Preparation for the London 2012 Olympic and Paralympic Games - Public Accounts Committee Contents


Appendix B—Letter to the Committee of Public Accounts, from Jonathan Stephens, Permanent Secretary, Department for Culture, Media and Sport


Overall Position on £9.3bn Public Sector Funding package

You asked for further clarity on the financial outlook. Tomorrow we will publish our next Quarterly Report on progress to London 2012, by way of a Written Statement to Parliament. I enclose an advance embargoed copy. Table 1 (page 13) shows that the level of uncommitted contingency in the PSFP stands at £476 million. Of this, £388 million is held by the Government and £88 million is held by the ODA against its remaining assessed risks.

The comparison (six months on from the data in the December NAO report) is set out in the table below:

Uncommitted funding remaining in PSFP At 30 September 2011 as in the NAO's December 2011 report (£ms) At 31st May 2012 as in the June 2012 Quarterly Report (£ms)
ODA Programme Contingency 174 88
Government-held programme-wide contingency 354 388
Total 528 476

As I explain elsewhere in this letter and annexe in more detail we also track and quantify risk to the PSFP. With the Games fast approaching, programmes of work are now reaching completion. As they are completed the level of remaining risk reduces. Our latest assessment, at the end of May 2012, gives a mid-range total cost if all risks arise of £252 million, which compares with £318 million at the time of the NAO report. I am therefore encouraged that risks are diminishing with, so far, only a fraction of assessed risk translating into actual cost pressures.

The outcome of these movements in risk and contingency is increased headroom, which we treat as the excess of the Government-held programme contingency over the mid-range quantification of all risks. At the end of September 2011, as reported in the December NAO report, this headroom was £36 million. In February 2012, I advised you that the headroom had increased to above £100 million. As at 31st May 2012 this headroom stands at £136 million, as set out below.

Uncommitted funding remaining in PSFP At 30 September 2011 as in the NAO's December 2011 report (£ms) At 31st May 2012 (£ms)
Government-held programme-wide Contingency
354
388
Mid-range quantification if all risks arise
318
252
Headroom
36
136

The picture on the budget as a whole is that we are spending contingency significantly more slowly than risks are reducing across the programme. These developments support my continued confidence that we will deliver the Olympic and Paralympic Programme within the £9.3 billion PSFP.

Our next report, covering the period to 30 September (including a post Games updated forecast of anticipated final cost of the PSFP against the £9.3 billion budget), will be published in Autumn 2012.

Methods of Quantification of Risk

You asked for a detailed explanation of the methods used to arrive at a financial quantification of each risk remaining. The way we approach risk is to try to think about all the risks that could arise, and to think about the range of potential costs of them all arising. We then add to those an allowance for unknown risks. For the potential costs of each risk, we identify a three point range from low to high and we take the midpoint of the range as the most likely outcome. For some of these risks we use probabilities to assess the range of potential outcomes. But the overall total is merely an estimate of how much we would need to set aside in the very unlikely event that all risks arise, at their most likely cost, and some unknown risks arise as well. We do not try to estimate which risk is more likely to materialise than others or to identify a likely total outcome. Consequently, this quantification is not a forecast of the most likely out-turn cost—instead it is a quantification of how much contingency we would need available in the unlikely event of all known risks materialising at their most likely cost, plus some unknown risks as well. So it is a test of prudence rather than an estimate of likely cost.

Hitherto we have reviewed and revised this risk assessment quarterly. From now on, as we move closer to the Games, we are reviewing the risk assessment monthly. In the Annex to this letter I have provided some more detailed notes and a table setting out in more detail how the risk assessment for each risk is assessed. Risk is dynamic. As risks are dealt with they are removed and as new risks emerge they are added.

Reporting full costs and legacy benefits

You asked me how I intend to account for and report the full costs of delivering the Games and the legacy against the benefits. I will assess the expenditure on the Olympic and Paralympic Programme against the £9.3 billion PSFP set by the Secretary of State in 2007 and on which we have, since, reported to Parliament on a regular basis.

We have always been transparent about the make-up of the Olympic and Paralympic Programme, the costs included in the PSFP, and about our progress in delivering it. Tomorrow's Quarterly Report includes our latest full pre-Games forecasts and we shall publish our latest full forecast post-Games in the report to be published in the Autumn. But, we shall not have the final picture until the post-Games retrofit of the Olympic Village is complete, the capital receipt from the sale of the Village delivered and the legacy transformation of the Olympic Park complete.

