Examination of Witnesses (Questinos 20-39)
DEPARTMENT FOR
CULTURE, MEDIA
AND SPORT
30 JUNE 2008
Q20 Keith Hill: I would expect to
see all of these set out on a piece of paper. How would they be
expressed on a piece of paper?
Mr Burr: There would be what is
known as a risk register, which would list what those risks are,
and it would give some indication of how likely they were to happen,
how serious they would be if they did happen, and who was responsible
for attending to them.
Q21 Keith Hill: In paragraph 1.19
you use the phrase "cross-cutting risks to the programme,
which may not be visible to individual delivery organisations".
How does that work?
Mr Burr: An individual manager
of a particular project or an individual player in the larger
programme may be very conscious of the things that they have to
watch out for but they may not have a bird's eye view of the links
between the different components of the programme and the issues
that those may raise, hence the need for top-down oversight of
the programme as a whole, which is all we were really seeking
to emphasise.
Q22 Keith Hill: In paragraph 1.20
you use the phrase "programme-level risks". What is
a programme-level risk?
Mr Burr: A risk for the whole
programme as distinct from a risk for a particular project within
that programme.
Q23 Keith Hill: How does that work,
a risk for the whole programme?
Mr Burr: Again, one would expect
to see at that top level an identification of the risks largely
relating to the whole being more than the sum of its parts, as
it were, so that there are risks relating to the whole which are
distinct from those which relate to the individual components,
and those too need to be managed.
Q24 Phil Wilson: When we won the
Olympics, we knew straight away that the two issues that we would
be faced with would be first, cost overrun, and secondly, will
we be on target. Every Olympics, ever since there has been an
Olympics, it has always been the same, and the press would obviously
focus on that, whether it is the truth or not. I just want to
reiterate what Keith Hill has said, which is in paragraph 22 of
the Report on page 7, which is just to say the construction programme
is broadly on track, procurement systems you have put in place
are being handled well, et cetera. I think basically you have
got off to a good start really. I just wanted to ask a few questions
about managing the budget. In paragraph 2.14 of the Report on
page 18 it talks about £853 million of savings you have assumed
in your cost forecast. How much of that has been secured already?
Mr Higgins: Quite a lot of that
has been secured through redesign and targeting of the individual
tenders so, as Jonathan said earlier on, we have just under £3
billion worth of contracts now let; a lot of the design work on
those, including the main venues, is well-developed, with even
subcontractors and suppliers in place. The importance of securing
those savings is to ensure that the process of design development,
planning, and then tendering and procurement keeps track with
the overall project timetable, and that has been achieved over
the last year.
Mr Stephens: It is worth, if I
may, citing the example of the work that has been done on the
reconfiguration of Olympic venues as a good example of how we
aim to bear down on costs. Our aim now is to ensure that we build
the absolute minimum of temporary venues and use, wherever possible,
existing venues within London. The plan for the venues has been
reconfigured, releasing significant savings as a result of that.
Q25 Phil Wilson: You do not say these
savings will be at the expense of the legacy benefits of the park
and the venues?
Mr Stephens: No, indeed. This
is partly in order to protect the legacy benefits and to focus
the spending on the venues and infrastructure that will be there
permanently.
Q26 Phil Wilson: The other point
is on paragraph 2.20, Mr Stephens. How were you able to forecast
the cash flow requirements for the life of the programme when
you have not completed a Programme Plan yet?
Mr Stephens: We do have a complete
cash flow forecast for the various different funders and over
the life of the programme through to 2012. Of course, that will
change as the rate of spend changes, and we have also considered
with all the funders the various contingency plans we need to
ensure that the cash can always keep flowing.
Q27 Phil Wilson: Another question.
In figure 4 it shows there are several pots of contingency, totalling
nearly £3 billion. When contractors know you have all that
contingency, how does it incentivise strong project and budget
management?
Mr Higgins: As was noted in the
previous Report to PAC, incentives should be put in place with
contractors to save money, and that is exactly what we have done
on the Stadium and the Aquatic Centre, for example. So we incentivise
behaviour that is aligned with our behaviour to get the right
outcome but also time and cost. If you look at the three big pots
of money, the first amount, which is project-level contingency,
we expect to spend. That has been created in many ways from the
value engineering and the cost savings we have carried out over
the last year. It has been approved by the Department to commit
to spend, but we then target that within our organisation with
strict change control. The second £1 billion is set aside
for unexpected ground conditions or inflation and, as an example,
the price of reinforced steel a year ago was £400 per tonne;
now it is £800 a tonne, so that second £1 billion is
to allow for unexpected inflation. The third £1 billion is
there for unpredicted events, and the credit crunch, now nine
months in duration, is certainly an unpredicted event. That is
those three amounts of money, and there is a gateway to each of
those three amounts of money which is harder and harder to get
through.
