Finance Committee, 11 Dec 2007

Meeting date: Tuesday, December 11, 2007

Official Report 130KB pdf

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Glasgow Commonwealth Games Bill: Financial Memorandum

Under item 2, the committee will take evidence on the financial memorandum to the Glasgow Commonwealth Games Bill. We agreed to adopt level 3 scrutiny of the bill, which involves taking oral evidence from Scottish Government officials and organisations that will be affected and producing a report for the lead committee.

I welcome to the meeting Derek Casey, who is the interim chief executive of the organising committee; Lynn Brown, who is Glasgow City Council's executive director of financial services; Nick Brown, who is the Scottish Government's bill team leader; and Maureen McGeown, who is a finance team leader in the Scottish Government.

I invite Mr Casey to make an opening statement.

Thank you, convener. We welcome this opportunity to give evidence to the committee.

As the convener said, I am the interim chief executive of the organising committee. I was the bid director until 9 November. Lynn Brown has been extremely closely involved with the development of the games budget. Nick Brown is the bill team leader. Maureen McGeown was closely involved with the development of the budget before the bid was submitted.

The games budget is set at £373 million. Revenues of £75 million are expected, which leaves a balance of £298 million. That will be met by the Scottish Government and Glasgow City Council on an 80:20 split that was agreed during the bid phase. The budget is the result of extensive work over several years by my team, the city council, the Scottish Government, the Commonwealth Games Council for Scotland and PricewaterhouseCoopers. It has also been subjected to detailed scrutiny by the evaluation commission of the Commonwealth Games Federation.

We are confident that the budget is realistic and robust. Although the bidding process has changed and is much more demanding and thorough—a change that we have welcomed—we have also learned important lessons from previous games. Unlike Manchester or London, our risks are limited by the nature of the proposals for the games in Glasgow, as more than 70 per cent of the venues are already in place and another 20 per cent are already in development.

We also have an appropriate contingency of £40 million in the budget, which we feel will be capable of absorbing any changes in revenue or expenditure targets.

The lessons from Manchester and Melbourne, which hosted the most recent games, in 2006, have been taken into account. We will be keeping a close eye on the developments in Delhi, which is holding the 2010 Commonwealth games, and London, which is holding the 2012 Olympic games—I should stress that the Commonwealth games and the Olympic games are significantly different in nature and scale.

As with any budget, there are risks associated with this budget. However, I am confident that those risks have been considered in detail during the past two years and have been addressed. I believe that, as a result, what we have provided in the bid document is an accurate estimate of the cost of the 2014 Commonwealth games in Glasgow and Scotland.

We would be happy to answer any questions.

The financial memorandum states that the overall cost of the games is £372.977 million, at April 2007 prices. Pages 52 and 108 of the Scottish Government's spending review document state that, in the next three financial years, £3.5 million, £3.8 million and £3.6 million will be spent on revenue costs, along with £0.6 million, £2.8 million and £8.0 million on capital costs. That comes to a total of £22.3 million over the three years. What is the expected profile of the costs over the remaining years until 2014?

I will ask Lynn Brown to answer that question, but I will say that those sums reflect the different stages of preparation for a games of this type.

I can provide for the committee a detailed cash flow description of the spend in every year. In the first three years, there is a limited spend because the capital spend does not rack up until later in the programme. The first three years are very much about setting up the games. We have a number of payments to make to the CGF in those three years, which total about £3.5 million, and we have host nation payments to make. The spend for the games does not increase until after the first three years. That fact is reflected in the workforce figures: in the first three years, there are about 40 staff.

I will use staffing as an example of a factor that goes across all the headings. About 30 or 40 staff will be in post in 2009, but there is a substantial increase in staffing after that point. The nature of cash flow in games preparation tends to be very much skewed towards the final two or three years. There is quite a light touch, in terms of expenditure, until about 2009 or 2010, and then there is a substantial increase in the next three to four financial years.

What is the expected total cost, in cash terms?

The total expenditure cost for the organising committee is £373 million.

That is the figure that you are sticking with.

That is the gross cost. The net cost—the public subsidy—is £298 million.

Revenue line 9 in annex A of the financial memorandum shows that Glasgow City Council will contribute almost £60 million to the budget. The financial memorandum states that the council is committed to using its own resources for that and that the sum is

"not a consequential cost of the Bill."

