Revealed: the true cost of Olympics
With a possible final bill of £8bn London’s 2012 Olympics could be the most costly sports event ever, says a report obtained by The Observer. Why were the original figures so much lower? By Denis Campbell
Sunday November 19, 2006
The Observer
City Hall, Ken Livingstone’s egg-shaped headquarters in the shadow of Tower Bridge, hosted many of the meetings, press conferences and receptions that paved the way for London’s unexpected but euphoric victory last year in the race to stage the 2012 Olympics. Last Wednesday morning it was the scene of a much more sombre and fractious gathering that will be remembered as the moment when the optimism surrounding that triumph gave way to the complicated and expensive reality of bringing the world’s greatest sporting event to Britain.
The truth sank in at the talks in the chamber on the second floor, where 22 of the capital’s 25 elected members of the London Assembly occupied their desks. In front of them sat Sir Roy McNulty and David Higgins, the interim chairman and chief executive respectively of the Olympic Delivery Authority, the body charged with building an array of sporting venues and regenerating a swath of the East End well before the 200-odd competing nations arrive in July 2012.
After the assembly chairman, Brian Coleman, opened the proceedings, the chamber’s two plasma screens displayed a photograph of Jack Lemley, a veteran American construction entrepreneur who until last month had been the delivery authority chairman. Then, over the public address system, came an audio recording of an interview Lemley gave recently to his home town newspaper in Idaho about the progress of 2012, soon after he surprisingly left ‘to spend more time pursuing his business interests in the United States’.
McNulty and Higgins, already looking uncomfortable ahead of a planned grilling by assembly members, visibly tensed. ‘They looked decidedly awkward,’ said one witness.
Their discomfort grew. As the DVD played, Lemley was heard warning that the costs of putting on the Olympics, which everyone involved had always insisted would be no more than £2.375bn, would rise exponentially. He predicted that major building projects would be late. That political interference had bedevilled his efforts. That the £280m new Olympic Stadium was mired in disputes over what it should be used for once the last Olympic final had been staged.
If seven time zones away in Boise, Idaho, Lemley was listening, he would have taken what emerged from the questioning, first of the pair from the authority, then of the Mayor of London, as vindicating much of what he had told the Idaho Statesman. The costs had increased ‘significantly’ since London’s victory in Singapore in July 2005, McNulty confirmed, blaming rises in the price of security and regeneration and the need to establish a bigger than expected contingency fund to cover construction cost overruns: £5bn was now a much more realistic figure than the original £2.4bn, it emerged.
Some assembly members were surprised to hear McNulty dismiss the original £2.4bn budget as nothing more than ‘a concept developed in a matter of months’ when London was putting together its bid for 2012. Assembly members of all parties were unimpressed and concerned by what they heard. But, they asked, weren’t the public told endlessly during the two-year bidding process that the costs had been carefully worked out and rigorously checked? How could costs have risen so dramatically, so quickly? Were the figures underestimated to help gain public approval?
Livingstone was more forthcoming. For example, he detailed how the original security budget of £190m had now, post 7/7, been revised to £850m. There was also the extra money needed to build 40,000 new homes in the Olympics zone at £1bn-£1.5bn above the £1bn originally set aside for regeneration. However, asked if the soaring costs of 2012 would leave London council tax payers footing even more of the bill than the £625m they are already facing, the mayor replied: ‘I may not be here in 18 months. Any guarantee I give about what happens in 2012 is not worth the paper it is written on.’
In such circumstances it is no wonder that concern is growing that the Olympics is in danger of becoming a huge and ever-increasing financial black hole. It is a worry shared by elected members from all the five parties represented on the London Assembly: Labour, Conservative, Lib Dem, Green and One London, formerly UKIP. Coleman says: ‘The original £2.4bn budget was wildly inaccurate. They’re now saying that it will be £5bn. But I would be surprised if they bring it in for under £9bn. It’s likely to end up at around £10bn. And at this rate of rise it could be at £20bn by 2012. That may strike people as overly pessimistic, but who would have said Wembley would be a year late and cost £1bn?’
The issue of exactly how much 2012 will cost, and who pays for the overruns, will take centre stage again this week, when the assembly’s cross-party budget committee debates a report it has produced - passed to The Observer - on the financing of the event.
Written before last Wednesday’s revelations, the assembly document puts the total cost of the Games as £4.4bn, at a time when London 2012 officials were still sticking to the £2.4bn now widely seen as a colossal miscalculation. However, given the new information, assembly members say that to calculate the true likely overall cost another £4.4bn needs to be added. This includes:
· The extra costs that were finally identified last week - £1.5bn for regeneration and £660m on security.
