27 June 2008
The London Olympics present a financial challenge like no other – combining a global sporting event with a major regeneration project. But to achieve its goals the Games will need substantial private investment
There are some projects that are bigger and more financially challenging than the 2012 Olympic and Paralympic Games – but not many. When London was awarded the games in July 2005, it took on much more than hosting the world's biggest sporting event. It committed to one of the largest regeneration projects in Europe, if not the world. The scale of ambition is breathtaking – and, for a finance professional, not a little daunting.
One of the most scrutinised issues about the project has been the cost – understandably, since hosting an Olympic Games is one of the most significant single public sector investments a government can make.
So what is our budget? In March 2007, we presented to Parliament a public sector funding package of £9.325bn. This is a lot of money – but consider what we are trying to achieve with this investment.
Aside from the construction of five international standard sporting venues – and their subsequent conversion to long-term community use – and a 17,000-capacity Olympic village, London 2012 will regenerate a 500-acre park, restore 8 kilometres of waterways, build 20 kilometres of new roads and clean and move 1 million cubic metres of soil. The project will also remove 52 pylons (each 65 metres high) and replace them with 12 kilometres of tunnels 30 metres below ground to house 200 kilometres of electrical cables. It will also remove 3.2 kilometres of gas mains and 19 electricity substations and relocate 2.5 kilometres of railway sidings.
Some 9,000 new homes will be built and 120,000 square metres of space provided for businesses located in what will be the broadcast and press centre during the Games. This accommodation will be fully cabled and ready for technologically sophisticated creative industries. In short, the area will be transformed beyond recognition benefiting thousands – if not millions – of people for generations to come.
This would be challenging enough. But of course the deadline is immovable. The London Games will begin on July 27, 2012 and the Paralympic Games on August 29. We cannot be late – which clearly has consequences for our financial planning. The challenge is to minimise the impact of this, particularly as it affects cash flow and overall costs.
So the public sector funding package has to do a number of things. It must deliver a fantastic Olympic and Paralympic Games on time and on budget – as well as delivering our wider regeneration ambition. And that is where most money will be spent: 75 pence in every pound will leave a long-term legacy in terms of regeneration value.
It is therefore misleading to say that London 2012 alone is costing £9.3bn. It isn't. It is a public sector funding package for both the world's biggest sporting event and Europe's biggest regeneration project. It also includes a provision of £2.7bn contingency funding, which might not all be used.
True, we could have put on the Games for a lot less money. We could have chosen a location that was not an area of high deprivation in need of major regeneration investment, and just built venues on a greenfield site. But this would have been an opportunity squandered – the chance to completely revive one of the country's poorest areas and improve the lives of millions of people now and in the future.
The source of funding presents its own challenges. There is not one single pot of money. In total, there are three government departments, two lottery funders, the Greater London Authority and the London Development Agency, each with their own cash-flow constraints, which have to be managed smoothly to keep the site works funded and on track. When you consider that at peak we will be spending about £4m a day – the equivalent of one new secondary school a week – the cash flow alone is a considerable challenge.
The financial involvement of the public sector is, of course, not the whole story. We simply could not fulfil the ambitions we have for London 2012, or achieve the long-term regeneration value, without private sector investment. Nor would we want to. A project of this scale provides a tremendous opportunity to call on private investment and expertise, both of which reduce the burden on taxpayers and help to stimulate growth and commercial openings across east London.
In terms of infrastructure investment, our strategy has been to focus private sector opportunities on projects that will have a long-term use, defined with sufficient clarity by the start of the procurement.
The Olympic Village is one such project, comprising around 4,000 residential units and with construction costs of more than £1bn. Preferred developer Lend Lease will lead the building of what will become new housing blocks. Debt and equity funding is expected to be raised against future residential property sales receipts. The Olympic Delivery Authority will finance the cost of site infrastructure and will benefit from a share of the profits from the future residential sales.
The broadcast and press centres will also be developed by the private sector, with the ODA contributing to costs to ensure the media requirements for the Games are met. The developer will have the long-term responsibility to maximise regeneration value by developing a new mixed-use business centre after the games. The ODA is in the final stages of concluding the deal and will make an announcement shortly.
The funding of utilities for the Games will also provide significant private sector investment. The ODA will build 6 kilometres of water pipes, 6.5 kilometres of gas pipes and 18 kilometres of electrical ducting, with the opportunity later to sell concessions with long-term revenue opportunities.
However, the private sector contribution to the wider regeneration of the area goes much further than the ODA's own projects. London 2012 has given an added impetus to the Australian property giant Westfield's multibillion-pound Stratford City development. This will be the largest retail-led, mixed-use urban regeneration project ever undertaken in the UK, with 1.25 million square metres of retail, leisure and entertainment facilities, offices, hotels, housing, communities and public space.
These facilities will enable Stratford to attract further commercial and residential development. In total, it is estimated that the private sector will invest about £7bn in the Stratford City Retail Development, Olympic Village, broadcast and press centres and utilities infrastructure.
There will also be major LDA-led long-term land and property development opportunities in the Olympic Park area when the land is sold after the Games. The government and the mayor of London will benefit from the land receipts, after repaying the LDA, which bought the land, and reimbursing the National Lottery for some of its investments in the project.
And, of course, beyond the physical infrastructure, there is the £2bn budget for the London Organising Committee to stage the event. The cost of clothing 70,000 officials, feeding 17,000 athletes and officials, mobilising the huge workforce (some 200,000 strong across both Games) and accommodating 20,000 media staff represents a massive logistical challenge. The cost is equivalent to staging 26 world championships concurrently.
This budget will be privately financed from ticket sales, TV rights, merchandising and domestic and global sponsorship – with the exception of a relatively modest contribution that the government is required to make to the cost of the Paralympic Games.
Make no mistake, the private sector has a massive stake in the Games, and a major role to play in delivering their long-term benefits. We have ensured that we have taken every opportunity to attract private investment and expertise into this project for the benefit of the taxpayer, the many thousands of Lower Lea Valley residents and of business itself.
Of course, the involvement of the private sector does not come without risks. The recent 'credit crunch' and resulting turbulent global economic situation has had an impact, for example, on the deal with Lend Lease regarding the Olympic Village. However, we believe that the general business proposition is sound and, though changing market circumstances obviously present a challenge, I am confident that it can be overcome. The ODA expects to sign interim agreements shortly and we remain on schedule.
The Olympic and Paralympic Games present a once-in-a-lifetime opportunity to deliver lasting regeneration to an area crying out for investment. The combination of public and private sectors working together is central and indispensable to achieving this ambition.
To ensure that this is achieved, the public sector will prove it means business by completing its side of the bargain on time and on budget. Indecision and delay would be fatal to a project of this size and complexity, and would seriously compromise the will and ability of the private sector to invest.
We have made an impressive start. The first major project, to dig tunnels and lay cables to replace the pylons that blight the site, has been completed on time and on budget. Contracts for most of the main venues have been signed and construction has started on the main stadium – more than two months ahead of schedule.
However, there is still a long way to go and a lot of challenges lie ahead. But based on the structures we have established and on progress so far, I am confident that London 2012 will raise the bar in terms of delivering a Games that is both a truly memorable event and also leaves a successful and enduring legacy.
David Goldstone is director, finance and build, at the Government Olympic Executive
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