All of our reports have and will include expenditure on legacy transformation of the Olympic Park. Other legacy programmes are part of normal business for departments or other public bodies, seeking to maximise the benefits by aligning their programmes with the objectives of the Olympic and Paralympic Programme. The Government has always been committed to making the most of the Games but there has not been separate dedicated funding provided for Games legacy other than the specific transformation funding. The Games provide some excellent opportunities for Departments and other public bodies to further their own objectives through programmes linked to the Games and they have chosen to allocate their funding to these programmes. There is no new funding. The Accounting Officers of the Departments concerned are responsible for the accountability of their legacy expenditure in the normal way.

In relation to legacy benefits, we have recently published "Beyond 2012 The London 2012 Legacy Story" (March 2012) which presents some legacy successes. In Autumn 2012 we will publish an initial pre-Games report on legacy benefits. In summer 2013 DCMS will publish a full report from the meta-evaluation of the legacy benefits. This will include results from the individual evaluations carried out by other Government Departments and so will give the wider picture.

I expect that, whilst the cost of individual legacy programmes will, in assessing their benefits, be identified, it will remain the case that the funding concerned is within existing settlements and cannot be assumed to be additional to what would have been spent if the Olympic and Paralympic Games were not being held in London. That is why such costs should not be added to the PSFP and presented as the total costs of the Olympics— because most, if not all, of these costs would have been incurred even if the Olympics were not happening.

Venue security

On venue security you asked what the Government might have done better. It was not possible to produce final costs for venue security at the point when the budget was drawn up originally because venue security costs follow on from detailed venue plans and competition schedules, which at that point had not been finalised. As the Treasury minute makes clear this covers over 1000 events and 100 venues.

We remain of the view that the costs would not have been different from where they are now, had it been possible to produce a more accurate assessment at an early stage. As the Government said in its response, we recognised that we were dealing with uncertainty here and it is because of this that we built high levels of contingency into the PSFP which are now being drawn on. However, there may have been more the Government could have done to make people aware that the figures that were published in our Quarterly Report and elsewhere were, necessarily, based on estimates and, that even if they remained static for some time, there was always a strong possibility that they would change.

The reason why the G4S programme and management costs have increased so substantially is that on the basis of the original demand, G4S were confident that they could meet the requirement from an already recruited and trained workforce. The increased demand has given rise to the need to recruit, train, transport and accommodate extra employees with consequential cost implications. These costs would have had to have been factored in, if the increased demand had been known when the contract was first negotiated. We do not therefore believe that, had the increased demand requirement been known at the point when the original contract with G4S was negotiated, the costs would have been lower.

When the PSFP was established in 2007, it contained a provision of £2.7 billion of contingency. This reflected the high degree of risk across the full scope and lifetime of the Olympic and Paralympic Programme. The contingency comprised £238 million as a safety and security contingency and £500 million that was immediately allocated to the ODA. At that stage the £2 billion balance of contingency was unallocated but could only be accessed by the ODA. The position was set out in our January 2008 Annual Report on the Games, and the July 2007 NAO report on the budget for the Games.

In the 2010 Spending Review we reconfigured the PSFP to reflect the changing focus of the programme from construction to operational delivery. We established a new baseline for the ODA and broadened access to the remaining contingency in the PSFP so that it was available for any cross-programme issues that may arise, including those of an operational nature. The re-configured contingency arrangements were announced in a Written Ministerial Statement to Parliament at the conclusion of the Spending Review and were included in our February 2011 Quarterly Report and in the February 2011 NAO Report.

The Home Secretary is responsible for delivery of a safe and secure Games and Dame Helen Ghosh, as Home Office Accounting Officer, is accountable for ensuring value for money for public expenditure on Venue Security.

Sports Participation

The value for money of the £450 million includes the investment in facilities, talent development, programmes for local communities and support for local sports clubs as well as getting more people active and playing sport. The Government's objective is to deliver more with the available investment which is why there will be a stricter payment by results regime for any further investment in sports participation. As the NAO's 2010 Report on Increasing participation in Sport notes, "Sport England now has a new strategy and a well-developed and improved funding assessment process for individual sports which we regard as positive developments that offer the prospect of improved value for money".

Legacy

You asked about accountability for the delivery of the legacy. Where legacy is the responsibility of a Government Department the respective Accounting Officer will be accountable to Parliament in the normal way. However, where legacy is a matter for the Mayor of London, as in the case of the work of the London Legacy Development Corporation, the Mayor will be accountable to the London Assembly.

