Max Fordham is owed £200 000 on lottery projects and he's by no means the biggest loser. So, how did the lottery bonanza go so wrong?
Professor Max Fordham is no grouch. In fact, the 66-year-old senior partner of services engineer Max Fordham & Partners is an affable, upbeat character who is passionate about building.

But at the moment, he is righteously aggrieved. Until recently, he thought he'd done pretty well out of the £1.26bn lottery bonanza that lasted from 1994-98. He had scooped 15 contracts to provide M&E services on Millennium Commission or Arts Council-funded lottery projects.

But since those days, the lottery has turned out to be a mixed blessing. Two of those clients – the £17m National Centre for Popular Music in Sheffield and the £89m Bristol Harbourside Centre – owe him more than £100 000. And at least three others have defaulted on fee payments because of disputes over cost overruns. So far, Fordham is owed more than £200 000.

Fordham is not a gambling man. He does not even play the lottery. But now it seems that the lottery – or more particularly, the Arts Council – has played him. And he is not the only one to have had his fingers burned. A picture is emerging of lottery projects all over the country that have gone awry, leaving contractors and consultants millions of pounds out of pocket.

Worse, it is beginning to look as though a sizeable part of this money will never be recovered. In the past month, accountants picking through the wreckage have offered a series of unappetising deals to angry firms.

On 2 November, 200 creditors of the National Centre for Popular Music were offered 10p in the pound of what was owed them, plus £1 per visitor. HBG Construction will take the biggest hit here: it may lose as much as £270 000. The following week, 100 creditors of the Harbourside Centre were finally offered 50p in the pound. That meant that German signature architect Behnisch Behnisch & Partner had to kiss goodbye to £400 000. The week after that, the Cambridge Arts Theatre sold the Cambridge Arts Cinema. This was one of a package of measures adopted when the theatre, which was redeveloped in 1996-97 at a cost of £12.7m, was about to go belly-up at the beginning of last year. Now, the best the design team can hope for is the 25p in the pound that it was promised in March 1998.

Meanwhile, the Earth Centre in Doncaster and the Royal Armouries in Leeds (the latter a private finance initiative project) are struggling to keep afloat after failing to attract the number of visitors predicted in business plans. The Earth Centre, which opened in April 1999, delayed paying fees to consultants and contractors, although it has now settled final accounts.

I couldn’t give salary increases in 1998. So the morale of the office drops max fordham on bristol’s harbourside centre

These troubles were on top of the common-or-garden disputes that hit lottery projects. The £32m Royal Exchange Theatre in Manchester, the £22.8m Victoria Hall and Regent Theatre in Stoke-on-Trent, the £7m Dovecot Arts Centre in Stockton-on-Tees and the £63m Hampden Park Stadium in Glasgow are all suffering from cost overruns. And all are disputing outstanding claims with consultants and contractors.

Construction professionals may be patrons of the arts. But that the industry should be forced to bail out Arts Council lottery projects is scandalous, its victims say. Rod Bennion, managing director of Wates Construction, which wrote off more than £100 000 on the Cambridge Arts Theatre, said last week: "We are not banks and we are not charities. We are in business to make profits for our shareholders." There are various reasons behind these financial headaches. In some cases, clients' business plans were based on inexpert advice, particularly regarding visitor numbers (and as a cruel irony, accountants that ratified erroneous projections of visitor numbers – such as the National Centre for Popular Music – are now handling their insolvencies). In others, the attractions were badly managed after they opened. Other projects were scuppered at a late stage of the design, or had their programmes squeezed by deadlines to raise match funding. The UK lottery bodies' funding timetable is out of synch with that of match funders, notably the European Regional Development Fund, so clients might secure a lottery grant but then run out of time to find match funding. And some clients were trading on the basis of funding promises that were broken. The Arts Council pulled the plug on the Harbourside Centre and the £28.5m redevelopment of the Hackney Empire.

The common thread in all these projects is that they rested on business cases underwritten by the Arts Council, which is not obliged to pay lottery grants until projects are finished. At the same time, clients were not required to set aside the funds to pay the fees of the professionals they had hired. Often, the clients were shell companies or charitable trusts set up to deliver the project and had no disposable assets. So, the professionals paid the price.

