West Ham and the London Stadium: Flares ‘n’ Slippers

Introduction:

We don’t particularly like politicians here at Price of Football. Not because we have any left/right leanings, our viewpoint is mid-Atlantic on most issues, but because they repeatedly fail the competence threshold, regardless of their affiliations.

Present London mayor Sadiq Khan (Labour) commissioned an investigation into the deal which has resulted in West Ham residing in the former 2012 Olympic (now London) stadium. The deal to give the Hammers the stadium was granted by the former administration, run by foot in mouth former mayor Boris Johnson (Conservative).

Herein lies the first point, had the previous mayor been Labour, what would be the chances of this investigation and report taking place?

The scenario

Moore Stephens forensic accounting department were tasked with investigating why the transformation costs of the stadium for football purposes rose from an initially estimated £115m in 2014, then £192m and then a final total of £323 million by the time West Ham took occupancy in the 2016/17 season.

Sadiq Khan clearly had a WTF moment when he found out that the local taxpayer would be paying for a substantial element of this increase in cost.

The report, a never-mind-the-quality-feel-the-width 169 pages, takes ages to read, but we nobly gave up a few evenings of gin, hookers and cocaine to wade through the contents.

https://www.london.gov.uk/sites/default/files/olympic-stadium-review.pdf

The history

Before the Olympics took place, the Olympic Park Legacy Company was set up to decide what to do once the games finished.

OPLC looked at a series of options, which were narrowed down to five. The initial desire was to have a 25,000 seater athletics stadium (option 4 below), but a wide range of other issues were considered too.

These were assessed initially from a financial perspective, with the following estimated costs.

The options were also considered from a non-financial perspective.

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The final decision was to go ahead with option 10a, but when the decision was made the costs (and more importantly, who would bear them), did not seem to be a major consideration.

This meant that West Ham ended up as tenants in the London Stadium (attempts to negotiate naming rights for the stadium have proven to date to be as successful as Marco Boogers career at the Hammers).

The second ranked alternative was the purpose built football stadium, likely to have been occupied by Spurs.

Either way, a significant amount of work would have been needed to convert an athletics stadium into one appropriate for football or multi-sport, and also back again if required.

The findings

There are two main areas when the costs appear to have gone haywire.

1: Construction costs

Political point scoring overrode commercial sense, and the desire to have a legacy (the stadium was chronically underused after the Olympics finished in 2012 until West Ham took occupancy) clouded the judgement of those negotiating from the side of the stadium owners.

West Ham didn’t do anything wrong, they were effectively lottery winners, who paid £15 million for a stadium that cost £323 million to make into something appropriate to play football, plus £2.5 million annually in rent*.

(*they also have to pay for a machine that blows bubbles when the team comes out at the start of the match and half time. It might also be used when they score a goal, but when I went to watch a match there, this facility was not required).

The increase in costs was due to many factors. Seemingly at every planning meeting a new problem would arise, or extra costs would have to be incurred to meet a deadline (such as hosting Rugby World Cup and Diamond League athletics meetings).

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So who paid for these expenses? When West Ham signed up to be tenants, they were effectively capped at contributing £15 million. The rest mainly came from the public sector, the benefits to which are questionable.

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2: Running costs

The set up for running the stadium is complicated. A company, E 20 Stadium LLP (E20), was set up in 2012 by two partners. 65% by LLDC (London Legacy Development Corporation) and 35% by NLI (Newham Legacy Investment) to operate the stadium on a day to day basis. E20 have made losses of nearly £255 million in the first few years of trading, and generated income of…err…£4.9 million.

The main reason for the losses is what is called impairment. Normally under accounting rules, if you buy an asset that will last you a long time you spread the cost over the period you use the asset. This is called depreciation, so build a property for £100 million, you think you will use it for 20 years and then scrap it, so depreciation is £100m/20 years = £5 million annual cost in the accounts.

Imagine, however, that you buy something and find out that you have vastly overpaid for it (this is also known as the Andy Carroll theorem). Under the accounting rules you have to include the asset in the accounts at its expected market price.

Any fall in value is called an impairment.

This is what has happened at the London Stadium. In the first three years of running the London Stadium, E20 has spunked spent £272 million on transforming the stadium into a multi sport arena, and then written off over £246 million of that cost as what has been created is vastly overvalued in market terms. The stadium is therefore valued at £26 million at at June 2016, when West Ham were due to move in.

Front loading of costs is not unusual in the murky world of public-private finance, and can be called prudent (albeit by the Hogwarts school of creative accounting). If you front load your costs and losses, then in later years you can make the company look more profitable.

However…whoever originally drew up the figures has made major miscalculations, and anything that could go wrong has gone wrong (including holes in the new roof apparently).

It is now estimated that the cost of removing seats for athletics meetings, and then bringing them back for when the football season starts will cost £7-8 million a year, and remember, West Ham are paying rent of £2.5 million a year.

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E20 appear to be responsible for all day to day costs of the stadium, including things such as the flags for when West Ham play home matches. Moore Stephens conducted a forecast using best case scenarios, but still envisages annual losses being made by the London Stadium, and borne by the taxpayer.

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Conclusion

We now have a blame game between the have bequeathed the current situation. Those who five years ago were desperate to be associated with the Olympics, and have a selfie with Usain Bolt seem to have gone unusually quiet. Whilst many people co-operated with Moore Stephens, others were less communicative, or circumspect in their responses.

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Those who are criticising West Ham are doing it because they don’t like the club and/or the club owners. Being effectively the only willing tenant for a multi-sport stadium meant that West Ham were in a very strong negotiating position when it came to determining their contribution to the transformation cost, and the annual rent. If you have a strong hand, then surely the logical thing (lets not pretend that ethics or morality are an issue here, they’re not) is to play it, even at huge cost to the public purse.

In that respect what we have with the London Stadium is merely a very high profile and visible varation of PFI deals signed up and down the country over the last 10-15 years by grinning politicians and their management consultant advisors.

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