Does that mean that the council is not being allocated specific additional resources for that commitment?

That is correct. We are not being given additional resources.

I congratulate you again on the tremendous victory in getting the games to Glasgow. I have a straightforward factual or technical question and one or two questions about income. On expenditure, line 14 of annex A in the financial memorandum has a figure of nearly £23 million for "IBC/HBO". What does that stand for?

Thank you for your note of congratulation. The support from all the political parties has been tremendous and it certainly made a huge difference to the final decision, so thank you for that.

I can split the cost. Of the £22 million—

Sorry—my question is not so much about the cost; I just want to know what the acronyms mean.

Sorry. IBC is the international broadcasting centre, which will be at the Scottish Exhibition and Conference Centre. The cost for that is about £3.3 million, to hire a big hut. The additional cost of £19.3 million is the estimated costs for broadcasters—that is the HBO element. The figure is based on advice from the CGF.

What does HBO stand for?

Sorry. It stands for host broadcasting organisation. So one part is for a physical structure to house the broadcasting and the other is a broadcasting payment.

Thank you. I am sure that everyone else knew what that was and I was the only one who did not.

I have a couple of questions about income. The Commonwealth Games Federation will contribute about £31.4 million, but that includes income from broadcasting rights. What assumptions have been made about the income from broadcasting rights? If that income is not realised, will the federation still make the same contribution?

The £31 million is divided into two elements. Roughly £1.5 million will be returned to us by the Commonwealth Games Federation in return for our sharing the knowledge that we will build up in the coming seven years, which will be fed into a central database and be available to the host cities in 2018 and 2022. That is one element of the amount.

The anticipated income from broadcasting rights is £29 million. The CGF gave us that figure after taking advice from broadcasting experts. It is the CGF's anticipated income. The CGF will continue to own the broadcasting rights, but we are in discussion with it about the joint selling of the rights in the next few years. We have a meeting on Monday to begin that discussion. We want the CGF's estimate to be a basis, rather than a ceiling, for the income from broadcasting rights. However, to answer your question directly, the risk of not achieving £29 million falls on the organising committee, not the CGF. That is why, after the evaluation commission of the CGF met us, we increased the contingency budget—the increase was related directly to that risk. The risk has been assessed and is built into the budget that is before the committee.

My second major question is in two parts. First, you estimate that local sponsorship will contribute slightly more than £23.5 million and that merchandising will contribute £1.5 million. It would be helpful if you expanded on that a bit. The other part is about the zero for lottery contributions. Is that because you have not asked for such contributions, or because you have asked for them and have not received a positive response?

If I take merchandising and sponsorship, perhaps Nick Brown can talk about the lottery.

We have allocated a net income of about £1.5 million from merchandising—that is the net income from the expected merchandising sales over the piece. According to research by experts in the field, that is a good average figure for the merchandising income that would come from a games of this nature.

It is important to stress that the current figure for sponsorship of £23 million or £24 million is based on the Scottish market. It is what experts have said is achievable in the Scottish market—it is a challenge, but I welcome that challenge. Based on what is achievable in the United Kingdom market, they have said that that figure is prudent. They are anticipating that there is enough scope in the sponsorship market in the UK to achieve a higher level. We have gone for the prudent approach and are acting cautiously.

We are in a unique situation, with the Olympics in London in 2012 and the Commonwealth games in Glasgow in 2014, and the sponsorship market is considering how it should respond. However, the sponsorship of the Olympics is at such a high level for top-tier sponsors—up to £75 million or £80 million—that a number of companies have approached us in the past few weeks to say that that is not really in their league and that they would like to discuss sponsoring the Commonwealth games. We are being cautious at the moment, and we will have to see how things fall into place over the next few years. As I said, we have taken a range of advice on the matter.

I can confirm that no approach was made for lottery funding. There was contact with the UK Government in 2005 to explore the possibility of lottery funding. The advice that was received was that funding from the lottery to support the bid would need to come through the normal lottery application processes. The decision was taken to identify funding on an 80:20 basis between the Scottish Government and Glasgow City Council. That meant that when the bid was submitted, it was based on identified and clear funding. One of the strengths of the bid was that it was based on identified funding rather than on hopes for bids in future.

