Examination of Witnesses (Questions 120-139)
14 NOVEMBER 2007
DEPARTMENT FOR
CULTURE, MEDIA
AND SPORT
AND OLYMPIC
DELIVERY AUTHORITY
Q120 Mr Curry: You think that is
going to happen?
Mr Higgins: So far we have had
a good response. It is not always the tier one or the high level
contractors because tier one contractors contract to tier two
down to tier six and we have to make sure that the small businesses
and their workforce get in. One thing we do have which benefits
our site is that it is an incredibly connected site and, therefore,
the workforce getting here by public transport and rail is good.
Q121 Mr Curry: Can I just come back
to this remarkable £18 million figure for the original cost
for the urban development corporation. I was Minister for Regeneration
for a while and, in fact, I suppose I was responsible for some
of the development corporations. You have said that the Olympics
is the biggest construction project in the Western World practically.
I do find it inconceivable that anybody could then postulate a
model based on an urban development corporation, it just beggars
belief. Had you said you cannot postulate on this because there
is no basis for comparison, but to move from that £18 million
to where we are, I simply find it Harry Potter-ish really.
Mr Stephens: It is very clear
that was a very significant underestimate. That was the first
attempt to put an estimate on these costs at a time when the decisions
had not been taken on the delivery structure and it reflects the
constant way in which these estimates are updated. That was the
first attempt, obviously a very significant underestimate, and
within a matter of months that was being revised by the time the
bid was successfully won to £160 million.
Q122 Mr Curry: I understand the explanation
and I am sure when it was put forward there must have been some
querulous comments in the Department and a few raised eyebrows,
but we are clearly not going to get any further on that. The Stadium,
you have not got a final end user lined up, have you?
Mr Higgins: The end owner. It
will be publicly owned. It is a publicly owned asset and the land
is owned by the LDA.
Q123 Mr Curry: But you want somebody
to do something in it.
Mr Higgins: We do need multiple
use. The key thing with the Stadium going forward is effectively
you have to have multiple use. You either have one single tenant
privately owned football stadium or you have publicly owned multiple
use stadiums and around the world we have seen many examples that
these can be effectively established. There is not an international
standard athletics track and field facility in London and a city
this size needs it. It will have a standard track plus warm-up
track, which will be a first. It will also be a facility that
can be used for other sports. We have had a number of interests
expressed from football through to rugby, and particularly community
use. This area of East London is particularly short of community
use venues.
Q124 Mr Curry: For football and rugby
the spectators are going to be a very long way away from what
is happening, are they not?
Mr Higgins: The same as they were
in Wembley before Wembley was demolished.
Q125 Mr Curry: So you are still looking
for what I used to call some Third Division south team to come
and—
Mr Higgins: There are plenty of
examples where this works but we all understand that premiership
football sides are incompatible with athletics because they do
not want the distance between the edge of the field of play and
the seating, and that is understandable.
Q126 Keith Hill: I would like to
explore some of the components of the apparent more than doubling
in the projected costs of the development. Let me turn first to
this question of taxation. There is a new £836 million but
I think you referred, Mr Stephens, to a possible total of £1.2
billion. Why does taxation appear as an additional cost in the
budget?
Mr Stephens: As the Report says,
it is a cost to the Games but it is a receipt that returns to
the Exchequer, so it is not an additional payment by the taxpayer,
if you like. The ODA is actually paying tax, it is liable for
VAT and, if it incurs it, it will be liable for corporation tax,
but obviously its source of funds is entirely the public sector
so it will pay that out of the funds it receives and those will
return to the Exchequer.
Q127 Keith Hill: So about 20% of
the apparent increased cost which has so alarmed the newspapers,
and possibly taxpayers, is actually an entirely paper transaction?
Mr Stephens: Yes, that is correct.
The increase net of tax is £4.1 billion.
Q128 Keith Hill: There is evidence
of good news, is there not, in these new figures in that I notice
the ODA's infrastructure and regeneration budget is down by nothing
less than £11 million. Why is that?
Mr Stephens: That will reflect
the latest estimates. Something that is important to understand
is that all the time developments are happening, so since this
budget has been composed, there have been significant developments
with the first major project, the tunnels, completing on time
and on budget. We have now got full access to the land on time.
We are now able to undertake the full site investigations which
are confirming that there are no serious unexpected problems with
remediation. Planning applications, which were uncertain at this
time, have now been completed. A number of tenders have been received
against individual contracts. All the time there are these developments
and at successive stages those need to be reflected in the new
and revised estimates. On a project of this size and scale within
the overall envelope, and we have set the overall envelope at
9.3, it is not a surprise to see individual projects going up
or down and we should expect that going forward.
Q129 Keith Hill: When we look at
changes, for example in the infrastructure and regeneration budget,
and in the core Olympic costs where there has been a very significant
growth in anticipated costs, nevertheless you are saying that
these estimates already include calculations about likely rates
of inflation, construction cost inflation and you are seeking
to take into account other variables which could affect the costs
as well. In other words, these estimates that we have here represent
your best calculation of the likely costs of the scheme.
Mr Higgins: I can confirm that
the Secretary of State's statement in March of this year, which
is reflected in table one which sets out the base budget for the
ODA of 5.25, and then with adding the VAT £6.1 billion, was
as a result of work that was carried out by the ODA and CLM leading
up to March 2007 and now as we report to the Funders Committee
in two weeks' time I can confirm the work we have done since then,
so nine months further on. We are further on site investigation,
tendering for the site, planning is now approved, vacant possession
has been achieved and we can confirm that base budget still stands
and we are not asking the Funders Committee for any further base
budget above that total figure of the 5.25 and the VAT that applies
to that. The bottom line general programme contingency, the £2.2
billion, remains unallocated and that will remain unallocated
after our Funders Committee at the end of this year.
