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Report on the Financial Memorandum of the Glasgow Commonwealth Games Bill

Remit and membership

Remit:

1. The remit of the Finance Committee is to consider and report on-

(a) any report or other document laid before the Parliament by members of the Scottish Executive containing proposals for, or budgets of, public expenditure or proposals for the making of a tax-varying resolution, taking into account any report or recommendations concerning such documents made to them by any other committee with power to consider such documents or any part of them;

(b) any report made by a committee setting out proposals concerning public expenditure;

(c) Budget Bills; and

(d) any other matter relating to or affecting the expenditure of the Scottish Administration or other expenditure payable out of the Scottish Consolidated Fund.

2. The Committee may also consider and, where it sees fit, report to the Parliament on the timetable for the Stages of Budget Bills and on the handling of financial business.

3. In these Rules, "public expenditure" means expenditure of the Scottish Administration, other expenditure payable out of the Scottish Consolidated Fund and any other expenditure met out of taxes, charges and other public revenue.

(Standing Orders of the Scottish Parliament, Rule 6.6)

Membership:

Andrew Welsh (Convener)
Derek Brownlee
Joe Fitzpatrick
James Kelly
Liam McArthur
Tom McCabe
Elaine Murray (Deputy Convener)
Alex Neil

Committee Clerking Team:

Clerk to the Committee

Susan Duffy

Senior Assistant Clerk

Mark Brough

Assistant Clerk

Allan Campbell

Report on the Financial Memorandum of the Glasgow Commonwealth Games Bill

The Committee reports to the Local Government and Communities Committee as follows—

introduction

1. The Glasgow Commonwealth Games Bill (“the Bill”) was introduced in the Parliament on 9 November 2007. The Local Government and Communities Committee has been designated by the Parliamentary Bureau as the lead committee for consideration of the Bill at Stage 1. Under Standing Orders Rule 9.6, the lead committee at Stage 1 is required, among other things, to consider and report on the Bill’s Financial Memorandum. In doing so, it is required to consider any views submitted to it by the Finance Committee.

2. In view of the significant costs associated with the Bill, the Committee agreed to adopt level 3 scrutiny. This involves seeking oral evidence from Scottish Government officials and from any third parties likely to be financially affected by the Bill.

3. At its meeting on 11 December 2007, the Committee took evidence from representatives of the Games Organising Committee and Glasgow City Council, and from Scottish Government officials. The Big Lottery Fund Scottish Committee and sportscotland also submitted written evidence at the invitation of the Committee.1 The Committee also received supplementary written evidence from officials2, and a copy of a supplementary note prepared by them for the lead committee. The Committee would like to record its thanks to all of these witnesses.

The Bill

4. The Bill provides Ministers and local authorities with the powers necessary to meet obligations under the Host City Contract for the preparation and hosting of the Games and to deliver the commitments given in the Candidate City File. 

5. Immediately after the award of the Games to Glasgow, the Scottish Government, Glasgow City Council, the Commonwealth Games Council for Scotland and the Organising Committee (which is a limited company under the joint ownership of the three aforementioned bodies, and has now been incorporated as ‘Glasgow 2014 Limited’) signed the Host City Contract as required by the Commonwealth Games Federation. The contract covers the obligations of the parties, including fulfilling all commitments contained within the Candidate City File and those made in the bidding process, and Commonwealth Games Federation requirements relating to the Games.

6. The Bill fulfils requirements on the Scottish Government under the Host City Contract to introduce legislation necessary to regulate issues such as marketing, ticket sales, street vending, advertising, traffic regulation during the period of the Games and compulsory purchase of land required for Games purposes. The Bill also provides Scottish Ministers with authority to pay grants and provide other forms of assistance that Glasgow 2014 Limited will need to deliver the Games, and to set conditions on such assistance to ensure that any public investment delivers Ministerial objectives.