Mr Stephens: If I may just add
the point that, of course, as well as bearing down and ensuring
that there is minimal use of contingency wherever possible, as
the NAO Report makes clear, there are circumstances, particularly
on a time-limited project of this sort, where early use of the
contingency is actually the value-for-money option to ensure that
costs and risks do not pile up at the end of the project, where
contractors would have us over a barrel. It is important to understand
that early use of the contingency may well be good management
and good value for money. [2]
Q28 Phil Wilson: One final question.
We have just talked about unforeseen circumstances in the future,
for example. You have mentioned property values, et cetera. If
there is a downturn in property values, how do you expect to get
the £1.8 billion from the sale of land and property after
the Games?
Mr Stephens: That was an estimate
by the GLA to inform the work that they did on the memorandum
of understanding. I should be clear that that estimate is not
built into the Olympic budget. It is not part of the budget. It
is not part of the Lottery projections either, going forward.
The work done last year was to ensure that there was in effect
a profit-sharing agreement between the Mayor and the Government
to ensure that future profits from the sale of the land after
2012 were shared with the Lottery, with the aim of enabling repayment
of the extra £675 million.
Q29 Phil Wilson: So that figure could
change. You continue to review that figure, do you?
Mr Stephens: It has not been reviewed.
It was done originally by the GLA. It is based, of course, on
long-term property values over a period of 20 years or so, so
it has not been reviewed recently.
Q30 Mr Bacon: I would like to ask
about the village, and just to start with, Mr Stephens, I would
like to clarify a couple of things. The Report says the village
will cost over £1 billion. How much more than £1 billion?
What is a rough estimate? Is it £1.1 billion or is it £1.9
billion?
Mr Higgins: I think at this stage
£1 billion is probably a reasonable estimate of the total
cost.
Mr Stephens: I am sorry. It is
really important that we should be absolutely clear. This is not
cost to the public purse.
Q31 Mr Bacon: I am aware of that
and that was my next question. I just want to be clear that the
£1 billion, or £1.2 billion or whatever it is, sits
entirely outside the £9.325 billion headline budget. Is that
correct at the moment? You have a budget. The Report says the
overall cost is likely to be, the headline budget which you will
deliver this thing within, is £9.325 billion, and the £1
billion for the Olympic Village sits entirely outside of that
because it is private sector funding. Is that correct?
Mr Higgins: No, that is not correct,
because the budget that we have, the ODA, which is the £6
billion, includes some money for contribution in Stratford, which
can be recovered against future land sales. So some of it is a
component of that. You will see that in that figure there which
includes the IBC and the village. Then you have the second £1
billion, which is the programme contingency, which covers abnormal
inflation or ground condition, and the overall funders' contingency,
and that covers unpredicted events such as the credit crunch.
So if, as our Chairman noted the other week in a statement to
the media, there may well be the need to draw on some portion
of that second £1 billion to fund the village, that was always
set aside for unpredicted events.
Q32 Mr Bacon: So the bit that sits
outside the £9.325 billion is the private sector funding?
Mr Higgins: That is correct. That
is right.
Q33 Mr Bacon: Good. The contingency
is £2.7 billion?
Mr Higgins: It is potentially
just over £2 billion for the ODA.
Q34 Mr Bacon: It is £2 billion?
I thought it was £2.7 billion.
Mr Higgins: No. The announcement
in March 2007 said there was an unallocated contingency of £2
billion for the ODA, and the budget announcement in March 2007
additionally allocated £0.5 billion to the ODA programme.
That made £6 billion baseline budget for the ODA, plus up
to £2 billion contingency, just under £1 billion for
other costs and provisions, and £238 million for security
contingency. [3]
Q35 Mr Bacon: How much of the contingency
has been spent in total so far? I have read £500 million
but what is the most up-to-date figure?
Mr Higgins: None of the £2
billion, either the programme or the funders' contingency, has
been spent or committed or asked for.
Q36 Mr Bacon: So there is still £2
billion sitting there?
Mr Higgins: Correct.
Q37 Mr Bacon: If you were to add
that to get your £9.325 billion, the £2 billion would
comprise part of that sum?
Mr Higgins: Correct.
Q38 Mr Bacon: In other words, what
I am really getting at is, were you to have to—and I am
not expecting you to have to—to pay for the Olympic Village
entirely out of the contingency, you could?
Mr Higgins: You would never do
that because—
Q39 Mr Bacon: I did not say that
you would. In fact, I actually said I did not expect you would.
What I am really asking is, if you had to, the contingency is
so humongously large that you could. There is enough money there
because it is so big. I am really asking you to confirm that £2
billion is larger than £1 billion, Mr Higgins.
Mr Higgins: Correct, but the second
£1 billion is used—
2 Note by Witness: This is set out in the NAO
Report in Section 9 of Appendix 4. Back
3
Note by Witness: A contingency of 2.7bn was set aside in
the March 07 statement. £500m was provisionally allocated
in that statement to the ODA to meet known cost pressures and
is now incorporated in the ODA's £6.1bn baseline budget.
In addition, £238m was set aside as contingency for wider
security and policing and is therefore not available to the ODA.
This leaves £2bn contingency potentially available to the
ODA above its baseline budget of £6.1bn. Back
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