14 NOVEMBER 2007

DEPARTMENT FOR CULTURE, MEDIA AND SPORT AND OLYMPIC DELIVERY AUTHORITY

  Q80 Mr Bacon: I would like to move on to insurance which, for something like this, is going to be quite a significant item. How much do you reckon it is going to be for insurance roughly?

  Mr Higgins: We have allowed roughly £50 million.

  Q81  Mr Bacon: So that leaves you £175 million for the Olympic Village, does it not, roughly?

  Mr Higgins: I am not sure. How did you work that out?

  Q82  Mr Bacon: Well, if you look at paragraph 48, you will see that it is £161 million for additional inflation. Have I got that right? Yes, I have. On page 21, £161 million for additional inflation. If you then go to Figure 6, you will see that figure of £386 million, the third one down, and it says, "Additional inflation allowance, contribution to the Olympic Village and insurance". Well, if you knock off the additional inflation that we know about, £161 million, that only leaves you £225 and, if you knock off £50 million, that leaves you £175 million for the Olympic Village. Is that correct? Have I got something wrong?

  Mr Higgins: No, that is about right. That is about the right figure for the Olympic Village at that point, yes.

  Q83  Mr Bacon: Which works out at about £10,000 or £10,294, in this little spreadsheet I have got here anyway, per bed in the Olympic Village, does it not?

  Mr Higgins: I think it is probably inaccurate to take that figure—

  Q84  Mr Bacon: Because it is only the public sector contribution, I appreciate that. How many dwellings are there going to be in the Olympic Village?

  Mr Higgins: Roughly 4,000.

  Q85  Mr Bacon: And your actual expectation is that they will pretty much all be sold off as private dwellings afterwards or a mixture of affordable and private, but that they will all be used afterwards for dwellings?

  Mr Higgins: Absolutely, and 30% are affordable and that is set out in the planning approval.

  Q86  Mr Bacon: Could I ask you about the legacy because the Chairman mentioned the drop in funding from £738 million down to £165 million. It seems to me that one of the reasons why the private sector has not been throwing money at you is because there is still an enormous amount of uncertainty about who will own the venues afterwards and who will cover the conversion costs before the legacy, as it were, can take effect. When do you think you will have more certainty about all of that?

  Mr Higgins: Progressively, we are getting much more certainty about the legacy. In terms of the private sector contribution, the two major items making up this revised figure are for the broadcast facilities, both the media and broadcast, and the figure is roughly around £90 million and we have got every expectation of getting a good contribution from the remaining tenderers on that part there. Then, the second part of that element is utilities and again we have had a very good response from the private sector for a substantial contribution to the utilities network and the power centre that is going to be built up on the Olympic site, so that is strong. The private sector contribution on the Village, as this Report notes here, there is some £600 million in the 2004 costs for the costs of the Village and we expect the vast majority, or all of that, to be paid by a private sector partner.

  Q87  Mr Bacon: And you expect that it will yield a substantial profit overall, the Village site?

  Mr Higgins: Yes, yes, it will.

  Q88  Mr Bacon: How will that be shared? Presumably, the Lottery, which is putting a lot of money into this, over £2 billion, will be getting something back, will it?

  Mr Higgins: The agreement on the London Development Agency's land allows the Lottery to recoup profits after the LDA's costs, and you will see that is covered in the Report here. On the balance of the land, we have allowed for recovery of some profit from the Village and we are still finalising the Village details, we have not released the complete details of that, but, if there is surplus profit that comes through from those deals, they obviously will be for the benefit of the funders of the Games, which include of course the Lottery.

  Q89  Mr Bacon: Will that put them, as it were, pari passu to their original contribution? Is that the idea?

  Mr Higgins: No doubt it will reflect their contribution when their contribution is finalised on what parts goes to the overall funding and contingency.

  Q90  Mr Bacon: I would just like to ask one final question about programme management costs. The Chairman referred to how they have exploded from £16 million to £570 million which is plainly just a failure to get a grip on what it was likely to be to start with, although the £16 million does sound very low. You, I think I am right in saying, got that wrong because it was modelled on an urban development corporation.

  Mr Higgins: Yes, that is right.

  Q91  Mr Bacon: Who was the bright spark who said, "Oh, this looks really like an urban development corporation, let's model it on that" because they were 3,500% out, were they not?

  Mr Higgins: I can cover that because at the time, and they still are, there is not one established for the Games site already in place, so that modelling covers that. Now, on the actual structure of the Games, the Act had not been drafted at the time, therefore, what structure and whether there was to be an ODA or a LOCOG or a central corporation running the entire project was yet to be determined and, therefore, the actual costing and the appointment of the delivery partner was yet to be determined, so when, after the successful bid, the drafting of the Act and the passing of the Act in April 2006 establishes the ODA, the ODA then goes out to competitively find a delivery partner and we can start to work out the brief and finally work out the cost of the delivery partner. Now, the money allowed here for the delivery partner from an external benchmarking point of view is quite realistic, and it is very realistic compared to other major infrastructure projects, the Channel Tunnel Rail Link or major projects at airports, that is quite a standard charge, but it is a very different model from what was envisaged. The model envisaged originally was based on urban development corporations which, frankly, worked very well for the Docklands, if you look at the way that the Docklands and Canary Wharf were delivered, or Milton Keynes or other major projects.