Summary of evidence

General issues

7. The Financial Memorandum states that the key financial impact of the Bill will arise from the provision under section 41 to allow Scottish Ministers to provide assistance to Glasgow 2014 Limited. This assistance could take a number of forms, including the payment of grants.  

8. The budget, as approved by the Commonwealth Games Federation, consists of expenditure totalling £372.977 million and revenues of £75.140 million, leaving a balance of £297.837 million to be met from public subsidy. The Scottish Government has committed to provide 80% of the net cost, while Glasgow City Council will fund the remainder. The Scottish Government’s contribution is, therefore, estimated at £238 million.3

9. To satisfy the requirements of the Commonwealth Games Federation, the Candidate City File included a detailed breakdown of the estimated Games budget. Annex A to the Financial Memorandum provides a summary of the expected revenue and expenditure in the same format. The Committee found this level of detail helpful. However, it does not illustrate the expected profile of the Scottish Government’s funding commitment over the years to 2014.

10. The Scottish Government’s Spending Review 2007 document (pages 58 and 108) states that £3.5, £3.8 and £3.6 million will be spent on revenue costs over the next three financial years (2008-09, 2009-10 and 2010-11) and £0.6, £2.8 and £8.0 million on capital costs - a total of £22.3 million over the three years.4 In evidence, the Organising Committee indicated that, after a relatively light touch in the next two or three years, there would be a substantial increase in expenditure in the subsequent three or four years. Officials provided helpful supplementary evidence containing a detailed breakdown over the financial years to 2015-16.5

11. The Committee noted that the Financial Memorandum states that the budget is expressed in April 2007 prices, and sought clarification on the expected total cash cost. The supplementary evidence explained that expected inflationary increases are one of the costs already built into the figures presented. It stated that, “The total spend of £373.4 million includes a contingency provision for increase in costs of £40.5 million.  The cost of the Games, therefore, at 2007 prices is £332.9 million.”

12. The provisions of the Bill do not, in themselves, require Glasgow City Council to fund a contribution towards the cost of the Games. However, the Council has committed to doing so, and its share is estimated at £60 million. The Financial Memorandum (paragraph 109) states that the Council is committed to using its own resources for this and it is not, therefore, regarded as a consequential cost of the Bill. In evidence, the Council’s executive director of financial services stated that it is not being allocated specific additional resources for this commitment.6 The supplementary written evidence shows that the Council’s contribution will be relatively small in the early years, rising to £7.2 million, £12.5 million and £29 million in the years 2012-13, 2013-14 and 2014-15 respectively.

13. The Financial Memorandum states that there are unlikely to be net costs falling on local authorities as a result of provisions such as the use of enforcement powers and traffic regulation. It also states that it is not possible to estimate the cost of the possible exercise of compulsory purchase powers.

14. The Financial Memorandum further notes that the provisions in the Bill will restrict business activity, but only for those seeking to benefit from the Games without authorisation. Glasgow 2014 Limited is expected to charge businesses for street trading and advertising authorisations. Restrictions on road use brought in as a result of the Games Transport Plan may also impact on the business community.

Specific income sources

Commonwealth Games Federation contribution

15. Revenue line 1 of Annex A to the Financial Memorandum shows that the Commonwealth Games Federation is expected to make a contribution of £31.4 million towards the costs (8.4% of the total). Written evidence from Scottish Government officials to the lead committee indicates that the bulk of the £31.4 million is an estimated £29.9 million anticipated income from broadcasting rights, which the Federation will sell. In evidence, the Organising Committee confirmed that, while the sums raised from this source may turn out to be higher than £29.9 million, the risk of not achieving that figure falls on the Organising Committee so the sum is not guaranteed. Officials confirmed that the estimated figure is based on work by consultants, and is a realistic comparison with broadcasting revenue for previous Games. However, they had also increased the contingency in the budget to address the risk of falling short of this figure.7