What is the difference between the way in which the Olympics and the Commonwealth games were treated? Lottery funding was part of the Olympic bid.

Yes. The Olympics are supported in part by specific Olympic lottery games, which required primary legislation in the UK Parliament. It was decided that we would not approach the UK Government to seek legislation to enable that in relation to the 2014 games in Glasgow. The bid was submitted on the basis of the identified funding, which was split 80:20 between the Scottish Government and Glasgow City Council.

The £60 million from Glasgow and the £220 million or so from the Scottish Government are large amounts of money. If it had been possible to get some lottery money to supplant some of that, surely that would have been a prudent thing to do.

At the moment, there are no plans to do that because the funding for the games has been identified. On whether the lottery will contribute to the games, we would hope that the lottery distributors will look favourably on applications for grass-roots community projects that will help to build a lasting legacy for the games in Scotland. At the moment, however, the funding for the bid has been identified. It was a strength of the bid that we were able to submit it with the funding having been identified, and we can see no reason to change that.

I echo what Nick Brown just said. It was a strength of the bid that the money was coming from exchequer funding, but we should not forget that lottery funding is going into facilities and venues that will be used for the games—competition and training venues in Glasgow and other parts of the country. I also echo what has been said elsewhere about lottery funding. With exchequer funding supporting the games themselves, lottery funding is going, perhaps more appropriately, into grass-roots development and the development of the athletes who will participate in the games. There is quite a distinction between those two sources of funding.

As you said, there is a political consensus in support of the games but, as the MSP for Orkney, I assure you that there is a geographical consensus as well.

I will ask about sponsorship for the event. Obviously, we do not know what will happen in the economy over the coming years. However, have you made any decisions about the sorts of organisations or corporate entities that you will not approach when seeking funds? I am sure that you are aware that there is some controversy about the linkages between certain companies and certain sporting events.

It will be a matter for the organising committee to make that decision, but I am certain that it will take the same view as in previous games on tobacco sponsorship, which has been discussed in the context of sport on many occasions. For illustrative purposes, we have used a range of types of organisation, but there has been a tendency for the games sponsorship to concentrate on the financial, information technology and retail sectors and I think that the organising committee will go for those in the first instance.

What lottery support did the Manchester games receive? Was that support part of the bid or was it support for facilities and grass-roots development?

The lottery funding for the Manchester games fell into three categories. Sport England, which was the lottery distributor in England, initially concentrated on funding the infrastructure for the games—in other words, some of the games venues. It provided a percentage of the funding for the stadium in Manchester, the swimming pool and one or two of the other ancillary facilities. Belatedly, it also provided some money—I have to confess that I am not sure whether it was exchequer funding or lottery funding—for some of the revenue costs for the Manchester games. The third element was that, as I have mentioned, a substantial amount of Sport England money went to the governing bodies of sport in England that were participating in the games as well as to the Commonwealth Games Council for England. That money was provided for talent identification and top-level performance in the English governing bodies of sport.

That was the policy that Sport England adopted. Clearly, the approach to organising the Glasgow games has been different, except that money is going into venue development in Glasgow and I expect that lottery funding will also go to the governing bodies of sport in Scotland to ensure that we win some medals in 2014.

I will take you back to lottery funding for the London Olympics. My understanding is that an amount of money has, in effect, been top-sliced from the lottery for those games and that grass-roots organisations throughout the United Kingdom—including Scotland—have felt a squeeze because of that. I do not understand why we would not try to get a little bit of top-slicing for the Commonwealth games too because, otherwise, we will take even more money from grass-roots organisations across Scotland. I recognise that there is a difference in scale between the Olympics and the Commonwealth games and that we are not talking about equal amounts of money. I also appreciate your point about having a clearly identified stream of money for the bid, but I do not understand what would prevent us from going back to the UK Government and saying that we should have some top-slicing of lottery funding for the Commonwealth games too. That would allow more money to be invested into grass-roots sport in Scottish communities.