  Chairman: Well, thank you very much, Mr Higgins, and the one thing which has emerged from that line of questioning is that such is the uncertainty of these future profits from land sales that we cannot be sure that the Lottery will be reimbursed at all, and I find that very concerning.

  Q92  Mr Davidson: I wonder if I could just say at the beginning, Chairman, that I wonder whether or not by the end of this hearing our visitors from Nigeria will think themselves lucky that Abuja did not win the Commonwealth Games! Could I ask about construction costs. Because of the booming economy that we have and the growth in construction across the South East and the UK in general, is construction cost inflation rising more than expected?

  Mr Higgins: The original bid had 5% and you will note that that figure of 167 allows for it to be 6%. You will have seen market evidence on rising steel prices, so obviously iron ore and steel prices have gone up considerably, so there are inflation pressures. If, for example, inflation was to go up by 2% in the next two years, that would probably add around a figure of £50 million to the cost pressure if it then returned to its original figure, so yes, we are exposed to cost pressures, as any other major project is.

  Q93  Mr Davidson: But you have not detected so far that construction cost inflation is greater than that anticipated in your bid and your contingency?

  Mr Higgins: We are well in the process of tendering at the moment and now we have major tenders closing on the major venues, the Village, roads and bridges, so it is different. In fact, with roads and bridges and highways, infrastructure, we do not see the same cost pressures that we are seeing in other venues and buildings, so with the building boom in the City of London, and there is a massive number of commercial projects under way, that is probably creating more pressures in that area than it is in the area of infrastructure.

  Q94  Mr Davidson: One of the things that does worry us a bit is that builders, whilst not quite as voracious as farmers, are nonetheless somewhat keen to exploit the situation where perhaps the client is over a barrel. I am a bit concerned with the lack of competition for some of these contracts. As I understand it, the Olympic Stadium has only got one bidder and the Aquatic Centre has only got one bidder, which is not quite the strongest position for yourselves to be in. Did you anticipate having only one bidder at this stage when you were drawing up the initial estimates?

  Mr Higgins: I suppose high-profile, iconic structures are not the sort of projects that the industry necessarily is originally attracted to, and there is some history on stadiums across the country which does not make it easy. I suppose the best of describing it is to say that we have spent £13 million now on the Stadium since we appointed McAlpine's in design development work and in testing the design, what is termed as Stage D which was launched last week. You could not do that sort of work with three other competitive bids or two other teams working together, we just would not have the capacity to do that, so at some stage on these sorts of projects you have to get to one bidder. We are not in the luxury of being able to complete the design and go out and do a fixed-price tender. That would be one way of doing it, but we do not have the years it would require, so our protection, to answer your question as briefly as I can, is that we do choose a partner, but then we insist on absolute transparency to drill down to the actual trades, tenderers and suppliers and hope for greater competition there. One of the benefits of having a delivery partner, like our partner CLM, is that they can act and allow us to scrutinise the tender process of the trades.

  Q95  Mr Davidson: So I should not be worried?

  Mr Higgins: It is a concern. It is set out in paragraph 51 of this Report, that it is one of the major risks, inflation, but also market appetite, so as much as possible we try and make the Olympics an attractive site to work on and we invest money in infrastructure, in strong plans on health and safety and in speedy decision-making.

  Q96  Mr Davidson: On the question of the other contracts on the infrastructure, are you happy with the state of competition for those contracts?

  Mr Higgins: Yes, we are. We are well down the track on all of the enabling works and we have got over £½ billion worth of work contracted to all the enabling works, the tunnelling work is completed, we will be awarding the major bridge contracts in the next month or so and the competition levels there were very strong and we are very pleased with that.

  Q97  Mr Davidson: Can I now go on to the question of employment. We have discussed before issues relating to the scale of direct employment which was considered to be one of the reasons for success in previous big contracts. How well are you doing here in relation to having a proportion of direct employment as distinct from full self-employment?

  Mr Higgins: It is still early days, but we do have around 1,500 employees on the site there with around three-quarters at this stage, we understand, that are directly employed, which is very high in the industry standards, and we hope to increase that, so we are putting a lot of time into getting the right data and facts, so we are really requiring complete disclosure of our sub-contractors and suppliers and we are having good figures on that. Probably the most encouraging figures are that nearly 50% of our workforce and our suppliers are coming from outside the direct London area, so that should put less pressure on inflation, and around 180 of those people currently employed on the site have come from positions where they have not been employed for a considerable time, so getting unemployed people into work on the project is something we have put a lot of time and effort into, so we are quite pleased with that.

  Q98  Mr Davidson: My understanding was that around 50% of those who are employed on the site presently are from within London, but I am not clear whether or not that includes Poles and other Eastern Europeans who are presently living in London or whether or not it actually is London inhabitants who have been living in London, say, for the last five or ten years.

  Mr Higgins: I do not have that detail, but I do know that these are people who are living in London. We have strong figures in the boroughs, so we looked at the five boroughs of the London area and around roughly a quarter of people—

  Q99  Mr Davidson: Well, the figure from the five London boroughs was, I think, 20%, but, if somebody has moved into one of those boroughs yesterday from Warsaw, then the capital in which they live in a sense is Warsaw rather than London and I am, therefore, just seeking clarification as to the percentage of the workforce that have actually originated in Eastern Europe and how many are actually genuinely of the London community. Again the fact is welcomed that I think you said that 10%, and that was my figure, had been previously unemployed.

  Mr Higgins: That is right.