· The £250m for VAT on construction work that did not appear in the original budget submitted to the IOC.
· Money to cover a Treasury demand for a contingency fund stretching to 60 per cent of the whole budget.;
· The quickly rising cost to the London Development Agency of buying land in the East End for the Games: the revised figure of £1bn, up from a planned £478m, is likely, by the LDA’s own admission to the committee, to rise again to £1.5bn.
From those figures, it is easy to see why assembly members now put the real budget for 2012 at around £8bn. Peter Hulme Cross, one of the One London Party’s two members, says: 'It could be £8bn, and that wouldn’t surprise me. I think we’ll end up around £10bn. That’s an awful lot of money to pay for four weeks of sport.
‘The £2.4bn was fanciful and unrealistic, but I don’t think it was necessarily deliberate deceit. To win the Games, they had to put in a figure that was acceptable both to the IOC and the British public. But the powers-that-be just hadn’t costed the thing realistically.’ Others, more cynically but without hard evidence, believe that someone, must have deliberately downplayed the costs.
Soon after London’s victory, cracks began to appear in the London 2012 alliance’s insistence that £2.4bn would cover it. In September the government was forced to acknowledge for the first time, to this newspaper, that it was putting in £1bn to help regenerate the Lower Lea Valley, beside the planned Olympic Park where many of the 2012 events will be held.
By the following month, the Culture and Sports Secretary Tessa Jowell had begun emphasising controlling costs rather than sticking to the line of ‘absolute cast iron guarantees’ that £2.4bn was a final figure - even though around the same time Lord Coe denied an Observer report that the final budget would be around the £5bn suggested last week.
The bombs that exploded in London on 7 July 2005, the day after the capital was awarded the Games, are cited as the reason for the huge jump in the security budget. But as one Assembly source put it: ‘Everyone had said before 7/7 that London was a target and needed to be prepared, so why did it take bombs actually going off for someone to make a proper assessment of the costs of guarding a huge event like the Olympics?’
Similar questions can be asked about the delivery authority tripling its budget for buying and cleaning up land in the Lea Valley from £478m to, now, £1.44bn. Prime redevelopment land there was never going to be that cheap. Was it misjudgment or over-confidence?
Behind the facade of Olympic unity that covers all the 2012 stakeholders - government, mayor, British Olympic Association and Olympic Organising Committee - a furious row is going on about whether the contingency budget needs to be 20 per cent of the total - Livingstone’s preference - or the 60 per cent the Treasury has demanded. But the fact that the keepers of the government’s purse strings feel obliged to seek such a large reserve - the construction industry norm is 20 per cent - speaks volumes about the growing apprehension behind the scenes. There are a host of other actual or potential problems. One reason why Lemley resigned, it emerged yesterday, was because he was frustrated at the slow progress in cleaning up the contaminated land in the Lower Lea Valley. Just before he left he told an audience of building executives: ‘We have not yet touched this site and this is a huge problem. What if there is unexploded ordnance from the war? We have to identify what is in the ground to get the programme moving. Not a spoonful of dirt has been turned all summer.’
In addition the saga of the Olympic Stadium’s post-2012 use - athletics? football? - is proving divisive. There are also doubts about the organising committee’s ability to raise the £750m it needs from private sponsorship, and UK Sport’s chances of raising £100m to help fund British athletes’ quest for medals at the event. And a strategy to boost young people’s participation in sport - Coe’s key pledge in his pitch to the IOC - has not arrived. Some things are out of London 2012’s control, such as the doubling in steel prices since it won the Games.
The real possibility that work on key venues may not be done according to timetable, requiring extra payments to contractors to hire more labour - as happened in Athens before the 2004 event - is a private worry for the senior people in the 2012 team. ‘It’s a high-risk project that has to be finished by a fixed deadline,’ said one last night.
In July 2005 luminaries of London’s bid team, such as David Beckham and Steve Redgrave, hugged each other in delight in Singapore when London won. Back home, thousands watching on big screens in Trafalgar Square joined in the celebrations. The mood is different now. Scepticism has replaced exhilaration. London has begun experiencing its Olympics growing pains. With more than five-and-a-half years to go before London’s Olympics begin on 27 July 2012, there is time to take decisive action and restore public confidence. But London may be on the verge of setting its first Olympic record - overtaking Athens, whose event cost £9bn, as the most expensive Games in history.