However, as I've always made clear, I continue to look forward to answering to your Committee for the overall delivery of the Olympics programme as a whole, now and after the Olympics. I hope the Committee will continue to think that, although there will always be lessons to be learnt and areas where performance could have been improved, in terms of continuity and application of good risk, financial nad project management, and successful delivery on time and within budget, the Olympics offers an example of a successful major project which the Committee will want to recognise.

A copy of this letter goes to the Comptroller and Auditor General, to Dame Helen Ghosh and to the Treasury Officer of Accounts.

12 June 2012

ANNEX 1: RISK GROUPS AND METHOD

The quantified risk assessment (QRA) is an internal management tool. It is used to provide the Department and its partners with a view on all the potential pressures that could have an impact on the Public Sector Funding Package (PSFP). It does not take a view of the overall likelihood of those risks occurring as compared with each other. As such, the overall QRA is not, and never has been, a forecast of the likely out-turn cost.

Since March 2011 a group of representatives from each of the main Olympic delivery organisations has considered on a quarterly basis the potential risks that could materialise and require funding from the PSFP. From April 2012 this assessment has been carried out monthly. The risks are grouped either according to organisation or overall function (e.g. ODA or transport), with any duplications removed.

The group considers a low, high and mid-range value for each grouped risk. This assessment is an individual judgement for each risk, depending upon the particular circumstances. The mid-range value for each grouped risk is generally based upon a judgement of the most likely cost of the most likely risks occurring. Where appropriate— in 3 out of the 14 areas of risk in the QRA—this is based on a probability assessment. However, these probabilities cannot then simply be summed to each other, or to the other assessments that do not include probabilities, to arrive at an overall likely out-turn of cost. Usually the low and high values are some reasonable factor of the mid-range value. The exact methodology for each risk is recorded in the document shared with NAO (summarised in the table below without the figures).

The quantified risk assessment also includes an allowance for completely unknown risks as well as an allowance should several different risks materialise simultaneously and as a result their aggregate impact and therefore cost is higher than they would have been individually.

The low, high and mid-range totals for each risk group are summed to arrive at the overall conclusion.

The overall quantified risk assessment does not take a view between risk groups of which may be more likely to occur than others. For construction programmes, there is an accepted methodology for considering both the relative likelihood and impact of risks occurring and the links between risks and therefore the impact on the risk quantification. But, for an operational programme on the scale of the 2012 Games, the Department does not believe it is possible in any meaningful way to assess the relative likelihood and impact of risks occurring between a disparate range of operational risks. For example, we could not make a meaningful judgement between the likelihood of a LOCOG contract failing and a problem with the provision of local area traffic management.

Consequently, the low, high and mid-range totals cannot be equated to a judgement on the low, high and mid-range forecast overall outturn cost for the programme. Rather, they provide a range of potential costs which could impact on the PSFP in the exceptionally unlikely scenario that all risks were to materialise. As such, they provide the Department with a useful tool to monitor such risks and to identify where to consider appropriate mitigations.
Risk GroupMethod of quantification
Existing Olympic Delivery Authority Quantified Risk Assessment The ODA risk is taken from the ODA's existing QRA. This is in three tiers :

ODA Risks (P80-95)

Shared Risks

Funder Risks

The low estimate is taken to be zero ie that ODA programme contingency is sufficient. The mid-range estimate is taken to be the sum of the P80-95 ODA Risks and the Shared Risks, less the provision for industrial action which is included in the Operational Risks - Public Sector section of the QRA (see below). The high estimate is taken to be the sum of all three tiers, less the provision for industrial action and "Completely Unknown" (which is included as a separate section in the QRA). Risk is profiled as per the profile of ODA spend until 2012-13.

ODA risk has reduced significantly as building completes.

Operational Risks -LOCOGThese are derived from LOCOG's review of operational risk, based on the risks set out in the Civil Contingencies Secretariat's Strategic Risk Assessment (SRA). The principles used by LOCOG in this analysis are as follows :

This risk is focused upon events that would occur in Games time or close to Games time

All risks not covered in (a) will be considered in the LOCOG AFC process and should be covered within LOCOG's own budget control

LOCOG's insurance policies have been taken into account— the key one being cancellation, delay and postponement

LOCOG quantifies the risk based on the sum of the level of probability of it occurring multiplied by the expected cost if the event occurred.

The major items of risk are : delivery risk, cancellation, scope increases; and delay

A set proportion of this risk has been stripped out and included as a separate Paralympic Risk (see below)

LOCOG scope and revenueThese are derived from LOCOG's review (January and April 2012) of all scope and revenue risk not allowed for in its internal cost tracking of AFC and revenue forecasts. The risk categories include:

Food Inflation

Travel

Fuel

The mid-range risk assessment assumes that a third of the total risk is realised, and not offset by any additional revenue. The low risk estimate assumes zero risk—that LOCOG's costs and revenues balance (or are positive). The high risk estimate assumes that all the risks are realised and are not offset by any additional revenue.

