Examination of Witnesses (Questions 125-139)
LORD COE,
MR PAUL
DEIGHTON, MR
JOHN ARMITT
AND MR
DAVID HIGGINS
9 DECEMBER 2008
Q125 Chairman: This morning's hearing
is a further part of the Committee's inquiry into preparations
for the 2012 Olympic Games. We have a lot of ground to cover in
the course of this morning's session. To start the first part,
I welcome Lord Coe, chairman, and Paul Deighton, chief executive,
of the London Organising Committee of the Olympic and Paralympic
Games and John Armitt, chairman, and David Higgins, chief executive,
of the Olympic Delivery Authority. Now that we are approximately
half-way between the point at which we were awarded the games
and the event taking place perhaps I may ask what progress has
been made and whether or not we are on schedule.
Lord Coe: Thank you, Chairman.
We have 1,326 days and 189 Wednesdays to go to the opening ceremony.
I am delighted to be able to report to you that we are on schedule.
Before making my remarks it would be remiss of me if I did not
compliment the extraordinary performances this year of Team GB,
Paralympic and Olympic, which I think all of us around this table
would agree have given the whole project an exceptional platform
for the next four years. Beijing was centre stage for a large
part of our nation, for the organising committee and our learning.
We had 100 observers there across all operational areas. This
year very good progress has been made not just in Beijing learning
which is central to the way we drive the project forward. We had
to deliver two ceremonies in Beijing in the Olympic and Paralympic
fields. We made it very clear when bidding that we were doing
so for a Games in the new era of legacy and sustainability, and
you certainly know the views of our teams on that. This is probably
a more appropriate model now given the economic challenges that
lie ahead than we recognised when bidding in Singapore. Over the
past year we have delivered the launches of the Cultural Olympiad,
our educational programme and our sustainability plan, and we
have brought nine world-class companies to the table as business
partners going forward. Hindsight is a wonderful thing but I am
glad we started that process extremely early. We can genuinely
say we are on track and on budget and the real task going forward
is to seek efficiencies in the planning areas in everything that
we do. Perhaps Mr Armitt can update you on Olympic Park progress.
Mr Armitt: Chairman, 2008 has
been a good year for us and has seen strong delivery on site.
We have started on schedule and we have seen the successful completion
of two major projects. Today we shall announce completion of demolition
of the 52 pylons that run across the site. Those overhead power
cables are now in tunnels beneath the site. That was a very unusual
and complex project costing £250 million which was completed
on time and budget. A couple of weeks ago we announced that the
Weymouth facility was complete for the sailing. If you go to Olympic
Park today the stadium steel is visible from a long distance away.
We have also started work on the aquatics centre and major infrastructure
across the project. It is worth remembering that for all the work
we do on the Olympic site 75p in every pound represents major
regeneration and long-lasting benefits to London. There are always
challenges. Last year when we were in front of you we were concerned
about contamination, obtaining the site and site clearance. That
is all successfully behind us now. Today we face things like the
credit crunch and the impact that has had on the private finance
required for the Olympic Village and the IBC and MPC media centres,
but we have not allowed that to slow us down and construction
work has started. In the mean time negotiations continue to try
to find an acceptable financing package from the private sector.
I just remind everybody that there are lots of benefits to the
work we are doing. A lot of contracts are going to many companies
across the country. Local people who were previously unemployed
benefit from jobs on the site. We are also introducing a good
deal of training for people in the area, so there are jobs for
unemployed people and training and business opportunities across
the UK. There is still some way to go. We have three years of
very intensive activity, but we believe we have got off to a good
start and have good foundations in place.
Q126 Mr Evans: Do you foresee having
to draw down on any further contingency funds in the coming months
and, if so, for what?
Mr Armitt: The contingency is
largely in two parts: £1 billion of what is called programme
contingency and £1 billion of funders' contingency. As to
the former so far we have drawn down £21 million of the £1
billion and we are 25% through the work, so there has not been
too much drawdown. In the past I have always made the point that
given the nature of the works, life being what it is, we would
expect to expend the bulk of that first £1 billion. The second
£1 billion is the funders' contingency which was set aside
for unexpected events. So far the most unexpected event has been
a problem with financing the Olympic Village, and in order to
start construction the government has released £95 million
for the first six months which will take us through to the spring
when we hope to have financing in place. If not, it will require
a further drawdown of the funders' contingency, but overall I
am confident that we shall be able to complete the whole project
within the overall budget that has been set.
