The Big Question: How much will it cost for London to stage the 2012 Olympics?

Why is the cost of the Olympics in the news?

Within hours of London sensationally winning the Olympics in Singapore last July, speculation began about the budget, despite official insistence that the original calculations were rigorous. However, costs overruns are as much a feature of the modern Olympiad as running, jumping and marketing.

This week, Olympics minister Tessa Jowell finally confirmed before a committee of MPs that - 15 months after the bid victory - the 2012 Games are already over budget by £900m.

Pressure had been growing on the Government to come clean about the costs after the resignation last month of the project's combative American engineer-in-chief, Jack "The Terminator" Lemley. In a parting shot, he claimed costs would rise "exponentially", prompting an emergency inquiry before London councillors who heard from Lemley's successor that the bill increase would indeed be "substantial". In the past week the real cost of the Games has been put at anything between £5bn and £20bn.

What was the original cost estimate?

After taking advice from consultants Arup, the cost of building an Olympics site on a low-rent plot of land near Stratford, east London, was put by the architects of the bid at £2.375bn. This included £1.4bn for venues, £300m for elite athletes and up to £220m for security and the remainder for transport and contingency funds.

Funding comes from the National Lottery (£1.5bn), an increase in London council tax (£625m) and the London Development Agency (£250m). The organising committee (Locog), led by Sebastian Coe, is responsible for staging the Olympics and Paralympics at an estimated £2bn, which will involve expenditure such as converting venues such as Wimbledon to host the tennis tournament. But since Locog is not funded from the public purse, it has not been part of the row.

What has changed?

The construction budget, Ms Jowell says, has risen from £2.375bn to £3.3m. Inflation in the building industry has risen from 6.5 per cent to 8 per cent and steel prices have doubled. The cost of public transport links into the park and the athletes' village and media centre will also rise but an exact figure will not emerge until next year. The £400m cost of consultants CLM has also been added to the bill.

Ms Jowell also admitted the existence of other potential increases. Security - carved up between the Metropolitan police, the Home Office and Ms Jowell, or more likely a successor in Gordon Brown's future government may end up costing £1bn. A 17.5 per cent VAT bill on £3.3m has yet to be waived by the Treasury. The contingency fund, to allow for future overspends, will also rise, Ms Jowell said, by 60 per cent if the Treasury has its way.

Separately, an extra £1.044bn has been added for "non-Olympic infrastructure costs" such as building bridges (£116m), sewage (£145m), and under-grounding power lines (£232m) in the Lower Lea Valley. Mr Livingstone wants the Government to stump up an extra £1.5bn to create a new town of 40,000 homes in the Thames Gateway area.

Why are consultants being paid £400m?

Understandably, there was some fuss when Ms Jowell revealed that £400m from the public purse was going to private-sector consultants. In construction industry circles, however, it is considered standard practice to hire a "delivery partner" in such a project.

When David Higgins and Jack Lemley took the reins at the Olympics Delivery Authority a year ago, they decided that they wanted to hire a company with a broader role than initially envisaged, working beyond 2012 to ensure a lasting legacy. This change of direction explains why their fee has only recently been added to the bill.

The three companies involved in Anglo-American consortium CLM have a combined turnover of £10bn and a CV that includes Heathrow's Terminal 5. With about 200 CLM staff based at 2012 headquarters, their main responsibilities will include letting hundreds of contracts, site supervision, engineering and controlling costs - their first financial report is due early next year.

Will there be a legacy?

The unique selling point of the London bid was that the Olympics - apart from offering a fortnight of world-class sport and a great party for the host city - would leave a major sports legacy. As a world capital, London ought to have a high-quality athletics stadium and the Olympics will certainly leave that behind. For the local community, there will be a new 500-acre urban park in the Lower Lea Valley.

Lord Coe and his team have vowed not to repeat the Athens experience which left the Greek capital with a herd of white elephants. However, Hugh Robertson, shadow Olympics minister, is worried there is little sign of increased grassroots participation in sport. Rather, the cash is being channelled to meet the aims of Ken Livingstone - not known his enthusiasm for sport - in redistributing wealth to London's East End.

Will the games pay for themselves?

Ken Livingstone has publicly wagered that the 2012 Games will make a profit - a case of hope prevailing over Olympic experience if ever there was one. Much depends on the state of the London property market in 2012 and beyond. Although much of the green space is untouchable and the stadiums, athletes' village and media centre cannot be sold off, certain Olympic zones such as car parks could be sold for big gains.

If Mr Livingstone wins his bet, does he plan to reimburse Londoners who will have contributed at least £625m towards the Games in higher council tax? The mayor's pledge should not be confused with the cost of staging the two-week event - which will probably be in the black. (Even the notorious Montreal Games broke even on this basis). To offset the £2bn cost of event management, Lord Coe will raise funds through broadcast revenues, licensing, tickets and local and global Olympics sponsors such as Coca-Cola and McDonald's.

How is London faring compared with recent host cities?

The IOC says itnot concerned, but its sights are set on the two Games before London. Ms Jowell claims that neither Athens nor Sydney were so advanced at the same stage in terms of site clearance and budgeting. The issue is not whether London will be ready on time. But a poorly planned Games can result in massive budget overruns and the dropping of commitments such as the pledge to organise an environmentally sound Olympics.

Will London gain anything from hosting the Games?

Yes...

* The Games deadline has hastened much-needed improvements to public transport in London

* Most of the events at the 2012 Olympic games will probably play to full houses

* Part of the legacy will be the economic regneration of London's run down East End

No...

* No one can accurately predict how much the London Games will cost to stage

* The Olympic games has a long track record of leaving 'white elephants' in host cities

* The disruption will be immense; Paris 2012 would have been within easy reach, with none of the burden on taxpayers