Sponsorship

16. Revenue lines 2 and 5 of Annex A to the Financial Memorandum show that local sponsorship and merchandising are expected to contribute £23.536 million (6.3% of the total costs) and £1.5 million (0.4% of the total) respectively. In evidence, the Organising Committee stated that these were prudent estimates which have the potential to be exceeded. It anticipates that the Games are likely to be well-placed to attract support from companies that are in the sponsorship market but that cannot contribute at the level required to be a major sponsor of the 2012 London Olympics.8 The Committee also notes the officials’ expectation that the Organising Committee will be sensitive to the linkages between certain business sectors and sporting events, and is expected to focus on the financial, information technology and retail sectors for sponsorship.9

Lottery funding

17. Revenue line 6 of Annex A is for lottery income, indicating that this may be a standard expected element of Games funding. However, this line shows a zero entry. In evidence, Scottish Government officials confirmed that “no approach was made for lottery funding”.10

18. The Committee sought clarification on support for the London Olympics 2012 and the Manchester Commonwealth Games 2002 from national lottery funds. In evidence, the Organising Committee explained that Sport England, the relevant lottery distributor in England, provided funds for both infrastructure development and revenue costs for the Manchester Games, as well as support for the governing bodies of participating sports.11

19. Scottish Government officials explained that the London Olympics “are supported in part by specific Olympic lottery games, which required primary legislation in the UK Parliament”. They confirmed that, “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.”12

20. In addition to these specific lottery games, the Committee notes that a proportion of funds from other lottery games, which would normally be available to be distributed by bodies such as sportscotland, will be re-directed to fund the London Olympics.13 In a written submission, the Big Lottery Fund Scotland states that it has not yet been able to consider fully any additional support it may be able to provide to the Glasgow Commonwealth Games, but notes that the context will be set by the impact that the London Olympics will have on the income it has available to disburse post-2009.

21. The Committee notes that lottery funding has already been provided to some of the venues that will host events (and training) for the Glasgow Commonwealth Games, and that both the Big Lottery Fund Scotland and sportscotland stated their desire to continue to support participation in grass-roots sport. The provisions of the Bill do not, in themselves, require additional support for sports development. However, at a time when funds will be diverted to the London Olympics, sportscotland emphasised that using the Glasgow Commonwealth Games as an opportunity to build a lasting legacy for sport “will require significant investment”.14 

22. The Organising Committee and Scottish Government officials emphasised that they regarded it as a strength that the Glasgow bid relied on an identified commitment to public funding by the Scottish Government and Glasgow City Council. The Committee acknowledges this. However, the Committee notes that, notwithstanding the funding assumptions which underpinned the successful bid, the Scottish Government is not now precluded from making a policy decision to try to offset some of that public commitment by seeking lottery funding, allowing more money to be invested in grass-roots sport development in Scottish communities. The Committee strongly recommends that the Scottish Government pursues this issue, and reports to it on progress as soon as possible. The Committee would also expect to see progress reports on this issue in the annual reports of Glasgow 2014 Limited.

Margins of uncertainty and contingencies

23. A Financial Memorandum often presents the possible costs which may arise from a Bill as falling within a range of estimates. The Committee, therefore, sought further information on any uncertainty or risk associated with the estimates provided for this Bill. The Financial Memorandum states that the risk of cost overruns is limited by the nature of the bid, with over 70% of the facilities needed for the Games already in place and under 20% of the budget designated as capital expenditure.

24. The Committee acknowledges that the projected costs have already been evaluated by the Commonwealth Games Federation as part of the bidding process, and notes the Organising Committee’s emphasis that it has taken a prudent and conservative approach to estimating likely income from sources such as sponsorship.

25. In evidence, officials stated that a contingency of £40 million is included in the budget – although this is not separately identified as such in Annex A to the Financial Memorandum. As noted at paragraph 11, this contingency includes allowance for inflationary increases. Officials explained that a contingency level of 20% had originally been provided for the elements of the budget deemed to be most at risk of variance – broadcasting and sponsorship income, and capital expenditure. This had then been revised upwards following discussions during the Commonwealth Games Federation’s evaluation, and is also supplemented by contingencies against other budget heads.15 The Organising Committee stated that it believed the contingency figure to be a thoroughly-considered best estimate.

