CNBC Business | London's Olympian Challenge

London's Olympian Challenge

It’s the biggest engineering project in Europe, possibly the world. Some 4,000 companies and their 15,000 employees are already involved. And it is all coming together as the global recession deepens. Josephine Moulds reports

Supporters say that preparing to host the 2012 Olympic Games is exactly what Britain needs in the current economic climate, to stimulate spending and create  jobs; critics wail that it is a drain on public resources  that will result in a park full of white elephants, at a time when money is desperately needed elsewhere. Whichever way you look at it, hosting the Olympics is undoubtedly a costly business.

London bid for the event with a projected budget of £2.4bn, which soon ballooned to £9.3bn (€10.5bn), prompting the unsuccessful Paris 2012 team to say London’s bid was based on “promises not linked to reality”. The UK government counters that it decided to use the Olympics to regenerate part of East London only after putting in its bid. The cost of security also escalated following the bombings in London on 7 July 2005, the day after it was awarded the Games.  

Perhaps more significantly, the world’s financial system has collapsed since then, prompting an exodus of private funding from the project. Tessa Jowell, minister for the Olympics, has said: “Had we known what we know now, would we have bid for the Olympics? Almost certainly not.” 

The UK government has retracted that comment, saying that now is precisely the time for this investment to be made. But many fear Jowell revealed the truth of the matter: London is locked into paying out huge sums for luxuries it cannot afford. As the bills add up, the question grows ever more pertinent: will the Olympics be London’s bail-out or bust? 

In some respects, London is in a good position, having already secured €500m of sponsorship from a €725m–€780m target. However, although London has seven  confirmed tier one sponsors (each contributing £40m) and three tier two sponsors (each contributing around £20m), tier  one sponsor Nortel, the Canadian telecoms equipment manufacturer, filed for Chapter 11 bankruptcy in mid-January and UK banking giant Lloyds TSB has been part-nationalised. Funding for the construction of the Olympic park is even less certain. Private investment worth €560m has already walked away from the project.  

Igloo, a regeneration fund owned by asset manager Aviva, last year backed out of part-funding the 120,000m² media centre. The Olympic Delivery Authority (ODA) has now admitted that the UK government will probably have to foot the entire €340 bill for  the development.  

Another headache is funding for the €1bn Olympic village, originally due to be shared between Australian contractor Lend Lease and the UK taxpayer. At the time of going to press, the government was locked in talks with Lend Lease about its cash contribution to the project. The ODA fears the issue may not be resolved until the end of this year.  

David Higgins, chief executive of the ODA, says that the government will pay for the village, at least until March 2010. “We’ve accepted that it’s unrealistic to get private sector money into that at all. The advantage is it won’t have any debt attached to it. There will be complete flexibility to sell it to the private sector when the markets are better.” Alternative funding plans include a deal where not-for-profit Housing Associations pay for 1,400 affordable homes — half the amount needed for the Games.  

These funding hiccups will be covered by the €2.25bn contingency fund that is part of the €10.5bn Olympic budget. Despite the fluid nature of the budget soon after winning the bid, the €10.5bn figure now appears to be final. Most agree that the ODA will be forced to scale plans back, rather than exceed it.  

Some welcome this enforced ‘austerity’. Andrew Boff, Olympics spokesman for the Conservatives in the London Assembly, says: “One good side of this is that some of the plans are being revised down to something that is more common sense. In the planning phase we saw a trickling of the costs. People were throwing their pet projects on top because they saw that here was a lot of money.” 

But he agrees that there is a danger of losing the legacy of the Games if the ODA is pushed into taking the cheaper option, citing the media centre as an example. The ODA flirted with the idea of a cheaper centre that would be scrapped after the Games, rather than paying more for a lasting development to regenerate a particularly grim area of East London. It has now settled on building a permanent structure, but concerns remain that the legacy will move down as a priority as the ODA scrambles to get the park finished on time.  

Then there is the question of development in and around Stratford, where the park is based. Without that, the site is much more likely to be left to the birds, as there will be no additional facilities for potential new residents. Australian company Westfield Group is currently building a €1.6bn shopping centre in the Stratford City site next to the Olympic park, a 175,000m² temple to commerce due to house some 300 shops.  

The site should also play host to 2,000 new hotel rooms, although commentators remain sceptical of that figure. Sabina Wyss di Corrado of TRI Hospitality Consulting says: “I can tell you it’s not that much, especially with the credit crunch.” She expects 1,000 new hotel rooms in Stratford City.  

There has been a flush of planning applications for new hotels across East London. While many have been approved, it remains to be seen which will find the necessary funding. Wyss di Corrado says Travelodge, Premier Inn and Hilton are certain to open hotels, as well as some key international brands. But she expects a slew of projects to be scaled back or abandoned altogether.  

Other plans for the area have been put on ice. Last year, Newham Council abandoned the search for developers for a 4.8ha site next to Stratford City. Boff says: “It’s all mood music at the moment. Little stories about delays and not hearing confirmations that you were expecting to hear. There’s a general feeling of not much happening.”  

Supporters give a reasonably convincing argument that the legacy will look after itself once we emerge from the downturn. The Olympics provide the seeds of investment in a once derelict area, at a time when private companies are not investing in anything.  

When the Games are on, the argument goes, it will fuel the economy with a short, sharp burst of tourism and a boost in sentiment. Then, once the last race has been won, private investment will flock to the area.  

The Games do fit neatly with the UK government’s Keynesian plans to spend its way out of a recession, although Higgins admits that is a “happy post-rationalisation”.  

Up to 9,000 construction workers will be employed on the site this year and next, with thousands more at Stratford City, at a time when UK unemployment is predicted to hit three million. The government boasts that local people comprise 23% of this workforce. 

