Examination of Witnesses (Questions 1-19)
14 NOVEMBER 2007
DEPARTMENT FOR
CULTURE, MEDIA
AND SPORT
AND OLYMPIC
DELIVERY AUTHORITY
Q1 Chairman: Good afternoon and welcome
to the Committee of Public Accounts. I should like to welcome,
first of all, members of the Public Accounts Committees from Guyana
and Nigeria; you are very welcome and thank you for attending
our hearing today. Our hearing today is on the Comptroller and
Auditor General's Report The Budget for the London 2012 Olympic
and Paralympic Games, and this is the Committee's second hearing
on the preparation for the Games and we welcome back Jonathan
Stephens, who is the Permanent Secretary for the Department for
Culture, Media and Sport, the lead government department for the
Games, and we also welcome David Higgins, who is the Chief Executive
of the Olympic Delivery Authority. You are both very welcome and
thank you for coming today. Mr Stephens, maybe I could put a couple
of general questions to you first, and you might want to look
at Figures 6 and 7 on page 17, on the main reasons for the increase
in costs from the time of the bid to the budget announced in March
2007. I might say, Mr Stephens, it is a matter of regret to me
that the Department announced the revised budget totalling over
£9 billion on 15 March, just ten days after our last hearing.
I am sure that was not coincidental, was it, Mr Stephens?
Mr Stephens: Well, I recall that
hearing and I remember you asked me when we would have a final
budget and I replied it would be soon and you pressed me again,
quite rightly, on what I meant by "soon" and I said,
"I meant soon and I do not have a date", and I did not
at that time, and the final details were not resolved at that
time.
Q2 Chairman: So ten days later you
announced that, and this is now our first chance. Anyway, we are
here now to ask these questions, so I am looking now at this Figure
7, the main reason for the increase in costs, but what I cannot
understand is why you could not budget for such obvious factors,
such as tax, contingencies, security and running costs in your
initial estimate. Is this bad management?
Mr Stephens: Well, Figure 6 sets
out the increase in gross costs of £5.3 billion. Of that,
the tax accounts for £1.2 billion, as the NAO Report makes
clear, and that is a cost to the Games, it is not a cost to the
Exchequer because it is a receipt to the Exchequer, so, net of
tax, the increase in costs is £4.1 billion. Of that, more
than half, £2.4 billion, is set aside for contingency in
various forms.
Q3 Chairman: It is £2.7 billion,
is it not?
Mr Stephens: If you net the tax
off, it is £2.4 billion in total. Of the remainder, £600
million is set aside for wider policing costs. This was a known
uncertainty at the time of the bid, which indeed caused my predecessor
to notify the Committee of a contingent liability which could
not be estimated at the time.
Q4 Chairman: But in a sense you have
not answered my question. We bid for these Games in an era of
heightened security tensions, we all knew about the problem of
security and presumably there was uncertainty about tax which
you could have offset at the time. Some people might say to you,
Mr Stephens, uncharitable people, that you deliberately put in
a low bid to get these Games and fool the people, knowing that
the bid that you put in at the time to the British taxpayer was
totally unrealistic.
Mr Stephens: Well, the bid was
supported, as the NAO Report makes clear, by a succession of expert
input and analysis, three separate reports going into the costs
in as much detail as was possible, given the state of knowledge
and development at the time, remembering of course that this was
not an event that was certain, that the land was not in public
ownership, that detailed site investigations could not be undertaken,
and that the detailed plans of venues and so on could not, in
the time available or within reasonable cost constraints, be drawn
up.
Q5 Chairman: I put it to you, Mr
Stephens, that all these uncertainties you knew about at the time.
You could have offset them and you either acted in bad faith or
you were incompetent. Were you incompetent or did you act in bad
faith?
Mr Stephens: Well, you are quite
right, there were a number of uncertainties—
Q6 Chairman: Which were entirely
foreseeable.