A set proportion of this risk has been stripped out and included as a separate Paralympic Risk .

Cultural EventsThe high estimate assumes a 30% increase in the publically funded cost of cultural events, and the mid-range risk estimate a 20% increase. The low estimate assumes that any increase in the cost of cultural events can be absorbed within existing budgets.
Government OperationsThe agreed Government principle is that "costs lie where they fall." Departments are meeting their costs for the guarantees, but would be likely to resist further funding from their existing budgets if the scope increased. A mid-range provision of 5% of the total Government Operations expenditure is made to cover a potential increase in Olympic additional costs where, for whatever reason, the "costs lie where they fall" principle does not prevail. Low risk applies this principle strictly so provision is zero. High risk assumes that the extra Olympic additionality is met from the PSFP equivalent to 20% of existing expenditure.
UK-wide and London OperationsThe principle of "costs lie where they fall" applies to any local authority pressures beyond funding already provided. However, the risk assessment looks at additional pressures that might need to be met from within the PSFP. The high estimate of risks assumes that additional provision is required for five "out of London" local authorities based on the amount of funding provided to Weymouth. The mid-range estimates assume that PSFP costs are incurred by two host local authorities. The low estimate assumes that the status quo ie "costs lie where they fall" prevails.

In relation to London Operations the high risk is based on the Boroughs' own figures when they bid for funds in 2010. The mid-range risk is based on GOE's assessment of the maximum funding required by the City Operations Programme. The low risk is set at zero.

Integrated TransportThis covers risks relating to :

Travel Demand Management

Olympic Route Network

LOCOG

LOCOG fleet costs

Venue Transport (Local and non-local Traffic Area Management Plans)

Tfl cost pressures

Torch Relay spectator management

High, mid-range and low risks are established for each and then aggregated

Quantification of transport risks is managed by the DfT Olympic

Assurance team, drawing on the latest risk reports for the transport governance boards, and other assurance information.

Estimated financial impacts of each risk, under low, mid and high scenarios, are allocated between DfT and the PSFP on a "costs lie where they fall " basis. These assessments take into account contingency held by ODA and LOCOG and the pressures identified in PSFP monthly reports. Each update is assured by ODA Transport, LOCOG Finance, GOE Transport

Assurance and DfT experts.

Increased threat of security to the Games This quantified risk assessment is based on an Olympic Security Directorate (OSD Home Office) report to SROs quantifying certain security scenarios, based on the cost of providing additional police officers and infrastructure.
Policing and Wider Security : Scope Changes/Gaps within planned threat levels OSD has advised low and mid-range risks of zero on the basis of the level of confidence that it has in the budget for Policing and Wider Security. The high risk estimate assumes that additional requirements arise in the build up to or during the Games which require extra funding to be made available within the PSFP
Venue Security : Scope changes/gaps within planned threat levels Estimates are based on a list of potential risks to venue security

The high estimate assumes that all further risk materialises, the mid—range estimate half of it and the low estimate none. Indications are that the risk is continuing to reduce.

ParalympicsA set proportion of LOCOG "Operational" and "scope and revenue" risks has been stripped out and included here.
Supply Chain (including contractor workforce) This looks at the risk of supply chain failure due either to poor contract management or supplier failure. LOCOG has undertaken an assessment of risk for each of its major contracts, based on spend, nature of delivery, impact on Games price and specification certainty. It has applied a quantification of risk to each contract based on 2.5%/5%/10% of the value of the contract according to the probability of risk and uplifted this for the remainder of its lower value contracts and the non-LOCOG contracts.
Post Games handover of the ParkThis encompasses the risks arising from change approvals undertaken by ODA and subsequent compensation events to contractors that are to be novated, and risk of failure to hand over the venues and sites on time and in a reasonable condition.
Concurrent risks and Consequent risks"Concurrent Risk" are where several risks occur independently at the same time. "Consequent risks" are where one risk occurring increases the likelihood of a series of further risks occurring. Both have the potential to increase impact and cost above the levels otherwise allowed for in the QRA. The provision has been quantified on the basis that that the "integrated transport" and "increased threat to the security of the Games" risks are realised concurrently , resulting in a 10% increase in costs.
Completely unknownThese are circumstances arising that result in costs which were otherwise unseen. We have used a round, reasonable number. The low and high estimates are half and double the mid-range estimate respectively.



 
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