Appendix BLetter to the Committee
of Public Accounts, from Jonathan Stephens, Permanent Secretary,
Department for Culture, Media and Sport |
Overall Position on £9.3bn Public Sector
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
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
|Government-held programme-wide contingency
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
|Mid-range quantification if all risks arise
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 costinstead 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
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
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.
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.
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
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
A copy of this letter goes to the Comptroller and
Auditor General, to Dame Helen Ghosh and to the Treasury Officer
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
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
QRAthis 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 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
|Risk Group||Method 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)
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 -LOCOG||These 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 revenue||These 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:
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 riskthat 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 Events||The 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 Operations||The 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 Operations||The 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 Transport||This covers risks relating to :
Travel Demand Management
Olympic Route Network
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 midrange estimate half of it and the low estimate none. Indications are that the risk is continuing to reduce.
|Paralympics||A 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 Park||This 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 unknown||These 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.