1. R Camber, "Olympics bail-out to cost taxpayer £500m after failure to secure private finance", 14 May 2009, Daily Mail

2. S O'Kelly, "Market watch: Why Mystic Tessa's Olympic Village figures don't add up", 16 May 2009, Daily Mail

3. G Prior, "Lend Lease to net £30m in Olympic Village fees" , 28 January 2009, Contract Journal

4. G Prior, "Doubts over Olympic Village deadline", 20 May 2009, Contract Journal

5. A O'Connor, "Taxpayer rescues Olympic village after private finance deal fails", 14 May 2009, Times Online

6. Press Release, "Mayor gives go-ahead to Stratford City development", 4 October 2004, London Development Agency, posted on www.lda.gov.uk

7. J Brasse, "Stratford City developers agree biggest-ever Section 106 payout", 18 February 2005, Property Week

8. D Reece, "Lipton quits architecture body in advance of auditor's report", 16 June 2004, The Independent

9. R Booth, "MPs call for transparency in Olympic venue deals: concerns raised over plans for public-private finance for 2012", 29 July 2005, The Guardian

10. "Constructing Excellence Announcement - Bob White and Don Ward become Chairman and Chief Executive of Constructing Excellence", 4th December 2006, Constructing Excellence

11. James Woudhuysen and Ian Abley, Why is construction so backward?, Chichester, Wiley-Academy, 2004, p 120 to 123

12. V Dodd, " 'Go back to Iran' remark lands Livingstone in further trouble", 6 April 2006, The Guardian

13. D. Morrison, "Construction matters", 16 Jun 2006, The Telegraph

14. A O'Connor, "Westfield has ongoing vision for Olympic site", 21 July 2008, Times Online

15. Associated Press, "EU approves aid for British rail restructuring", 13 May 2009, posted on www.forbes.com

16. A Bolton, "Olympic park lock-in for programme managers", 1 March 2006, New Civil Engineer, posted on www.nce.co.uk

17. Press Release, "David Higgins to be Olympic Delivery Authority Chief Executive", 22 November 2005, Greater London Authority, posted on www.london.gov.uk

18. Building Design, "Village flat numbers slashed again", 24 October 2008, posted on www.bdonline.co.uk

19. D Stewart, "Olympic Village apartments slashed by 900", 4 July 2008, Building, posted on www.building.co.uk

20. G Prior, "Half price plan for Olympic Village", 15 Oct 2008, Contract Journal

21. N Gerrard, "Olympic Village funding deal won't be final until spring 2009", 14 January 2009, Contract Journal

22. A Morby, "Lend Lease 'pricing big concrete firms out of Olympics' ", 18 February 2009, Contract Journal

23. James Woudhuysen and Ian Abley, Why is construction so backward?, Chichester, Wiley-Academy, 2004, p 117 to 118

24. Ibid, p 121

25. R Milne, "Plan on building 150,000-200,000 houses per year until 2020", 6 December 2005, Planning Portal

26. B Carlin, "Brown announces 240,000 homes a year", 24 Sep 2007, The Telegraph

27. James Heartfield, Let's Build! - Why we need five million new homes in the next 10 years, London, audacity, 2006, p 15 to 18

London 2012's Olympic Building Project: the Case of the Shrinking £1 billion Government Village

The Olympic Village in Stratford sheds light on the relationship between the state and the market in contemporary Britain.

Stratford's Olympic Village will house a total of 17,000 athletes over six weeks in 2012 and at just over £1.0 billion is the single largest building project for the 2012 Olympics. After the events, the village will be converted into an urban village of 2,700 to 2,800 homes.

On 14 May 2009, the government stepped in to bail out the project with an extra £324 million from the Olympic contingency fund after the private developer, Lend Lease, could only raise £150 million to invest in the development. (1) At 2009 prices the flats would fetch under £250,000 each, whereas the cost is around £400,000. (2) The Village will still be built by Lend Lease, but for a fixed fee of £30 million. (3) On 20 May concerns were even raised over the now tight timetable. (4)

What several newspapers called the "nationalisation" of the Olympic Village was pushed back from the front pages because of the continuing MP's expenses row. A time, perhaps, to bury more bad news. Previous public-private partnerships have become controversial often because the government gets a raw deal. In this case there is a potentially enormous shortfall, while Tessa Jowell, the Olympics Minister insisted at some point that the £1.0 billion project was still an asset, the Daily Mail's calculations and Lend Lease's funding showed that, barring a massive house-price boom up to 2015, when the housing is sold, her "figures don't add up". (2)

The government is in the incredible position of having to step in to rescue a private-sector house-building project in an inner London borough surrounded by billions of pounds of new government-funded infrastructure. Hugh Robertson, the Olympic spokesman for the Conservatives, said: 'This is the least desirable part of the Olympic budget to be taken over by the state. It's vital that it is handed back to the private sector as soon as market conditions improve'. (5) From a "free market" perspective in a country with housing shortages, Robertson is no doubt nonplussed - or perhaps at a loss.

