A Night At The Fag Packet Olympics

As we've blogged many times, the 2012 London Olympics is a classic of fag packet planning. And that original £2.375bn budget was almost certainly dreamed up over an evening playing the Withnail drinking game down at the Stoat and Weasel.

Last week the National Audit Office produced its second report on the whole disaster (see this blog for PAC hearing on first report). And this time they've had a go at unravelling just how such a half-baked budget could ever have been cooked up.

What they conclude is a shocking testimony to the prevalence of wishful thinking and outright deception among our rulers.

The fag packet was first scribbled on one evening down the Weasel in 2002. It was then that the DCMS, the Greater London Authority, and the British Olympic Association jointly commissioned consultants Arup to produce "a study".

At £85 grand, it wasn't cheap. But it was certainly half-baked. It purported to be "a high level cost-benefit analysis of a ‘specimen’ Games (excluding regeneration) for appraisal purposes". And it reckoned the whole thing could be done for a public subsidy of just £494m (para 25).

That's right. £494m.

Even though the Sydney games- one of the most successful ever- had just cost Aussie taxpayers over £1bn, and Athens was well on course for £5bn.

The DCMS ordered up another round (£31,000) and asked PWC to do another "study". Sniffing the political air (or something), they reckoned it would cost between £1.1bn and £2.1bn (para 26)- both figures being way beyond the initial Arup estimate.

So in the space of just two rounds, the fag packet had gone from £494m to maybe £2.1bn.

It was at this point that Tessa Jowell entered into a "memorandum of understanding" with Ken Livingstone to go ahead and bid. The agreed cost figure was £2.375bn (para 27).

But then someone pointed out they still hadn't agreed where precisely these so-called "specimen games" were going to be staged. So they cobbled together a site in Stratford and the Lea Valley and got PWC to do another "study" (for a further £182,000). This time they reported that "the net costs associated with hosting the Games" would total "some £4.5 billion" (para 28).

That was clearly far more than the politicians wanted to admit, so they scurried around trying to cut public sector costs. In particular, they got Partnerships UK, the Treasury quango that promotes PFI deals, to guess at how much private funding might be available. PUK guessed an extraordinarily precise figure of £1.336 billion (para 30).

In the event, they decided to halve that figure, and put in £738m. (That was still wildly optimistic, with the latest guess now standing at just £165m).

Somehow, through systematic optimism and entirely omitting a whole raft of stuff like tax payments and security, they got the figure back to £2.375bn.

But it wasn't worth the fag packet it was written on.

We now know the real figure was £9.325bn. Plus a further £8bn or so in transport and other infrastructure.

But as taxpayers we should still be very concerned. Because given the shambles so far, the NAO also asked whether the latest £9bn budget presented in March (see this blog) is at last sound and complete.

And the answer is- surprise- nobody really knows. There's still big uncertainty whether the contingency reserve will be enough, how much construction inflation will be pushed up by all the building work, what will be the detailed design specs, how keen contractors will be to undertake the work, and the detailed cashflow benchmarks.

As the NAO chillingly concludes: "The budget for the Games as announced by the Secretary of State is in effect an outline budget... A baseline budget should be underpinned by clear definitions to help ensure that costs are allocated consistently and financial information can be relied upon... The budget was finalised only shortly before the Secretary of State’s announcement to Parliament, but the timescales meant that the formal drawing together of the budget, the key assumptions and judgements underpinning the cost estimates, and the key deliverables which the Olympic programme is expected to bring had not been completed." (paras 78-82)

We will need to watch them very carefully.

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