Public humiliation as costs hit £72m

The building in West Bromwich is now £49 million over budget and Sandwell Council has been urged to come up with an escape plan if it finds itself no longer able to afford to run it.

The report by auditors KPMG today:

* Warned that the £1.1 million a year set aside to run the building for the next three years would be insufficient

* Urged Sandwell Council to consider "mothballing" or even demolishing the site if it gets too costly

* Revealed the costs to Sandwell taxpayers of paying back a £1.2 million loan taken out by the council would be £220,000 a year for seven years

The building opened behind schedule last year after a final £3 million handout from main funder the Arts Council, with the gallery itself only opening this August.

But Sandwell Council, which is now responsible for the project and has spent £20.6 million on the building, remained defiant today and said there was no question of closing or demolishing the centre despite the warning from KPMG, adding that shutting it would cost too much.

Sandwell's regeneration chief, Councillor Bob Badham, said: "In all projects you have to bear in mind what would happen if it didn't work. Decommissioning and demolition has been something we have had to consider in the past. It has been rejected on sound business grounds. It is not a cost-free option by any means."

In the report due to go before the council's audit committee next Tuesday, KPMG said there were "important lessons" to be learned.

It said it was vital that Sandwell Council "consider alternative uses and their operational and financial impact and this should include the consequences of mothballing the building if operating it becomes too costly".

It also advised the council that "if no other alternative use is viable for this building (it should) consider the costs of decommissioning and demolishing the building".

But it warned that if the building is decommissioned funding bodies could try to "claw back" millions of pounds.

The report reads: "With the benefit of hindsight the authority may have taken a different course of action.

"However, given the information and evidence of the key stages of the 15 years of this project, we re-iterate our view that the authority has acted reasonably."

On the decision by the council to allocate £1.1 million a year to running the gallery KPMG warned: "There is uncertainty as to whether this will be sufficient owing to difficulties in obtaining tenants and determining costs."

Councillor Tony Ward, leader of Sandwell's Conservative group, said: "This building is a money-eating monster fed by the taxpayers of Sandwell. We warned four years ago this would cost in excess of £70 million and we were right."

West Bromwich East MP Tom Watson said: "The biggest scandal is that the Arts Council has singularly failed to live up to its responsibilities. It is the largest player and had accountants on this project since day one."

Sally Luton, regional executive director of Arts Council England, West Midlands said: "Arts Council England is aware of KPMG's report, but has yet to study it in detail."