Mr Stephens:— and that is
why the Department commissioned, on the foot of the first Arup
report on the specimen Games, a further PwC report to assess the
risks around the Games and that suggested that the costs would
lie in the region of £1.1 billion to £2.1 billion. Further,
on the basis of the detailed PwC assessment that fed into the
final bid, a risk assessment was done around that which suggested
that, with an 80% probability, the costs would lie within plus
or minus 10% of the sum that they suggested, so attempts were
made to assess the risks at the time that the bid was made and
also to register that there were some elements that were fundamentally
uncertain, including policing where, as I said, my predecessor
notified the Committee about contingent liabilities, saying that
it could not be estimated at the time, but that the Home Office
anticipated that there were wider policing costs. I have to say
that, eight years out from an event, I do not know of any other
event where you would expect the detailed policing plans—
Q7 Chairman: No, but we would just
expect the taxpayer, who is generally very happy to have these
Games, to have an honest estimate at the time that we bid for
these Games of what it is going to cost us. Now, we are looking
at contingencies now of anything between £2.4 billion and
£2.7 billion. The suspicion is that this is a very large
contingency because you want to make absolutely certain now that
this £9 billion is an upper limit, so really for this purpose
you have deliberately made the contingency very large, it is puffed
up with loads of uncertainties which we have not got to the bottom
of, it is not very transparent, and you are using that as a safety
net so that you can come back to us in five years' time and say,
"We've achieved our aim; we are within budget". Is that
fair? In other words, the contingency fund is over-generous and,
as my colleague said, it is what I would do!
Mr Stephens: I think it is a prudent,
but realistic, attempt to manage the very significant and considerable
risk around this project. This is—
Q8 Chairman: So that is a yes, is
it, as my colleague Mr Davidson would say?
Mr Stephens: No, this is the equivalent
of building something twice the size of Terminal 5 in half the
time. At its height, there will be 20,000 workers on site and
the spending will increase from currently just over £1million
a day to more than £5 million a day; it is a very big and
complex construction project. There will be a number of risks
that we must expect to materialise over the course of the life
of the project. This is a realistic and prudent way of managing
those risks which over the last six months or so has been backed
up and supported by a detailed and quantified risk analysis, so
what we have done is, project by project, identify the risks that
may arise on the individual projects at the level of the programme
as a whole. External to the project is—
Q9 Chairman: I will stop you there—
Mr Stephens: Well, if I may just
say, we have quantified each of these risks, then modelled them
across all possible scenarios and, on top of that, we have sought
to make an allowance for, what you might call, unknown unknowns,
and all of this—
Q10 Chairman: Why did you not do
that originally? If you can do it so well five years before the
Olympic Games, why not originally?
Mr Stephens: Well, if I may just
complete the point, all of this supports the contingency at £2
billion or so outside of the £500 million that has been allocated
to the ODA already that is set out in the budget, so there is
now a detailed and quantified analysis modelled against all the
possible scenarios that supports this contingency.
Q11 Chairman: It begs the question
why we could not do it originally. You will resign if it now goes
above £9.3 billion, will you?
Mr Stephens: I am absolutely clear,
this is the public sector funding package and it will not be exceeded,
there will not be any more money for the construction of the Games
and I am confident, on the basis of the risk analysis that has
been done—
Q12 Chairman: Anyway, you have not
answered my question, so I will now go on to the next question
about how you got it so incredibly wrong about the contributions
from the private sector, and this is dealt with in paragraph 30.
We were told £738 million and we are now told a measly £165
million. Why were these contributions from the private sector
so wildly over-optimistic?
Mr Stephens: Well, again this
reflects the state of knowledge and development at the time. At
the time, this was not an event that was certain and you could
not approach individual private sector contractors with a specific
proposition. The Department turned to its advisers, Partnerships
UK, as the NAO records, and they actually identified potential
opportunities of £1.3 billion and the Department discussed
that and reached for the more conservative estimate of £730
million, but that was clearly at the time subject to a large number
of uncertainties. What I would say is that, going forward, it
is clear that the private sector will be making a very significant
contribution. There will be the Village, which will almost exclusively
be built and paid for by the private sector, there is the much
wider Stratford regeneration, which would not have gone ahead
at the scale and pace that it will without the Olympic Games,
and, in addition, the budget takes no account of potential future
land sales and development opportunities beyond the Olympic Games
with the private sector, so the picture overall is that there
will be a very significant private sector contribution.
Q13 Chairman: Looking at Figure 7
again, why do you need a budget of more than £½ billion
just for the Olympic Delivery Authority's programme management?
