to determine how best they see the balance
between accommodation, between housing, between office use, between
factory use, whatever people have in mind for what is a very significant
building, one and a half million square feet, post the games for
legacy? Outside of that the London Development Agency is appointing
a master planner at the moment who, over the next 18 months to
two years, will in fact produce a master plan for the wider Olympic
site which will go for planning consent in 2009-2010 to ensure
that going forward there is a continuum of activity on the site
and it is not one where simply the games take place, everybody
stops and says: "What are we going to do next?", which
is what has happened elsewhere. I would argue from everything
which I have seen in this country, we are taking an approach to
legacy in a far higher level of detail than has been the case
in the past, a massive amount of consultation with the people
who are interested in how the site is going to develop. Our job
is to ensure, first and foremost, that we do provide something
which is absolutely right for the games and at the same time take
into account, as far as we can in the time available, what is
the best opportunity for legacy and make sure we provide the opportunity
for that legacy use in our designs, and I believe we are doing
that very thoroughly and very responsibly.
Q173 Helen Southworth:
It does not give me an awful lot of confidence in terms of the
business focus of this huge investment of public money. The idea
that 2013-2014 is too close a time for you to be able to consider
what the end use is going to be does not seem reasonable.
Mr Armitt: We are looking at the
end use, and the end use of the stadium has been very much focused
under the guidance of the sporting bodies as to what is the ideal
opportunity, for example, for the stadium.
Lord Coe: Can I make a very quick
point. No host city has ever undertaken this level or quality
of work in its legacy thinking this far out. We are five years
away from an opening ceremony. We are absolutely focused as much
on the operational success of these games as what we leave behind.
Every piece of design, every bit of thinking is about what we
do, what we leave behind that genuinely communities can use, and
I think you will find that we have actually nudged the Olympic
thinking into a very different era.
Q174 Helen Southworth:
So which disciplines have not yet had a full agreement with the
national governing body on where events are going to take place
and the design of the venue for the games and for legacy? How
many?
Lord Coe: We work on a daily basis
with all our national governing bodies to make sure that, both
in terms of operational success and legacy, this is a seamless
programme.
Q175 Helen Southworth:
That is as read, but really in terms of the venues currently planned,
how many do not have a legacy outcome ingredient?
Lord Coe: Five years out, this
is exactly the kind of discussions, conversations, consultations
we have undertaken. If you look at the Olympic stadium, the Olympic
stadium, as John rightly said, there is no justification—and
this is where legacy is the heart of our thinking—for leaving
a second 80,000 seater stadium in London. Track and field primary
purpose reduced to 25,000 going forward with a live facility,
and that facility will have track and field as its basis but we
are discussing with local football clubs, we are discussing with
local rugby clubs, we have already started discussions with UK
Athletics. All these discussions are live and taking place, and
five years out the question that we would not want to be sitting
here answering is: "Why are you not involved in those discussions?"
Absolutely we are, and that is taking place across every venue
and every sport.
Q176 Helen Southworth:
Perhaps I can ask you about the interrelationship between designing
and building the venues in terms of that time-line and knowing
what the legacy is going to be for that venue. How are those going
to match up? How are they currently matching up? What is the plan
for those? What is the programme?
Mr Higgins: They are very closely
involved. British cycling is heavily involved, national swimming
is involved in that, British canoeing is involved in the canoeing
facilities, UK athletics have been in and met with us, gone through
many of the details of legacy, so on every single one of the venues
there is a lot of discussion on legacy and design.
Q177 Helen Southworth:
Would you be able to give us an indication of the programme planning
for each of those venues that identifies what the legacy agreement
is going to be and how it matches into the design process, where
it comes into the design process?
Mr Higgins: We can certainly write
to you and set that out,[3]
but I can assure you that there are stakeholder groups set up
on every venue that involves both the local authorities, who have
a key role as well, plus the national sporting bodies.
Mr Deighton: Can I give you an
example. There are actually some outstanding examples of this
going on. To the north of the park, an area we call Eton Manor
which in Paralympics will be the venue for the wheelchair tennis
and the archery during the Olympics Games and the facility for
training in the main, we already have lined up a legacy for five-aside
football, for hockey and for tennis where we have been working
with the national governing bodies, with the local authorities.
The original intention, and it is actually very creative, we are
taking the hockey pitches further south, rolling them up, laying
them back out at the top in Eton Manor using, effectively, the
changing rooms and the indoor facilities to service all three
sports. We consulted broadly with the people locally. It is quite
close to Hackney Marshes with a wonderful soccer tradition and
they said, "We must have a five-aside soccer legacy too."
So we are now working through a plan which has hockey, tennis
and soccer all laid out as part of the legacy. So, this is five
years out; this is just splendid work.
Q178 Helen Southworth:
If you can let us have a note on that to see how those two things
match up, that would be very useful. Can I ask if we can have
an indication of what return on the investment you are expecting,
what targets you are expecting on that return in order to give
us an indication of what amount is going to be paid back in? It
is something that we have a very particular interest in, those
of us who are in the regions that are not going to benefit at
all from the infrastructure investments in that area, but who
are seeing a very significant decline in the amount of money that
is available for our projects locally.
Mr Armitt: Yes, I can do that.[4]
I would make the point that those returns are more likely to come
from things that have a real commercial opportunity such as the
village and the housing, rather than an individual sports venue.
Sports venues, by and large, are not particularly profit making,
so it is more likely to be the returns which come from the commercial
activities which are carried on.
Q179 Helen Southworth:
That is why it is incredibly important to see it because our sporting
venues and our heritage venues and other venues are actually taking
the hit and we want to see that paid back. So that is of very,
very considerable concern and interest to us.
Lord Coe: If I may say so very
briefly, I would hate this Committee to run away with the idea
that London is anything other than poorly served in any of these
facilities that we are leaving. London has fallen way behind most
of our regional cities compared to our European capitals, so this
is not a self-indulgence in a capital; this is a city of seven
and a half million people, has one 50 metre swimming pool, no
cycling facility, no track and field facility worthy of its name
and a whole series of sports that have survived on the largesse
of local authorities in sub-standard conditions. So I think we
have to be very clear here about the difference between a cost
and an investment, and I hear John furnishing you with those figures,
but I would also make the very clear point that there is a much
broader implication, and if you go into large parts of London
they will tell you that they have been 30 or 40 years behind where
most of our regional cities have been for a long time.
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