The London Olympics - a gold standard budget?

There is something about the Olympic Games and budgetary discipline that just do not go well together. Paul Gosling finds out what

The 2004 Athens games ended up costing twice their 4.6bn euros (£3.1bn) budget. Beijing's 2008 games are expected to set new records in spending at around $35bn (£18bn), though we may never know how much they really cost. And then there is London.

Amid the instant celebrations of the London success in capturing the 2012 Olympics, there was perhaps too little evaluation of how realistic the costings had been. That weakness has now been put right. A budget originally put at £2.37bn has been revised to nearly four times that figure at £9.3bn.

But there has been much confusion about what is being paid for under the heading 'Olympics'. The sporting facilities and related accommodation are being built on some of the most badly polluted land in London. Cleaning-up this area of East London will cost a fortune, but will produce lasting benefits. A great deal of money will also go on improving the transport infrastructure (which does not come within the Olympic budget) and security (some of which does).

'£1bn will be spent on regenerating the Lower Lea Valley, where the Olympics will take place, but that would have happened anyway - it's just that now it will happen sooner,' says a spokesman for the sponsoring government ministry, the Department of Culture, Media and Sport (DCMS).

Other causes of the rapid escalation of the Olympic bill also cannot be blamed on either the government or the London 2012 bid team. Just one day after London won its bid, came the 7 July bombings. Instantly the task, and cost, of security ballooned from the budgeted £190m to a figure several times that.

But other extra overheads relate to a belated dose of realism. Some £840m of the additional projected costs comes from the recognition that VAT has to be paid on the construction costs. The budget for the bid had assumed that the transaction could be conducted as if it was intra-government spending, with VAT reclaimable. Eventually it was recognised that any such VAT treatment could breach European Union state aid rules.

The DCMS dismisses suggestions that this is a serious issue, given that the money will stay within the government. 'It's just an accounting issue,' says the spokesman. It also turns out that the original budget did not include anything for contingencies. An additional £2.7bn has now been set aside for the unforeseen.

The impact of the Olympic building programme on costs was also underestimated, not least because the very fact of winning the bid pushed up prices, such as for land purchase and construction. Building the stadia is just one of several massive capital works projects scheduled over the next five years. The largest are the government's Building Schools for the Future programme and a range of transport schemes, some needed to support the Olympics commuting arrangements. And that is without the mooted £10bn-15bn London Crossrail project which may, or may not, be approved and commence before 2012.

Consequently, the costs of employing construction workers is set to rise significantly. According to ConstructionSkills, which represents the sector, an extra 90,000 workers need to be trained to meet the demand. And, as China found in building Beijing's stadia, this will no doubt lead to a need for more homes in the capital and further knock-on costs. Another £400m has gone into the London Olympics budgets to take account of the higher land value caused by the success of the 2012 bid.

While there is finger-pointing about the reasons for the escalation in costs, it was inevitable that there would be an increase. Not the least of this relates to the cost of actually building the stadia. The Olympic Delivery Authority has been allocated, in the revised budgets, £5.3bn to construct new sporting facilities, but this is not a capped budget. A spokeswoman merely says that it promises there will not be any 'exponential' cost increase in the future.

So just who did put together the original and seemingly discredited budgets? According to the DCMS, it was senior financial managers at the department, plus the London 2012 bidding team.

If there are doubts about the final costs of the Games, there are even greater questions hanging over their financial benefits. Analysis by UBS Investment Research suggests that the gains may be less than many have assumed. It points out that most jobs created will be short-term, in construction or tourism, producing only a small positive outcome in employment terms. The regeneration of East London promises to produce the most positive results, with an extra 4,500 affordable homes planned. And, judging by previous Games, it can be expected that major international corporations will invest and locate in this deprived area as a result of the global publicity.

The biggest worry is that the British simply do not have a very good track record - if you will excuse the pun - in producing major capital projects on time and on budget. Wembley and the Millennium Dome stand as monuments to grand projects, where reality failed to match the plans. True, the £800m Wembley Stadium has now been completed - two years late - and looks good, and true also that Manchester's Commonwealth Games were regarded as a magnificent success that contributed to the city's regeneration.

The Conservative peer, Lord James, who, as David James, took over executive management of the Millennium Dome, believes that the planners of the 2012 infrastructure must learn the lessons from previous failures. Lord James points out that despite the bad publicity that the Dome got, it was actually built 'nearly on budget, at an overrun of only 2.5%'. It was in revenue expenditure that matters got out of hand. According to James, failings included allowing public bodies to run services they had no expertise in and sponsors converting promised donations into gifts of staff time in lieu; and staff fraud caused by poor controls on ticket sales.

Accounting controls, in general, were weak, claims Lord James. 'The bought ledger at the Dome was a complete and utter catastrophe.' He says he found that many suppliers were sent regular monthly payments of £50,000 or £100,000 a time, without any attempt at reconciling these against actual invoices or agreed fees for contracted services. Similarly, he suggests there was no vetting of subcontractors.

Further, Lord James explains, government regulations on the use of consultants were counter-productive. The rules regard it as bad practice, and potentially a sign of improper behaviour, if the same consultant is engaged more than once on a single project. 'This means that you have got to pay the next one extra fees to go through the learning curve of understanding what needs to be done,' he argues. 'This is folly unrestricted.'

Lord James fears that these failings are not being learnt from when it comes to the 2012 Olympics. A National Audit Office report on the Dome did not endorse all of Lord James's criticisms, but did conclude that the Dome's financial management was not strong enough, with organisational arrangements over-complex.

Yet for the London Olympics, responsibility is shared between the London Organising Committee of the Olympic Games; the Olympic Delivery Authority; the London Development Agency's Olympic Delivery Committee; the London Thames Gateway Development Corporation (for the regeneration); Transport for London (in charge of the transport infrastructure); and the Olympic Lottery Distributor, which grants lottery money to 2012 projects.

And this is nothing like a complete list, with many more delivery agencies expected to pull everything together. Ensuring coherent and strategic planning and management looks set to be a challenge - to put it politely. Plus ca change.

Paul Gosling is a journalist and contributing news editor to accounting & business.