This again has increased dramatically from £16 million to
£570 million. The £16 million does seem to be very low
estimate and we are now up to nearly £½ billion, but
why do you need such a large budget and why did you get your estimate
so wrong? Perhaps Mr Higgins might help me with that actually
because it is his organisation.
Mr Higgins: Figure 7, it shows
actually that the £570 million is made up of a number of
figures, the 344, which covers the Delivery Authority staff and
the Delivery Partner costs. We did go out externally in May 2007
when Ernst & Young carried out a comprehensive review of the
Delivery Partner's forecast costs and they confirmed that these
fell within an acceptable range to enable the ODA to agree commercial
terms for our task order. They did recommend that it be subject
to periodic review and the next major review of the Delivery Partner
costs will be next June.
Q14 Chairman: Mr Higgins again, you
might look at page 8, paragraph 13 of the Comptroller and Auditor
General's Report. We are being expected to provide all this money
and it seems to me that we have not really got a very clear statement
from you as to what the budget will actually deliver. Is that
a fair criticism? It is all very vague at the moment, is it not,
and, if not, why have we not got it?
Mr Higgins: We fully support the
recommendation that comes through in section 13 and indeed the
table on the following page sets out items (a) to (g) and we have
worked through those now since the budget was announced and we
are presenting them to the Funders Committee within the next few
weeks, so that work has been carried out.
Mr Stephens: And I can say that
we expect, once the detailed scope has been signed off by the
Funders Committee, to publish an account of that early in the
New Year.
Q15 Chairman: Mr Stephens, how are
you going to make sure that LOCOG breaks even or, preferably,
makes a surplus?
Mr Stephens: We have a close relationship
with LOCOG and we monitor their budget monthly. The Minister for
the Olympics appoints one member of their board who is currently
the Chief Executive of the Government's Shareholder Executive.
We review their budget with them and their performance against
it and of course they are, as the IOC reported, on track and on
time. They have secured three major tier one sponsors, which is
far in advance of previous Olympic Games which have been lucky
to secure one major sponsor before the previous Olympic Games.
Q16 Chairman: What worries me is
that, judging by your record so far, I do not have any confidence
in your ability to plan ahead. I think what is going to happen
in the run-up to these Games in 2012 is that you are going to
start panicking, things will be half-finished and you will start
throwing money at it. Is that a fair criticism or an unfair criticism?
It has happened in every previous Olympic Games, as far as I can
see, and it will happen here and one of the reasons why I am asking
the Comptroller and Auditor General to try and have these reports
and these hearings now is so that this does not happen and that
we do shine the spotlight on to you and Mr Higgins now.
Mr Stephens: Indeed, and it has
been very useful to have the NAO's engagement. Their Report says
that the budget process leading up to the March 2007 announcement
was thorough, that it was based on detailed analysis and expert
input and that it represents a significant step forward in putting
the Games on a sound financial footing, and that is one of the
reasons why, alongside the NAO's own interest, Tessa Jowell invited
the Comptroller and Auditor General to review the budget that
she had announced. Indeed, we are keen that the NAO continues
to review the further work that has gone on since the budget was
announced, in particular, the work that follows through on all
the recommendations on page 9, which means that we have now completed
work on the cashflow analysis, but the detailed scope, as Mr Higgins
said, is there and ready for consideration by the ministerial
Funders Committee and the linking of the detailed budget breakdown
with the scope is also there, ready and waiting, and with all
of that we are happy for the NAO to continue to review.
Q17 Mr Dunne: I would like to follow
directly on the point you have just raised. Now that you have
a budget which is set out to us in Figure 6, is it fair to say
that you have each component by project, that each component of
the plan has its own budget?
Mr Stephens: Yes, that is the
work that has gone on since then, the report which has gone to
the ministerial Funders Committee which will provide the basis
for a more detailed breakdown and budget which I hope will be
published in the New Year.
Q18 Mr Dunne: Is it phased by stages
for each project?
Mr Stephens: Yes, we have a detailed
cashflow analysis year by year, and indeed that has gone into,
and informed, what was published in the Comprehensive Spending
Review as well as the basis for the requirements from the Lottery.
Q19 Mr Dunne: Did I hear you right,
that the cashflow is year by year? Do you have a month-by-month
cashflow?
Mr Higgins: Yes.
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