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Collusion or cock-up over bid costings?

Some more fascinating evidence about how the original bid costings were £5bn too low emerged from the House of Commons Public Accounts Select Committee deliberations on 14 Nov 2007.

Mr Marius Gallaher, the Alternate Treasury Officer of Accounts, HM Treasury, gave evidence.

Mr Alan Williams is the Labour MP for Swansea West

Jonathan Stephens is Permanent Secretary, Department for Culture, Media and Sport.

David Higgins is Chief Executive, Olympic Delivery Authority.

[Extract from uncorrected transcript begins]

Mr Gallaher: The bid was estimated at the time based on the facts available to those who were constructing the estimate and the bid at the time. In the light of London winning the Olympics there was going to be a clear re-evaluation of those estimates to take account of contingencies.

Q170 Mr Williams: That may be so, but why not do it at the beginning so we had a clearer idea what they needed? That is what the Treasury guidance is about.

Mr Stephens: What I can say is that in all the considerations and expert analysis, as far as I am aware no suggestion was made that a specific amount for programme contingency should be provided over and above the contingency that was already included project-by-project within the bid estimate.

Q171 Mr Williams: What contingency was already in?

Mr Stephens: There was an existing contingency built into the various projects at varying levels up to 20%.

Q172 Mr Williams: In paragraph 62 we are told at the time of the bid that no provision was made for contingency on the Olympic bid as a whole. You have agreed to that, you have signed up to that.

Mr Stephens: Yes.

Q173 Mr Williams: That contradicts what you have just told me.

Mr Stephens: That is for the Olympic programme as a whole. That is the programme contingency. Elsewhere, at paragraph 61 the report makes clear that it did include contingency provision at the level of individual projects.

Q174 Mr Williams: It goes on to say: "During the course of the budget review process, however, the Department and the Olympic Delivery Authority concluded that it would be appropriate to increase the budget to include programme contingency..."

It needed this because - these were great surprises that you discovered - "because of the general risk of 'optimism bias'", in other words an underestimate of what happened on building costs.

You were unaware of that risk before, obviously. "...and more specifically because of the complexity...", perhaps no-one had drawn your attention to the complexity of the project, "..and scale of the Olympic programme", you must have noticed the scale of the Olympics.

It gets worse: "...the interdependencies of different elements of the programme, and the immovable deadline for delivering the Games. These factors bring significant risks of cost pressures...", which my colleague, Mr Mitchell, referred to.

Are you saying that you were not aware of all of these dangers at the beginning, they came as a surprise to you, a revelation, partway along the route that suddenly you needed to do something that the Treasury had been saying you should have done at the outset anyway?

Mr Stephens: I return to the point that the estimates at the time of the bid were compiled on the basis of the knowledge and advice on developments available at the time of the bid. The expert advice that has been published is fully available and reflects the risk factors.

Q175 Mr Williams: Sorry, let us come back to that. The advice at the time was unaware of complexity, unaware of scale, unaware of the interdependencies, unaware of the danger of cost escalation in the building industry. On all of these things you were naïve and innocents in the economic world and you did not realise these things went on, but suddenly it dawned on you and you made provision which the Treasury should have been insisting on you making from the outset.

Did the Treasury get involved at any stage in insisting that a proper contingency provision be made?

Mr Gallaher: I believe the Treasury was consulted in the construction of the bid.

Q176 Mr Williams: It was consulted at the beginning on the construction?

Mr Gallaher: Of the estimate.

Q177 Mr Williams: At that stage, therefore, Treasury would probably have indicated its long-term guidance, would it not?

Mr Stephens: What is clear is that the bid was collectively agreed across Government.

Q178 Mr Williams: Sorry, first of all I want an answer from the Treasury.

Mr Gallaher: The Treasury would have pointed to the guidance available.

Q179 Mr Williams: There we are. Despite what you just said, the guidance was drawn to your attention right at the beginning but you chose to ignore it. Why? Was it incompetence?

Mr Stephens: I repeat, the bid was collectively agreed across Government. It reflected the state of knowledge and expert advice on developments at the time. The expert advice on which it was based has been largely published and is publicly available and can be reviewed.

That shows that it did include an attempt to analyse risks and provide for contingency project-by-project on those risks. The bid was constructed at a time when the delivery structure was not in place, the land was not in public ownership and the detailed plans for venues could not be drawn up.

Q180 Mr Williams: In that case, the provision for the contingency at that stage should have been even higher because of all the unknowns, should it not?

Mr Stephens: I come back to the point that in the detailed and expert analysis which the Department commissioned and took into account, which was available across Government, there was risk analysed, contingency built in project-by-project, but no suggestion that over and above that there should be a programme contingency fund.

Q181 Mr Williams: It was the same with the security side. We are told that the provision made for security was, in fact, only site security during the construction phase. There was no provision whatsoever for security during the Olympics. Had anyone ever mentioned Munich to you?

Mr Stephens: Had anyone mentioned?

Q182 Mr Williams: I will spell it out to you: M-U-N-I-C-H. There was a little incident there some years ago.

Mr Higgins: The bid did include costs for running the Olympic security during the Games within the Olympic Park. That is covered for in the local budget.

Mr Stephens: If I may say so, my predecessor, the Accounting Officer at the time, wrote to the Committee at the time of the bid and she said: "While an allowance of 190 million for security costs has also been made, which is covered by the Olympic budget, the Home Office consider that there may be wider costs associated with policing and counter-terrorism. At present it is not possible to quantify these wider costs precisely". That was brought to the attention of the Committee at the time.

Q183 Mr Williams: No, no, what was the last word?

Mr Stephens: "... not possible to quantify these wider costs precisely"

Q184 Mr Williams: "Precisely". So it was possible to calculate. It may have been wrong but there could have been a calculation. You did not even make a calculation because you only took in the construction phase. Why did you not make a calculation at the beginning? I come back to my original question on this issue: had you not noticed what happened at Munich some years ago?

Mr Higgins: If I could clarify the scope of the security. There are three areas of security.

To cover your issue of Munich, the cost of securing the Olympic Village and the Games venues during Games time is a LOCOG cost, is budgeted for and was always budgeted for.

The cost of security of the Games venues and infrastructure during the construction of the Games and up until handover to LOCOG during the 60 day period of the Games is covered within the ODA allowance and there always was a budget. There was a budget of some 190 allowed for at the time of the bid. That has been increased since then but there always was an allowance.

The cost that we are talking about, the 600 million, is a cost to cover the other security costs which are covered by Home Office or Met Police outside the Olympics. That covers the arrival of dignitaries and securing the rest of UK and London during Games time. That is a Home Office and a Met Police cost. These are for covering major events, whether it be G8 or a Wembley Final. These costs are obviously substantial because of the size and scale of the Olympics. That is the issue which was notified to the Committee, that these were unknown at the time. They are difficult to determine even now.

Mr Williams: From where I am sitting this smacks of convenience rather than competence. Thank you, Chairman, my time is up.

Chairman: I think that last line of questioning sums up what has been a difficult afternoon for you, Mr Stephens, and I think you can expect a critical report from this Committee. It seems to me that you, or rather your predecessor, grossly underestimated the entirely foreseeable costs and it would have been a lot better if you had taken the public into your confidence at the time. Thank you very much.

[Ends]

From: uncorrected transcript of evidence Public Accounts Select Committee

See also; Chaotic
Project Management


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