However, reintroducing the private sector is not so simple, because whether private or public money, the state and the construction industry already have a symbiotic relationship that goes well beyond a financing deal - and largely explains the trouble there has been.

The Olympic Park, the umbrella term for the entire Olympic building site, fits into a bigger plan: "Stratford City". The initial plan from Stratford City Development Partnership, a consortium of companies, was approved by the Mayor in October 2004, and already had the Olympics in mind. (6) This £4.0 billion plan to regenerate Stratford was to take place over 20 years. In 2005 the consortium paid a record £120 million in planning gain, under Section 106 of the Town and Country Planning Act, 1990 - introduced to claw back some of the massive profits gained by developers merely for getting the planning approval. (7) At the same SCDP announced they were to work with the government on the Olympics and collaborate with one another's compulsory purchase orders. After London won the Olympic Bid in 2005 the Stratford City area plan has become even more valuable.

Stratford City Development plc comprised three companies: Chelsfield, Stanhope, and London & Continental Railways. LCR, a post-British Rail consortium behind the Channel Rail Link and other stations, owns the land; their development partners were Chelsfield and Stanhope. What Stanhope brought to the table, in particular, was its strong relationship with government through planning quangos.

Sir Stuart Lipton, Chairman of Stanhope has been a developer since the 1960s. In 1999 he was appointed to the government funded quango the Commission for Architecture and the Built Environment, which in England charged with "facilitating improvements in the quality of the whole built environment". Lipton had to stand down from Cabe in June 2004, just 48-hours before an auditors report. (8) The Stratford City development had six Cabe commissioners with involvements of various kinds, four of them through Stanhope. (9) Lipton was also a senior government adviser on the Olympics plans when Stratford City plc agreed to co-operate with the Olympic Delivery Authority on purchasing land in the area.

Peter Rogers is co-founder of Stanhope plc in Britain and its Technical Director. In 2003, Rogers became chairman of the quango Constructing Excellence, which was about "driving the change agenda in construction… to produce a better built environment", and funded by John Prescott's planning department. Rogers stepped down in early 2007. (10) Peter's elder brother is the architect Lord Richard Rogers of Riverside.

Richard Rogers is currently chair of the Greater London Authority Panel for Architecture and Urbanism, and also chair of the Urban Task Force, an organisation set up in 2000 to "identify causes of urban decline" and "establish a vision for urban regeneration based on... design excellence, social well-being, environmental responsibility, within a viable economic and legislative framework". Through the UTF Richard Rogers has been perhaps the intellectual force behind the idea of using Brownfield sites for development, rather than at any stage opening up Greenfield. (11)

Over time, Chelsfield was bought out by Multiplex, which in turn was bought out by the Reuben brothers. As "bickering" broke out over paying ongoing costs on the Stratford City project, London's then Mayor got involved. In April 2006 Mayor Ken Livingstone told the Reuben brothers, the billionaire businessmen with a 50% stake in the Stratford City project to '... go back to Iran and try their luck with the ayatollahs' - even though they were from India and of part Iraqi (not Iranian) descent. (12)

In June 2006, Westfield an enormous Australian developer with 119 shopping centres in four countries bought out the development partners in SCDP. (13) This secured funding for the areas around the Olympics and replaced the embarrassing and fractious original players with a partner from the other side of the world.

In addition to the Stratford City projects, Westfield won the project for a new retail centre - the largest in Europe, announced at Downing Street in July 2008. Westfield was no doubt influenced by the prospect of rapidly building a shopping centre and passing through the planning process. (14) Nor would sorting out the Stratford City mess make them unpopular with the government or the Olympic Delivery Authority. Westfield has deep pockets with £10.0 billion of ongoing investment in the UK.

It would seem that the Stratford City project could now go forward on a much more solid financial basis - though there was to be one remaining problem. On 13 May 2009, the European Union agreed to allow the UK government to bail out LCR, owners of among other rail properties the Stratford City site, to the tune of £5.2 billion because of the company's overall importance to the European rail network. (15)

The Olympic development itself is being run by the Olympic Delivery Authority. In early 2006, the ODA decided to go with land from the Stratford City consortium for the Olympic Village - previous plans had only the south eastern tip of the Olympic Village encroaching on the Stratford City site. Chief Executive of the ODA David Higgins cited concerns about the immovable deadline: 'All this land is available which would eventually have been developed, but by using some of that land we were able to start the athletes' village earlier'. (16) After a tendering process, in 2 March 2007 another Australian company Land Lease were brought in to run the project. Lend Lease had worked on the Sydney 2000 Olympic Village. Higgins knew them well. Higgins was Chief Executive at Land Lease from 1995 to 2002, before he became Chief Executive of English Partnerships, the government’s national regeneration agency, which lasted until his 2005 appointment to lead the ODA. (17) He was Jowell's right hand man.

Over just four years the costs of the 2012 Games had risen from just under £2.4 billion to 9.2 billion. The government, to avoid international embarrassment, had to stump up the cash; perhaps the low initial figure had been a necessary self-deception required to host the games. Costs on the Olympic Village itself were now reaching the £1.0 billion mark. Worse, from 2008, the sums were beginning to look difficult for the developer with rising costs and lower projected sales.

