The Big Question: Is the economic downturn going to blight the 2012 London Olympics?

Why are we asking this now?

London won the Games in a time of economic plenty but is building them in a global recession. This week it felt it as Nortel, a major sponsor of the organising committee, filed for bankruptcy. The worry is that this could set off a domino effect, jeopardising the Games' delivery. Today also marks the exact halfway stage between London's being awarded the Games on 6 July 2005 and the opening ceremony in the Olympic Stadium in July 2012.

But are the Games on track?

Despite the ferocity of the downturn, a crisis in the construction sector, and the refusal of banks to lend to subcontractors, broadly speaking they are. The Olympic Delivery Authority (ODA) has a £2bn contingency budget, of which it has only released £95m so far. It remains likely that, albeit with scaled down ambitions, the Games will be delivered on time and within the £9,325bn budget.

But that's way over the original budget, isn't it?

At the time of the bid, the public estimate for the Games was £2.4bn. But in March 2007, Tessa Jowell announced the new budget would be nearly four times the original. Much of the increase was purely down to inflation between 2004 and 2012, which wasn't accounted for. But VAT, which could be as much as a £1bn, was also left off, and the £2bn contingency pot (not all of which will necessarily be used) was scaled up. And the events of 7/7 – just a day after London won the Games – led to a huge increase in the security budget.

What is the significance of Nortel's bankruptcy?

Nortel is the first major sponsor of the London Organising Committee of the Olympic Games (LOCOG), the organising committee, to hit this sort of trouble. LOCOG's £2bn budget, all of which comes from private money, includes £700m to be raised from Olympic partners. LOCOG have already secured over £450m – well ahead of where other Games were at a comparable stage. But the American telecoms giant, which has filed for Chapter 11 bankruptcy, may now struggle to provide the £40m worth of services it had pledged. If the other 10 sponsors, who have committed anywhere between £10m and £40m, also threaten to renege on their funding, the delivery of the Games may suddenly look less plausible. Aside from jeopardising a substantial chunk of money, Nortel's difficulties set a dangerous precedent.

What's happening to the Olympic village?

Since late 2007 the bottom has fallen out of the construction industry and property market. Its main victim in relation to London 2012 has been the £1bn Olympic Village. Half the cost was meant to be come from the private sector, but Lend Lease, the Australian firm which is the preferred developer, has not been able to raise any capital because of banks' refusal to lend.

The ODA admitted in October that the taxpayer could therefore foot the entire bill for the Village and has released £95bn from the contingency to begin construction. Only 2,700 flats will now be built in the Village – down from the original 4,500. That means the 17,000 athletes and officials will have to live five to a room rather than four. Other subcontractors hired by the ODA could also go under as the recession bites – forcing the public to bail them out.

Are other venues affected?

An international media centre, designed to house 20,000 international journalists and initially budgeted at £400m, will now cost just over £300m. Again, half the money was supposed to come from the private sector, but hasn't. It will now be funded entirely by the taxpayer, and will feature a mixture of permanent and temporary facilities.

The flagship Aquatics centre, designed by Zaha Hadid, has quadrupled in cost to £303m. Meanwhile, the long-term use of the £496m Olympic Stadium, the centrepiece of the Olympic Park, remains unclear. It's likely to house a sports academy after the Games, but whether or not 25,000 seats will regularly be filled for athletics meetings is doubtful. Several football and rugby clubs remain interested in moving in, but won't do so while it has an athletics track.

Consultants KPMG were paid £200,000 to examine whether or not any savings could be made on the temporary venues but concluded there were none.

So who are the key players?

David Higgins and John Armitt, both former civil engineers, are the chief executive and chairman of the ODA. Higgins, who was paid £624,000 last year, is Australian and a former chief executive of Lend Lease. He was heavily involved in the Sydney Games of 2000. Armitt, a former head of Network Rail, is paid £144,000. Paul Deighton and Sebastian Coe are the chief executive and chairman LOCOG. Lord Coe, the former Olympic 1500 metres champion and Tory MP, who worked as William Hague's chief of staff when Hague was party leader, is paid £250,000 a year. Deighton, an Arsenal fan who was once reputed to have amassed a fortune of £100m, is a former banker with Goldman Sachs. He is paid £557,440.

The other major figures are Olympics Minister Tessa Jowell, Mayor of London Boris Johnson, and Lord Moynihan, a former Olympic rowing cox and Tory sports minister who looks after the interests of competitors in his capacity as chairman of the British Olympic Association.

How does all this leave the regeneration of east London?

Infrastructure investment in Stratford has been committed and will not now recede. The London Development Agency is determined to generate up to 50,000 jobs and make Stratford a new transport hub for London. A new Eurostar terminal and expanded Docklands Light Railway service will connect the area with Canary Wharf and the continent. Shops, restaurants and offices will hope to move in as the economic recovery gathers pace, and plans to help a London University set up a campus remain intact.

So how will London compare with the spectacular Games in Beijing last year?

Ministers were quick to point out that the London Games would steer clear of imitating Beijing. There will be a fundamental difference of scale. The Chinese spent at least £20bn – double London's budget. They recruited 400,000 volunteers, closed 200 factories, took a million cars off the roads and hung 40m flower pots to ease pollution and improve their eco-credentials. London will do none of that, though there will be several thousand volunteers.

Last year The Independent revealed plans for several opening ceremonies in parallel across London, as well as ticketing schemes to avoid the fiasco of empty seats. Boris Johnson has said that the London Games will be more "intimate" than Beijing. Innovations include plans for hand-held electronic devices for each spectator, detailing unfolding events, are also being looked at.

So could the preparations for the Games be knocked off course?

Yes...

* Closure or bankruptcy of major sponsors like Nortel could force Government to increase its funding

* Crisis in the construction industry could mean sub-contractors fold before completing their work

* Security concerns, including any rise in the threat of terrorism, could place more strain on the budget

No...

* There is still £1,905bn of the contingency funds available, and many of the venues under way

* New images show that progress on centrepiece Olympic Stadium is well ahead of schedule

* The International Olympic Committee has twice given London top marks for preparation work

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