Friday, March 31, 2006

Olympics Watch: Scary Portents From Wembley

It looks like the new Wembley stadium will not now host major sports events until next year- an entire year behind schedule. There are some chilling portents here for the 2012 Olympics, and the size of its likely cost over-runs (see previous blogs starting here).

What we know about Wembley is that the FA did a fixed price deal with Aussie lead contractor Multiplex. The overall price was fixed at £757m. But of course, in the real world the project soon began over-running- collapsing roof beams, collapsing sewers, wildcat strikes, "high winds"...stuff just happens.

As a result, Multiplex has been forced to pick up additional costs: in February it set aside over £100m, and its final over-run is expected to be over £200m. On the face of it that's a 25-30% over-run, but it takes no account of the initial contingency reserve already priced into the contract, and it ignores likely additional losses among sub-contractors. So the true figure is certainly higher. And Multiplex's overall losses won't stop there because the company has been weakened as a credit- it's already been forced to renegotiate terms with its bankers and bond investors. Their board must be rueing the day they ever heard of Wembley.

As for the FA, they will receive penalty payments from Multiplex for late delivery, but they're reportedly capped at £14m. Meanwhile, its Wembley subsidiary has borrowed £450m from the banks to finance the whole thing, with a capital and interest repayment of £40m due in September. Looks like another round of crisis debt rescheduling ahead.

The conclusions for 2012 costs?
  • As the organisers try to negotiate fixed price contracts, they're going to find the price has gone through the roof: who'd want to risk following Multiplex, particularly given the massive scale of the 2012 project compared to little old Wembley? With all works taking place in the same small area at the same time.
  • As a result, the organisers may well settle for traditional variable price contracts so as not to scare taxpayers too much too early (it's called salami slicing- see here).
  • The "easy option" of Wembley's 12 month slippage will not be available in 2012. Organisers will have to pay whatever it takes to get the thing done on time. Whatever the nominally "fixed" pricing contract says, if it takes bucket-loads of extra taxpayers' cash, that's exactly what it will get. Slippage is not an option.

The Wembley debacle reinforces our view that the eventual cost of the London Olympics will be in the range £10-20bn. And it seems Gordon Brown is already coming round:

19 July 2005: Brown at the Treasury Select Committee: "The Government and the Mayor have agreed a package of £2.375 billion. Assumptions are well-supported and they are achievable. That is the basis on which we are funding the Olympics".

22 March 2006: Brown in the Budget speech: "Together the government, the London authority and the national lottery have already agreed funding of £3.4 billions."

So in just 8 months he's already increased his estimate by £1bn. With another 75 months to go, that clearly implies we're in for a further increase of 9.4x£1bn= £9.4bn. Which will take the total to £13bn.

Dig deep my friends. Dig deep.

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