Fordham is fuming about this: "The state shields its money through these shell companies that it then dumps. In fact, these companies are trading illegally because you have to have the funds to pay the people you enter into contracts with." The Arts Council declined to comment on this.

A consensus has emerged in the past few weeks that, in the future, consultants should be given some protection from the risk of client insolvency. As Bennion says: "There has to be some mechanism to ensure that the procuring body has funds outside the awards to be paid by the Arts Council." Euan Lees, senior project surveyor at Davis Langdon & Everest (owed money on the Sheffield pop museum and the Cambridge Arts Theatre) suggests that: "Retentions ought to be ring-fenced in a trust fund." Not surprisingly, Fordham concurs: "A trust fund should be set up at the outset, administered by a trustee of the funding body. The money should be paid out as the work progresses, at the start of each phase." Arts organisations are notoriously inept at running themselves profitably. Yet the business cases for these projects were supposed to have been checked and rechecked by countless third parties – accountants, leisure specialists, European funders such as the European Regional Development Fund, not to mention the Arts Council and Millennium Commission's own consultants and project monitors.

It now emerges that visitor numbers were often calculated on the basis of local resident population within a two-hour drive time and flawed comparisons with other attractions. Invariably, allowances were not been made for increasing competition from other venues. What is more, a leading leisure consultant commented: "Elements of business plans appear to have been cut and pasted from one project to another: they tend to have used the same ways of raising money and it is a striking coincidence that most of them predict 300 000-400 000 visitors." The floundering of these projects has sen shockwaves through the industry. Question marks have arisen over the viability of other lottery schemes, particularly those in remote locations that lack the infrastructure to support tourism or a critical mass of attractions. What of the £50m Magna museum of industry at a former steelworks in Rotherham, the £74.3m Eden botanical gardens in Cornwall, or the £37m Deep aquarium in Hull? As more visitor attractions come on stream, the competition for visitors can only intensify. A leading leisure operator and consultant who has worked on half a dozen lottery projects said: "They should be revising their product and amending the business plan throughout." The Cambridge Arts Theatre, the Earth Centre and the National Centre for Popular Music have all had to shake up their management teams and reboot their operations, incorporating more retail and corporate hospitality and beefing up their marketing strategies. The client for the Deep has been advised to revise its scheme to make it sustainable with only 200 000 visitors a year, rather than the 400 000 it hoped to attract.

So what went wrong? Lottery losers speak out

"The Arts Council wants the privileges of being a client, without the obligations" Stefan Behnisch on the Bristol Harbourside Centre "These schemes should carry a health warning" Rod Bennion, Wates Construction, on the Cambridge Arts Theatre "If the millennium projects were going to be profitable, the private sector would have built them" Leading Leisure Consultant and Operator "If we were to go into it again, we would be looking for some kind of guarantee from the Arts Council that we’d get paid" Stephen Bugg, DL&E "Lottery project champions have to be optimistic. You get the money by saying that this is an outstanding scheme that’ll pull in the punters. Lottery clients need more help from people going through the books" Barry Brown, Bland Brown and Cole, Architect on the Cambridge Arts Theatre

The projects that went bust and the firms that got stung

National Centre for Popular Music, Sheffield Construction creditors: HBG Construction, Phillips Special Projects, Branson Coates, Buro Happold, Max Fordham & Partners, Citex, DL&E. Money owed: £500 000 Deal offered 10p in the pound, plus £1 for each visitor over 150 000 a year in the next five years Harbourside Centre, Bristol Construction creditors: Behnisch Behnisch & Partner, Buro Happold, Ove Arup and Partners, Max Fordham & Partners. Money owed: £2.8m Deal offered 50p in the pound Cambridge Arts Theatre Construction creditors: Wates Construction, Bland Brown and Cole, Davis Langdon & Everest, Max Fordham & Partners, Hannah Reed Associates. Money owed: £1.5m Deal offered 25p in the pound