Q127 Mr Evans: There have been changes
in circumstances over, say, the past six to eight months. You
mentioned "credit crunch" but to the rest of the world
it is "recession". Sadly, there have also been terrorist
incidents in Mumbai and banks and firms have gone bust. I am just
wondering whether anything has happened over the past six to eight
months that have caused any expenditures or concerns that you
did not foresee.
Mr Armitt: No. So far the release
of contingency has been very much under control. Apart from the
issues around financing we have not had any significantly unexpected
events. That is why we have had to release only a small proportion
of the programme contingency so far. Inflation in the construction
industry has remained fairly high in the past 12 months. Some
statistics that I saw only a couple of days ago showed a 7% increase
over the past year, but clearly there has been a slowdown in the
past quarter. Looking ahead, potentially that could benefit us
if there is continued slowdown in inflation. On the other hand,
the very point you make about companies getting into financial
difficulty and perhaps going bust is a risk to us. The nature
of the contracts we have let means we have very good sight of
the sub-contracts particularly placed by the major contractors
and through that process we hope to be able to keep a reasonable
eye on the state of health of the companies that supply us so
that if somebody starts to get into difficulties we can perhaps
take action to mitigate the impact of it, but you are quite right
to highlight it as a risk going forward.
Q128 Mr Evans: Six months ago £1
was worth about $2 and was riding high against all other currencies.
Since that time the pound has gone into free fall. Has that had
any impact on costs?
Mr Armitt: It will have an impact
on any materials that are bought from overseas. We have ordered
quite a lot of materials in the past 12 months and clearly the
devaluation of the pound is one of the factors that has kept up
inflation within the construction industry because to a large
extent inflation is made up of materials costs.
Q129 Helen Southworth: Perhaps you
would share with us your analysis of the impact of the economic
downturn on the construction areas within the village and explore
with us what you believe will be the balance between the issues
around private financing and changes in cost in relation to that?
Mr Armitt: As we have seen in
the house building sector in particular there is a significant
slowdown in the volume of construction now taking place. By "house
building" I do not mean simply traditional houses but obviously
blocks of flats as well. That slowdown increases pressure on all
the companies in that sector and makes those companies hungrier
for work. As developers slow down the rate of building they carry
out potentially it could provide some softening in the market
for us in procuring for the Olympic Village. That has to be set
alongside other pressures on the market which I described in my
previous answer. As far as concerns financing, it is an ongoing
negotiation which is being handled by Mr Higgins. We are making
progress but, as you would expect, in the current circumstances
I would describe it as slow but steady progress. Clearly, we do
not want to be driven into completion of those discussions if
that comes early and therefore costs more than it might otherwise
cost if we delayed it by a few months.
Mr Higgins: That is right. We
have an asset. The most important thing is to separate delivery
from funding and not make compromise decisions on delivery and
so maintain the quality of design, sustainability and management.
That is what we are doing. We have to ensure that the athletes'
experience is enhanced. Over the past six months we have enhanced
the village from the point of view of athletes' experience. I
believe that it is better than the bid book now and better than
it was a year ago. We are building for games time less high rise
which will mean more public open space. It is a bigger plot than
at bid time, but we should not be forced into making short-term
decisions which destroy public value in the funding. The funding
market is extremely difficult. There is huge uncertainty as to
the price at which these apartments will sell. The government
has that risk in any case. We have a committed partner in Lend
Lease and its board is very supportive. We have good support from
two banks and we need to work through those processes. There will
be government funding and investment required in the village and
that results from reduced expectations about the sale price of
the housing. That is just the reality as a result of the decline
in forecast sale values when these apartments go on the market
in 2013 and 2014. But if we ever let programmes slip behind we
will spend a lot which will not be decent value for money and
make compromises and we are not doing that. Four of the apartment
blocks already have foundations well under way. There are planning
approvals for five of the projects. An enormous amount of effort
is going into the design quality of the apartments at the moment.
Q130 Helen Southworth: Therefore,
you will not reduce the quality of what will go on site?
Mr Higgins: Absolutely not. That
would be very short-sighted. The government has direct exposure
to £500 million to £600 million worth of market housing
on this project just at the Olympic stage, let alone its long-term
investment in land around Stratford as well as the LDA's landholding.
It has a long-term interest in keeping the value of the whole
estate sound.