The Olympic Village project was scaled down to try to squeeze budgets, from 4,300 homes to 3,300 and then 2,700. (18) The tallest blocks - which have planning permission - are to be postponed until after the games. The excuse was that athletes accommodation could not be above the eighth floor. This was already known from the outset, with higher floors in the earlier scheme earmarked for officials. Paradoxically, although this reduced overall spend, it was bound to increase unit costs.

There has also been an attempt to rein in overall costs by reducing the specification of the Olympic Village buildings. A standard interior core was adopted for all fourteen architects who had successfully bid to design the housing, leading one to say they were reduced to "designing glorified cladding". (19)

However, what has remained in place is the Construction Management model - where one company runs a host of sub-contractors. Fixed cost, vertically integrated contractors can do without the endless negotiation between subcontractors and architects, instead taking standard blueprints and working to an agreed, fixed cost. One operator told Building Design that the £1.0 billion project could be done for £450 to 500 million to the same specification. A 14-strong team of architects has been commissioned to design the village. A contractor said: 'A fortune has been spent on this already. The fact that there are 14 architects there tells you all you need to know about cost control so far'. (20)

The ODA was in no mood to pass off this prestige development to a standard fixed-cost contractor - after all building had already begun even before a financial agreement with Lend Lease. (21) The spreading out of funding to a host of smaller contractors enables architects among others to rack up fees. This ratchets up costs, but spreads government money around a beleaguered construction industry.

Another cause of cost bloat is related to the host of regulations and procurement procedures which are applied to state backed initiatives. To take an example from the Olympic Village project, one major contractor explained some of the process of providing concrete: a '... plethora of initiatives… have added six-figure sums to the overheads of qualifying contractors. All these initiatives were put forward on the basis that you either comply or are taken off the tender list... [Contractors are] bombarded with initiatives on environmental and occupational health and social responsibility'. (22)

Bringing these initiatives into the building industry is not Land Lease's idea, because the British building industry has at least nine bodies overseeing a series of measures to make building, both in production and its effects, a "self-conscious" tool of social and environmental policy making authorities - including the ones that Lord Rogers and friends head up. (23) As James Woudhuysen and Ian Abley argue in Why is construction so backward?: 'What used to be a matter of running an efficient business and keeping it within the law has become a display of corporate innocence to the quango quagmire'. (24) And builders, rather than merely putting up with the shifting sands of regulation, have learnt to embrace them - both because it brings in work and because it adds costs, especially in lean economic times.

Government and the building industry have become tightly linked through regulation, quangos, social and environmental policy, but house prices have also become a central plank of economic policy. House price increases have underpinned the expansion of consumer credit.

When for many people house prices are unaffordable one important way of maintaining property prices has been to provide state backing to "affordable" housing. As well as the extra state financing announced on 13 May 2009, the Olympic Village is already in receipt of a huge tranche of state backing through the "affordable housing" side of the project. This "hidden subsidy" is not counted as part of the Olympic budget on the basis that it would be spent anyway. Triathlon Homes, a consortium of housing associations and social landlords, has a £100 million grant from the government-funded Homes and Communities Agency, which replaced English Partnerships in December 2008. Triathlon raised an additional £168 million through the European Investment Bank and an unnamed British bank at commercially undisclosed terms. The London Mayor has insisted that at least 10% of new housing projects are for affordable housing - for this project the figure is fully 50%.

While the Olympic Village is a special project, the attitudes involved are illustrative. The Olympic Village is in some ways a microcosm of the problems with building projects today. "Best practice" has created housing at £400,000 per unit. After removing the £143 million refitting programme to convert the athlete rooms into flats it comes out at about £340,000 on average for an apartment.

It seems that a combination of the government pursuing social engineering and a private sector eager to push up costs has given us the worst of both the market, with its potential for risk-taking and innovation, and the state, with its potential for setting clear goals, standards, and planning.

In 2005 the government had a target of building 150,000 to 200,000 new homes per year. (25) Then Britain was creating 175,000 new households each year, and there was a shortfall of half a million homes. In 2007 Gordon Brown raised the target to 240,000 homes a year, but while household growth continues, building has stagnated. Brown said '... I've met too many young couples who've told me - we work hard, we save, we play by the rules, we want to get on and yet we can't afford to buy or even rent our first home'. (26)

Land prices have increased dramatically with a planning policy block on development on new land and a typical first-time buyer cannot afford a mortgage in 85% of British towns. (27) The close ties and the way of working between business and government as it applies in the Olympic Village raises questions about how both are fit for purpose when it comes to meeting these housing needs.

The government has had to bail out its housing developer, even on such a well funded project because it is based around the industry of a speculative housing boom creating "unaffordable housing". Government has worked hand in hand with this industry - adding cost, complexity and policy - and subsidy - at each turn. Perhaps the shrinking £1.0 billion village might prompt a rethink.

Handing the Olympic Village back to the private sector when prices are above £400,000 might take some time.

Mark Beachill 21.05.2009

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