1. On 15 March 2007 the Department for Culture, Media and Sport announced a budget of £9.325 billion for the London 2012 Olympic and Paralympic Games. The announcement came twenty months after London was awarded the Games and just ten days after this Committee's previous hearing on preparations for the Games, at which we expressed concern about the continuing absence of an agreed budget for the Games.[2]

2. The revised budget does not represent the full cost of preparing for and staging the Games, but represents the cost to the public sector of building the venues and infrastructure required to host the Games, as well as policing and wider security. It excludes expenditure of £650 million by the London Development Agency to acquire the land for the Olympic Park, the private sector's contribution to the costs of the Olympic Village (which is still being negotiated), and planned expenditure of some £2 billion on staging costs. The London Organising Committee of the Olympic Games and Paralympic Games (LOCOG), the organisation responsible for staging the Games, is intended to be self-financing.[3]

3. The budget also excludes the costs of staff in government organisations carrying out Olympic related work (including the Government Olympic Executive set up to manage and co-ordinate the Government's interest in the Games), and the costs of improving wider transport links in London. These activities are essential to the delivery of a successful Games. Expenditure incurred by the public sector on improving transport links around London may be brought forward or be higher than it would otherwise have been without the Games.[4]

4. The cost estimate of £9.325 billion is £5.289 billion higher than the estimate of just over £4 billion at the time of the bid to host the Games. The increase is mostly accounted for by new provisions totalling £4.3 billion for programme contingency, tax and security, and by the increase of over £1.1 billion in core Olympic costs (Figure 1). Following our hearing, the Olympics Minister made a further announcement on 10 December 2007, confirming the high level breakdown of cost estimates announced in March 2007.[5]Figure 1: Summary of the differences between the March 2007 budget and the cost estimates at the time of the bid

Costs and provisions	March 2007 Budget (£million)	The estimates at the time of the November 2004 bid (£million)	Difference (£million)
Olympic Delivery Authority budget:
Core Olympic Costs	3,081	1,966	1,115
Infrastructure and regeneration	1,673	1,684	(11)
Contingency	500	No estimate included	500
Sub-total (Note)	5,254	3,650	1,604
Other (non-ODA) Olympic	388	386	2
Other provisions
Policing and wider security	600	No estimate included	600
Tax (Note)	836	No estimate included	836
Programme contingency	2,247	No estimate included	2,247
Sub-total	3,683		3,683
TOTAL	9,325	4,036	5,289

Note: The Minister's announcement on 10 December increased the ODA's pre-tax budget by £43 million to £5.297 billion, with an equivalent decrease in the tax provision to £793 million.

Source: C&AG's report: The budget for the London 2012 Olympic and Paralympic Games, HC612 (2006-07)

5. Asked whether it had deliberately excluded costs from the bid to help win the Games, the Department said the bid estimates had been prepared at a time when it was not certain that the Games would be awarded to London, the land was not in public ownership and detailed plans for the venues had not been drawn up. Some costs had not been included because of significant uncertainties, but the bid was the best estimate at the time and there had been no intention to deceive.[6]

6. The largest single increase was the £2,747 million provision for programme contingency. An initial allocation of £500 million had been made to the Olympic Delivery Authority at the time of the budget announcement in March to meet known financial pressures on the construction of venues and infrastructure. This allocation left £2,247 million to cover factors such as changes in statutory requirements (for example, environmental protection and health and safety), unforeseen ground conditions and potential increases in the cost of security and construction.[7]

7. HM Treasury guidance recommends that budgets for major projects include a contingency to allow for optimism bias, the tendency for the costs of projects to be underestimated. This contingency should reflect a realistic assessment of the risks of additional costs, but not be so generous as to undermine the need for costs to be kept under control. Estimates at the time of the bid included contingency provision for individual projects, ranging from 10 to 23.5%. There was, however, no contingency for the delivery programme as a whole, despite HM Treasury having been consulted and the bid agreed across Government. The Department said that before the bid, the size, scale and complexity of what was to be delivered, as well as the need for this scale of programme contingency, had not been fully appreciated.[8]