Q131 Helen Southworth: What opportunities
arise because of the economic downturn on the site that you have
with such a degree of security and size of project?
Mr Higgins: I think there will
be a decline in inflation. We do not see it at the moment because
we are still awaiting inflation from Europe from where a lot of
the materials come.
Q132 Helen Southworth: Can you give
us a little explanation of what that will comprise? Is it the
lower price of raw materials?
Mr Armitt: To take structural
steel as an example, the cost has gone up by 300% in the past
three years. It went from £350 to £400 per ton to £1,300
per ton. That will start to reduce, but there is no great evidence
that it is happening quickly.
Q133 Helen Southworth: In terms of
the village itself, are you looking at different ways to structure
it to take account of some of the changes that you need to make
in relation to timescale?
Mr Higgins: Absolutely. We have
deleted the high rise. The early plans had four 30-storey towers.
They are good from the point of view of value; they would be the
highest value we would expect, but in a market like this it is
not sensible to build four 30-storey towers. If you have very
small pre-sales the whole market knows that you have to sell four
large tower blocks. We are building more low rise and affordable
housing initially. That is not outside the planning requirements
which overall are about 30% affordable housing. It is just a much
more sensible solution from the point of view of the government's
risk and also it produces a better village for the games. It may
be worth asking Mr Edwards later this morning about his experience
of the games. We have presented the games plan to the BOA, IOC,
the Olympic Board and also the Athletes' Commission.
Q134 Chairman: Therefore, you are
suggesting that even though the village has been scaled down by
30% it will not have any effect on the athlete experience?
Mr Higgins: I think it will actually
be better for athletes than it was at bid time a year ago, but
I suggest that you ask Mr Jonathan Edwards as a former Olympic
athlete about his views on the new plans—who I believe is
to appear before you later this morning.
Q135 Chairman: It slightly begs the
question why you originally decided that you wanted 4,000 units
if 2,800 would provide a better experience.
Mr Higgins: Two years ago you
would make a profit on every apartment you built. Therefore, the
more you built the more money you made. That has completely changed.
It is hard to believe but in July 2007 people camped out over
night for two nights to buy apartments in Stratford so they could
get at the front of the queue. In an apartment block directly
adjacent to the Village the world has changed and therefore we
need to be more efficient and build less. We certainly do not
want an overhang in the private market.
Q136 Chairman: Therefore, the original
plan was based not on what was best for the athletes but on maximising
future revenue?
Mr Higgins: The original development
was wholly privately funded and it was a plan to build around
legacy and then to house athletes. When it became clear that there
needed to be public subsidy for the project we then asked: what
do we really have to build? What is the most efficient build for
the games time? Why build extra houses on which we will lose money?
Let us hold off on that; they can always be built later on when
the market recovers, but it is silly to build 500 extra apartments
when they are not required, in particular the more speculative
but higher value high-rise apartments which obviously were very
attractive two years ago but are more risky from the government's
point of view and are less adaptable for games time.
Q137 Helen Southworth: In terms of
the return to the lottery at the end of this process, all of the
payback is dependent on the profit that is made at the end of
the games and in the following years. It is really important for
Members of Parliament and the public who are financing the entire
thing that there is focus on payback. Have you also made an analysis
of the likely impact of these changes on that payback? Will you
be keeping a very clear focus on ensuring that none of those opportunities
is lost over the coming years because of the current downturn?
Mr Higgins: We are very aware
of and transparent about lottery investment in infrastructure.
That deal relates to the LDA's own land which is public parkland,
not the Stratford deal. That is land controlled by London and
Continental Railways. That land deal is the subject of a relationship
between the mayor, the LDA and lottery. They do their own analysis
on the impact of the market surely, but what we do as the ODA
is ensure that the infrastructure that we put into the park will
facilitate the appropriate sustainable development. We have sized
all the major utility infrastructure to legacy plus 25% and, therefore,
the lottery and LDA should be able to get maximum value from the
land receipts which will not be limited by the infrastructure
we are putting in.
Q138 Helen Southworth: Will you be
able to provide continuing reassurance to us? You will have a
very clear focus on it in the next period?
Mr Higgins: We are very focused
on legacy. 75% of everything we do is set into legacy. Accountability
for the recovery of receipts from land sales is a contractual
relationship between the lottery, mayor and LDA.
Q139 Helen Southworth: But it will
be determined to a very significant degree by the decisions that
you take?
Mr Higgins: We are very much focused
on it.
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