But it will not only be London or Londoners that would benefit, says Lloyds TSB, which 12 months ago, launched a business guide to help companies nationwide to capitalise on the Olympics. The bank estimated then that the entire commercial benefits of the Olympics would be around €24bn. However, although it said the south-east would be the biggest beneficiary, with an economic boost of €9.7bn, the bank claimed other regions would benefit. For example, there could be a €5bn lift to the economy of the north and north-west, €3.6bn in the Midlands and €2bn in the south-west and Scotland, the bank suggests. The sectors with the highest levels of optimism for business opportunities were transport and communications, hotel, catering and leisure, and construction. Launching the business guide, Truett Tate, Lloyds TSB’s group executive director of Wholesale and International banking, said: “Regardless of industry or location, the London 2012 games provides a golden opportunity for businesses to expand, diversify and reach new audiences.” 

The feverish period of activity running up to the Games should then finish just as the economy starts to pick up. Tim Parr, a partner at Deloitte who heads up the accountancy firm’s Programme Leadership team, says: “If this downturn follows the pattern of previous ones, the Games should happen just into the upturn. So they could help the economy pull out of recession, because obviously these things depend largely on sentiment. “The legacy for me is that you are going to have a beautiful park in an area that didn’t have that, with some facilities that will be used. There are rail links and investments going into that area. I think the legacy will evolve organically from those fundamental elements.”  

The transport links to the Olympic park should certainly be a welcome benefit of the Games. The €22.6bn investment in transport infrastructure was going ahead anyway, but the Games put a very definite deadline on the works. And in a city where construction has yet to begin on the Crossrail project conceived in 1974, deadlines are very important.  

Tony Travers, director of the Greater London Group at the London School of Economics, says: “Six years after major reinvestment began there’s still not any real evidence of major improvements.” He is cagey about the city’s ability to cope with the influx of visitors. “London’s transport system is fragile at the best of times, particularly the Underground. If it all works, it will be all right. The main risk will be the breakdowns that occur on the system with regularity, which are by definition unpredictable. It’s down to the luck of the gods, really.” 

Whether London is ready or not, those visitors will come, with the consequent boost to the tourist trade. There are various figures bandied around as to the economic impact on tourism, but experts warn against their reliability. Alex Byars, consultant in Deloitte’s Sports Business Group, says: “For something like the Olympic Games, it’s so massive you could be way out by a factor of 10 times. It is very difficult to draw any parallels in terms of looking at [previous Games].  

“Being in Europe makes it a different proposition just because of the volume  of visitors likely to have access to it. Compared with something like Sydney, London is less than a three-hour flight for around 300 million people.”  

Many tourists will, of course, be put off from visiting London during the Games, but the event will put Britain in the shop window. Elliott Frisby, of VisitBritain, says: “Tourism is one of the areas where we believe there will be UK-wide benefit. The great thing about the Olympics is that destinations around the country will be profiled. Non-accredited media will be looking for stories about the rest of the country and the culture.” 

There is, of course, a danger that a disastrous Games could spoil the UK brand. Many UK viewers were dismayed by the handover ceremony at the end of the Beijing Games, where the slick Chinese operation put Britain’s cultural display to shame.  

Parr thinks unfavourable comparisons can be avoided by focusing on what Britain does well. “In Britain, watching sport is a very social activity. People make a day of it; you go to spend time with your friends. If we aspire to that, we can do something distinctly British.  

“One of the things that was missing in Beijing was the experience for people outside the venues. What we will see [in the UK] is much more atmosphere. If London gets it right it will infect the city and the country.” 

Economics aside, he believes the Olympics will leave a much more important legacy in Britain. “It is complex. You can’t measure whether people are inspired by people winning gold medals, the benefits to sport, even health benefits for the country. Sometimes you just have to make a bet and think this is a really good thing to do.”

The Olympic Curse

If London achieves even a portion of its legacy pledges, it will have succeeded where so many other host cities have failed.  

In January this year, Beijing was already showing the signs of suffering from the ‘Olympic curse’. Despite a growing economy, hotel prices in the capital fell as rooms in the flash hotels — built for the influx of foreign tourists — lay empty.  

The iconic Bird’s Nest stadium lies largely unused, apart from a trickle of foreign tourists, who pay 50 yuan (€5.50) for a tour. The city’s largest football team chose not to move to the ground, as it was too big for its crowds.  

Beijing’s most welcome legacy is a dramatic reduction in the pollution that plagued the city, after a number of factories closed for the Games have not been allowed to reopen. Ironically, the same legacy could be London’s — an ageing fleet of diesel-fuelled taxis and buses means that air quality has plummeted and the UK is likely to be sued by the EU for some of the worst air quality in Europe.  

In Athens, which hosted the Games in 2004, 21 out of the 22 venues used during the three-week event lie abandoned, and the stadia are overrun with rubbish and weeds. But citizens welcomed the air-conditioned and desperately efficient metro system that the Games left behind.  

Sydney, which hosted what has been called ‘the most successful Games ever’ in 2000, also warns of expensive white elephant stadia. Its vast Olympic park is rarely used and has been dubbed Jurassic Park by locals.  

Supporters argue that the Games lifted the self-confidence of the Aboriginal population, who competed for their country with considerable success.  

The Cost of the Games* 

1948 London £761,688 

1956 Melbourne £5.4m 

1964 Tokyo $72m 

1968 Mexico City $176m 

1976 Montreal $1.5bn 

1984 Los Angeles $412m 

1996 Atlanta $1.7bn 

2000 Sydney $3bn 

2004 Athens $7.2bn 

2008 Beijing $40bn** 