The Scottish Government wants as much money as possible to be made available for grass-roots community projects. The Scottish Government has raised the issue of top-slicing but, at the moment, the money has been identified and is available to support the bid to put the games on. In a sense, it would be contradictory to top-slice money from distributors that could otherwise support community and grass-roots projects in order to support the staging of the games. I am not sure that it is correct to say that top-slicing money from the lottery would allow more money to be made available for grassroots sport in Scotland.

The top-slicing would be across the UK's share of lottery money. Otherwise, we would be expecting the lottery to fund the Commonwealth games via the Scottish distributors out of money that was already identified for Scotland. Whose responsibility would it be to go to the UK Government and ask for that to be done? Would it be the Government or you who would have to make that decision?

That would be a policy issue for the Scottish Government to decide. The organising committee has agreed to the 80:20 split. The wider issue of lottery funding, either its top-slicing at UK level or its distribution throughout Scotland, is a policy matter for the Scottish Government.

You mentioned at the outset that you have provided the most accurate estimate of cost. The financial memorandum states that the risk of cost overruns is limited by the nature of the bid—you touched on that in your opening remarks. Accepting that the purpose of the financial memorandum is to present the best estimate of the likely cost, what do you believe to be the element of uncertainty or potential variation in the figures that are in the financial memorandum?

I will ask Lynn Brown to say something about that. Imagining the technology that will be required is a prime example of one of the most interesting and difficult aspects of the process. We are trying to forecast what the technology might be like in seven years' time, but we can only make best estimates of such things. We have considered the various risks and the quality—the danger—of those risks. Lynn has done a thorough job in looking at the variations under each of the budget headings, and it might be useful to give some examples of those.

The committee has already asked about two areas in which we consider that there is a higher level of risk—broadcasting income from the CGF and sponsorship. The other area is the £53 million capital spend on the venues. We undertook a risk analysis against those headings and, indeed, against every heading that is listed in the financial memorandum. We produced a contingency for risk of 20 per cent of capital spend and income from broadcasting and sponsorship, which came to about £24 million. When the CGF evaluation commission came for its week-long evaluation, which was very thorough, it thought that that figure was too light. Therefore, before the final bid was submitted, another £8 million was added to the contingency, so that the figure was £32 million.

Just before the visit to Sri Lanka, we reconsidered the bid in the light of the formal report from the CGF evaluation commission, which was published at the end of September or the beginning of October. We did what directors of finance normally do and looked at all the headings, and I stripped out what I thought were contingencies sitting in individual budget heads, as each budget head had been developed in detail. That came to another £8 million. So, we are sitting with a contingency of £40 million. That is how it has been worked up.

You refer to the venue costs as being an area in which there is some uncertainty. The fact that capital expenditure is a relatively small part of the bid has been identified as one of the strengths of the bid. However, the pressures on the construction industry are enormous, and construction industry inflation almost certainly runs ahead of price inflation. What level of threat does that pose to the budget? Are there mechanisms for reviewing that budget over the next few years?

We are aware of that issue—it is why we have put a relatively high 20 per cent contingency sum against those costs, whereas for other things the contingency is zero, or close to zero. Just this morning, I discussed the issue with representatives of the construction industry. Clearly, there are issues concerning the cost of steel, the availability of skilled labour and what the construction industry is doing about that. We will continue to have meetings with the construction industry over the next seven years to ensure that any such problems are forecast early.

The industry representatives are confident about the issues. There are some issues concerning apprenticeships and skills training that we need to address over the next seven years—not just in construction but in other areas that will affect the games. We have taken some early steps to ensure that we are talking to the experts in the field about that, but we will keep it under review on a regular basis.

Are you confident that you can iron out delays in tendering and the like?

I think so. It is also important to look at the nature of the capital spend within the organising committee. It is not true to say that all the facilities are small scale, but they involve relatively small packages of capital expenditure—for example, the cost of the hockey centre at Glasgow Green is of the order of £3 million, and the mountain bike centre at Cathkin Braes is costing roughly £2 million, so we are not faced with hundreds of millions of pounds of expenditure for one big project that could be affected much more by the cost of steel and by labour shortages. The strength of the bid has been that 90 per cent of facilities are already in place or committed, which leaves the organising committee with a relatively small capital expenditure of roughly £70 million in total.