8. Following a detailed and quantified risk analysis, the Department and the Olympic Delivery Authority considered that the level of programme contingency was now prudent and realistic. The biggest risk was the immovable deadline, and to avoid cost escalation at the end of the programme it was essential to do as much work as possible early on. The Delivery Authority said good progress had been made, with some £600 million of the budget now committed to major projects, but construction price inflation remains a significant risk given the existence of other major construction projects and the high demand for skilled labour. In the Department's view, the only safe assumption was that all of the contingency would be used.[9]

9. Provision for tax costs was omitted from the original bid estimate because at that time the delivery arrangements for the Games, and thus the tax implications, were unclear. Following HM Treasury confirmation that the Olympic Delivery Authority would be unable to reclaim VAT, tax liabilities of £1,173 million were included in the March 2007 budget (£836 million included in Figure 1 above, plus £337 million within the programme contingency).[10]

10. The original bid estimate included £190 million for site security during construction, which increased to £268 million in the March 2007 budget. The March 2007 budget, however, provided an additional £600 million for policing and wider security, tasks shared between a number of bodies including the Home Office, Metropolitan Police, regional police forces and the emergency services. The Home Secretary is in overall charge of security for the Games and has appointed an Assistant Commissioner of the Metropolitan Police as the Olympic Security Co-ordinator, supported by the Olympic Security Directorate.[11]

11. The figure of £600 million was a preliminary estimate pending development of the detailed plan for security, and a further £238 million was included within the programme contingency. The Department confirmed that it had been consulted on the Government's plans, announced on the day of the Committee's hearing, for improving security precautions more generally in the UK (for example, restrictions on car access and checks at railway stations), and that the programme contingency was designed, amongst other things, to cover the impacts of regulatory changes.[12]

12. The other main change from the estimates at the time of the bid to host the Games was the £1.1 billion increase in the core Olympic costs. This area of costs included venues, those transport projects to which the Olympic Delivery Authority was contributing, site security and programme management. More than half the increase, from £16 million to £570 million, was for the Olympic Delivery Authority's programme management costs, including the cost of its delivery partner, CLM. The Department had modelled the original estimate on an urban development corporation and prepared it before setting up of the Olympic Delivery Authority. The Delivery Authority had since commissioned an external review of its delivery partner's costs, and considered them realistic compared with other major infrastructure projects.[13]

3   C&AG's Report, paras 3, 49, 73; Figures 5 and 6 Back

4   C&AG's Report, para 49; Figure 5; C&AG's previous report, Session 2006-07, Preparations for the London 2012 Olympic and Paralympic Games-Risk assessment and management, HC 252, para 75 Back

5   C&AG's Report, paras 7, 36; Figure 6; HC Deb, 10 December 2007, cols 9WS-14WS Back

6   Qq 4-6, 138-139 Back

7   C&AG's Report, Figures 6 and 7 Back

8   Qq 140, 163-166, 175-180; C&AG's Report, paras 60-62 Back

9   Qq 7-10, 92-93, 119, 131, 133, 146 Back

10   Qq 2, 142; C&AG's Report, para 6; Figures 6 and 7 Back

11   Qq 76, 182-184,; C&AG's Report, para 59; Figures 6 and 7. The Olympic Security Directorate, led by the Assistant Commissioner of the Metropolitan Police, comprises members from the regional police forces and the emergency services. Back

12   Qq 75, 116; C&AG's Report, para 59; Treasury Minute on the Thirty Ninth Report from the Committee of Public Accounts 2006-07; http://security.homeoffice.gov.uk/news-publications/news-speeches/PM-security-speech Back

13   Qq 13, 90-91, 121; C&AG's Report, Figures 6 and 7; CLM is a consortium of three companies - CH2M Hill, Laing O'Rourke and Mace Back