Q130 Keith Hill: I notice in that
part of the budget we have just been talking about that there
is, nevertheless, a £500 million contingency. Have you any
idea whether that is going to be spent?
Mr Higgins: That was announced
by the Secretary of State in March and that identified known cost
pressures at the time. The statement was in March 2007 and it
reflected work that we had done leading up to that statement in
partnership with CLM, so it did identify areas where we saw known
cost pressures on individual projects, particularly projects which
we were starting, so the enabling works, the utilities, the early
works on the rail, works at Stratford regional station, so it
provided prudent contingencies within those individual projects.
Within that overall figure, that figure of £6.1 billion,
including VAT, there is project level contingency, so that £500
million was recognising that.
Q131 Keith Hill: Would I be right
in thinking that actually the overall contingency in the programme,
which amounts to £2.7 billion, is extremely prudent. It represents
42% of the new budget less contingency, does it not? The NAO itself
observes that this is at the higher end of the range for non-standard
civil engineering projects set out in Treasury guidance. Why has
it been put at such a very high level?
Mr Higgins: This is a project
of a size and scale that has not been achieved before in this
country and uniquely to a fixed deadline and, therefore, we think
it is a prudent, realistic contingency. We expect part of that
contingency to be spent, that is sensible practice. A contingency
is not there to be locked in a box and never touched; a contingency
is there to be utilised to reduce risk and our biggest risk on
this project is time.
Q132 Keith Hill: You expect some
of it to be spent?
Mr Higgins: Yes.
Q133 Keith Hill: How much? What proportion?
Mr Higgins: That is yet to be
determined but certainly it is realistic to expect some of the
contingency to be spent.
Mr Stephens: If I may, the only
safe assumption is to expect it all to be spent and that would
be compatible with the £9.3 billion budget, and it has been
set at a prudent but, I believe, realistic level. Obviously we
are all working to ensure that, if possible, less is spent, but
on a project of this size and complexity we must expect risks
to materialise and as they materialise that will result in contingency
being transferred from the programme to the ODA budget to ensure
that those risks are managed.
Q134 Keith Hill: I understand that,
but we should also be aware, picking up Mr Higgins' point, that
there is absolutely no guarantee that the entirety of that £2.7
billion in contingency will be spent.
Mr Stephens: No.
Q135 Keith Hill: In other words,
if you include the taxation element and the contingency element
in these new figures, there is really quite a lot which does not
inevitably represent any real increase or any real extra burden
on the taxpayer.
Mr Stephens: You are absolutely
right. None of that contingency has been spent as we speak. I
think it is prudent and realistic to expect a significant amount
of it to be spent on a complex and high risk project of this sort,
particularly given the fixed deadline which, as the NAO Report
brings out, produces particular risks. We are seeking to manage
those, not least by advancing the timetable as much as possible
so as to reduce the cost pressures. Whatever is not spent will
be returned to the funders but it is realistic to expect a significant
amount, if not all of the contingency, to be required.
Q136 Keith Hill: One final question,
and I come back to an issue that has been raised before. You had
warnings perhaps about the figure that you put down for the private
sector contribution, but why has the private sector contribution
to this great national project proved so disappointing?
Mr Stephens: I think as an overall
picture it would be wrong to say that it is disappointing. As
we have been explaining, that particular sum does not include
a very significant private sector contribution to the Village
which is being built and largely funded by the private sector.
There is the wider Stratford regeneration multi-billion pound
scheme which would not have proceeded at this scale and pace without
the Olympics.
Q137 Keith Hill: Well, I challenge
you on that. As a Minister I had direct responsibility for the
Thames Gateway and that development and I think that would have
gone ahead in any circumstances. I do not think you can count
the Stratford development as part of the private sector contribution
to this development.
Mr Stephens: I am not. I am illustrating
that around the Park there is the wider public sector contribution.
My point was at this scale and pace. There is a very significant
wider private sector contribution and they are also making significant
contributions to the separate LOCOG budget and this takes no account
of true land sales and returns from the private sector in that
sense. It is a rather narrow part, as it were, of the private
sector contribution of what overall I think is a very significant
private sector contribution.
Chairman: Still, it is extraordinarily
low. In a budget of £9 billion, the 100 and something from
the private sector is unbelievably low when the buzzword in modern
government is supposed to be about public-private partnership.
I am staggered. I think that one of your problems is that loads
of members of this Committee now are ex-ministers, so you had
better be careful what you say, but Mr Mitchell has never been
a minister and never wants to be a minister.
Q138 Mr Mitchell: I do not know about
"never wants to". The original low estimate of £4
billion, was that a deliberate attempt to deceive or was it just
an accidental by-product of excessive optimism?
Mr Stephens: Neither, I have to
say.
Q139 Mr Mitchell: Why was it so low
then?
Mr Stephens: This is the first
Arup report and then the PwC risk assessment around that first
estimate, the cost of the specimen Games, and then the more detailed
PwC contribution to the bid document. I think that reflected the
degree of expert input provided to it but it also reflected the
state of knowledge and developments at the time, a time when it
was not certain that the Games would be required in London, the
land was not in public ownership and the delivery structures were
not in place.
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