11 The Department, together with the Treasury, took the lead in deciding on the form of the PPPs and relied largely on London Underground to develop and procure the deals. London Underground had always understood that it would be expensive to negotiate such large and complex deals and in February 1999 budgeted to spend £150 million. The outturn was £180 million (£170 million in 1999 prices). In addition, having decided to reimburse bidders' costs, London Underground agreed to add £57 million to the total deal cost to cover bidders' costs up to the point of selecting preferred bidders. London Underground required the preferred bidders to disclose the level of bid costs they intended to recover from the service charge. After prolonged negotiations the accepted level amounted to a further £218 million of bidders' costs and fees. In total £275 million of bidders' costs are reimbursed. Those costs included a success fee payable to the sponsors of the Tube Lines consortium as compensation for funding bid costs based on the cost of capital, the lost opportunity of utilising this capital to make other business investment returns, and any risk of non- recovery of costs during the three year bid process. London Underground realised this at the preferred bidder stage and questioned whether it was reasonable. It was advised that this was a normal market practice and the level was a matter for commercial judgement.
12 Three factors that are not easily quantified contributed to the transaction costs which in total came to £455 million:
a As they were based mainly on output specifications rather than inputs, the costs of the programme could only be known when firm bids came in. It was then that the Department came to realise that the total costs falling on the taxpayer were far more than those considered affordable. There followed a review of the specification to reduce the total cost of the programme. The review and the subsequent re-bidding added some five months to the process therefore increasing costs.
b A second cause of re-bidding arose from identifying, before it was too late, and then addressing constraints on the ability of LUL to provide the power required by initial proposals for new trains.
c Transport for London was due to take over responsibility for LUL but only after the PPPs had been put in place. For most of the negotiations Transport for London, therefore, stood outside the process but understandably, as a future party to the deals, took a very close interest in it. Transport for London opposed the PPPs and made a number of interventions, including two applications for judicial review, in its efforts to change the deals. This - the Department believes - further extended the time taken to complete the deals and obtain state aid clearance, although Transport for London disagrees.