26. It acknowledged the particular risks of inflation in capital construction projects, noting concerns about the costs of materials and the availability of skilled labour. However, it emphasised that the remaining capital projects are relatively small packages which could be expected to be less subject to significant cost over-runs than major infrastructure projects might be.16 Given the competition from many other significant infrastructure construction projects in the same time period, the Organising Committee stated that it has already begun regular meetings with construction industry representatives to ensure that any possible tendering difficulties, cost pressures and delays are forecast early.

27. The Organising Committee also emphasised that both its own approach to robust corporate governance - and its accountability to a strategic group, chaired by Scottish Ministers, which will consider its annual business plan and ensure that objectives are met – will ensure that any potential cost over-runs are addressed very quickly.17

28. The Financial Memorandum states that, to satisfy the requirements of the Commonwealth Games Federation, the Candidate City File included a number of guarantees, including that Scottish Ministers will meet any potential economic shortfall of Glasgow 2014 Limited arising from the preparations for and the hosting of the Games. In evidence, the Organising Committee confirmed that this guarantee means that any cost over-runs will not be met wholly by the Scottish Government, but will be divided 80-20 between it and Glasgow City Council.18

conclusion

29. The Financial Memorandum provides a range of information about the expected costs of hosting the Glasgow Commonwealth Games. The Committee found the provision of this full financial context helpful, and sought to examine some of the assumptions and unpredictability relating to these figures. The Committee acknowledges the significant level of scrutiny that the estimates have been subject to so far. It also acknowledges the apparently prudent approach taken to income and expenditure assumptions, and the governance arrangements intended to ensure robust management of delivery.

30. The Committee recommends to the lead committee that it takes account of the issues highlighted in this report when considering its report to the Parliament on the general principles of the Bill.

31. In particular, the Committee draws the attention of the lead committee to its comments in paragraphs 17 to 22 on the possibility of national lottery funding to support the Games. The Committee strongly recommends that the Scottish Government pursues this issue.


Footnotes:

2 This is available on the Committee’s web-page at: http://www.scottish.parliament.uk/s3/committees/finance/papers-08/fip08-02.pdf

3 The figures used in this report are those in Annex A to the Financial Memorandum to the Bill as introduced. Included in the supplementary written evidence from officials is a revised version of that Annex. The revised version shows an increase in the budget from £372.977 million to £373.393 million. Although there has been a slight increase in the total budget, the level of public subsidy has remained the same. The £372.977 million budget estimate was prepared as a result of the June Evaluation Visit of the Commonwealth Games Federation reflecting the comments they had made.  The £373.393 million budget was prepared in response to the formal written Evaluation Report of the Commonwealth Games Federation which was received at the end of September 2007. The supplementary written evidence shows the detailed movements between the two estimates.

4 Scottish Budget Spending Review 2007 - http://www.scotland.gov.uk/Publications/2007/11/13092240/0

5 This is available on the Committee’s web-page at: http://www.scottish.parliament.uk/s3/committees/finance/papers-08/fip08-02.pdf

6 Official Report, 11 December 2007, column 244

7 Official Report, 11 December 2007, column 245

8 Official Report, 11 December 2007, column 246

9 Official Report, 11 December 2007, column 247

10 Official Report, 11 December 2007, column 246

11 Official Report, 11 December 2007, column 248

12 Official Report, 11 December 2007, column 246

13 A SPICe Briefing Paper for the Health and Sport Committee: Lottery Funding of Commonwealth and Olympic Games provides details of the expected impact on sportscotland’s funds.

14 Written submission

15 Official Report, 11 December 2007, columns 249-50, and as illustrated by the revised Annex A included in supplementary written evidence.

16 Official Report, 11 December 2007, column 250

17 Official Report, 11 December 2007, column 251

18 Official Report, 11 December 2007, column 251