13 Guidance is given to the Arbiter in the contracts as to whether certain costs, such as those for tendered subcontracts, are a fair reflection of the market. Initial work commissioned from Cambridge Economic Policy Associates by the Arbiter and published in 2003, suggested that there were a number of ways to assess the cost and efficiency of an Infraco. This and our own research shows that there could be a range of possible measurement mechanisms, each open to some interpretation:
■ Baselining of costs and performance - Measurement of outturn costs against a) an Infraco's financial model (including contingencies for cost overruns); and b) historical LUL information; and measurement of performance against PPP output specification.
■ Analysis of input price trends - Assessment of trends in the first period and making reasonable judgements about future input prices at periodic review. The water industry used a related technique on one occasion but Professor Stewart, advisor to OFWAT (the industry regulator), demonstrated that the cost functions changed too much for multi year analysis to be valid. The Competition Commission noted that this technique could be a useful supplement to OFWAT's existing methods of determining efficiency.
■ Internal cost and productivity benchmarking - Using data for sub-divisions of the Infracos, as in the sewerage industry. The Competition Commission have commented that this is a valid approach.14 The lack of competition in the Tube PPPs - two companies running the three Infracos - may reduce the Arbiter's ability to collect comparative data.
■ External cost and productivity benchmarking - OFWAT used this method in the past but their experience has shown that the data available on overseas companies is not always sufficiently comparable to companies in England and Wales for the work to be directly usable in price review assessments. This method may also have weaknesses in this case given that most international underground systems are operated by the state rather than by private companies and that LUL's network is one of the oldest, largest and most complex underground systems in the world.
■ "Components of work" analysis - To identify engineering good and bad practice on discrete elements of work and benchmark Infraco performance accordingly.
_____________________________________________________________________________________
14 Competition Commission, report on Vivendi Water UL plc and First Aqua (JVCo) Limited: A report on the proposed merger", p.30