As you have said, the split between the Scottish Government and Glasgow City Council is 80:20. The Commonwealth Games Federation requires Scottish ministers to guarantee to meet any economic shortfall, and I appreciate the steps that you have taken to try to prevent that from happening. In the event that there are cost overruns—it is the role of the Finance Committee to look at the bleakest scenarios—will they be met entirely by the Scottish Government, or will the 80:20 split pertain to those as well?

First, I will say a word about the corporate governance approach. There is a two-tier approach. The organising committee will be set up with a very strong corporate governance and finance overview, so that is one element. Of course, the organising committee feeds into the Glasgow 2014 strategic group, in which ministers are fully involved. Therefore, we have several mechanisms to ensure that any budget overruns—or potential overruns—are caught very quickly. If there are any cost overruns, they will be met on the same basis as at present.

Will there be regular reporting to the public on those costs as they are incurred throughout the process?

Reporting is an issue that will involve the relationship between the strategic group, through ministers, and this committee and Parliament. Although the organising committee is a company limited by guarantee, it has all the hallmarks of a public organisation and regular reports will therefore be an important element in its work.

Thank you. As there are no further questions, would any members or witnesses like to make any comments?

I do not think so, convener—thank you.

I thank our witnesses for their input, and wish them every success in their endeavours. We hope that this will be the most successful games ever and that they can deliver safely for all of us.

Under this agenda item, we must also decide whether to consider in private at a future meeting a draft report on the financial memorandum to the Glasgow Commonwealth Games Bill. I propose that we do so. Is that agreed?

Members indicated agreement.

Earlier, the issue of whether we should take evidence from the Big Lottery Fund was raised. What are members' views on that?

I raised the issue of lottery funding for the Glasgow games. The answers to Elaine Murray's questions confirmed that by this stage there was substantial lottery funding for the Manchester games. The penultimate paragraph of page 1 of the Big Lottery Fund's written submission states that it

"has not yet had the opportunity to fully consider, in depth, any additional, specific Commonwealth Games support we may be able to provide."

Ominously, the fund goes on to say:

"We will also need to give serious consideration to what levels of lottery income will be available for disbursement post 2009, when the London 2012 Olympic Games are going to have an impact on our lottery income."

To me, that is an implied threat that there may be little or no lottery income for the Glasgow games.

Because of the timescale involved, it may not be appropriate for us to take oral evidence from the Big Lottery Fund prior to writing our report. However, Glasgow City Council and the Scottish Government have committed a large amount of money to the games, so it seems reasonable and fair for us to explore the possibility of a substantial contribution from the Big Lottery Fund. At this stage, we may want simply to include that in our comments on the financial memorandum and to recommend that the Scottish Government pursues the issue. In a year's time, we could check what progress has been made. Members may also want to take the matter further at this stage. We cannot ignore the issue.

Alex Neil is right, given the scale of the money with which we are dealing. However, from the Big Lottery Fund's submission, it is clear that the prudent approach for the committee to take is to assume that nothing will come from the lottery—albeit that that might not be the case—and that the funding basis for the games is as it has been presented to us.

I take a slightly different approach from Alex Neil, as I do not understand the policy rationale for not trying to get more money up front. I am not convinced that it is the lottery that we should be pursuing; ultimately, this is a matter for ministers. There was a strong case for those making the bid to take a firm view on what the finances for the games would be, and I understand that the funding package that has been presented may have been the best in those circumstances. However, having won the bid, it is not particularly cynical for us to ask whether there is a way of leveraging other money into the games, even though a funding guarantee is in place. I assume that that is competent within the Commonwealth games process. It is less a matter for the lottery than it is for ministers, and not only Scottish ministers. There will be questions for Scottish ministers about why, as far as we are aware, additional money via the lottery is not being pursued.

I was going to make the same point. It was not clear from the witnesses' evidence whether the matter of lottery funding has been broached recently by Scottish and UK ministers. As Alex Neil said, all that we can do at this stage is refer to the matter in our report. However, Derek Brownlee is right to say that we should probe the policy decisions, which are for ministers to make.

I agree.

Do we agree to pursue the issue with ministers?

Members indicated agreement.

We have reached the end of this item. As agreed under item 1, we now move into private session to consider the main themes arising from our evidence-taking sessions on the budget process.

Meeting continued in private until 15:40.