1.19 In April 1998, the Department, satisfied that its objectives including eliminating the investment backlog could be achieved, told London Underground to proceed with implementing the chosen horizontally split PPP. Two priority tasks were: to determine how many Infracos there should be; and to carry out a preliminary assessment of the condition of the Tube's assets. For the former, London Underground's team concluded during 1998 that splitting the infrastructure business into three Infracos was likely to deliver better value for money. In particular, the team's investigation found little market appetite for bidding for a single Infraco. The resulting split led to two concessions for the deep tubes (see glossary) and one concession for the sub-surface lines, as shown in Figure 1.
1.20 To assist in the procurement, London Underground engaged Ove Arup to prepare an engineering assessment of the investment programme and to estimate base costs. Ove Arup's findings provided the basis for London Underground's estimate of the cost of the public sector carrying out a programme of maintaining and upgrading the Tube over 30 years. London Underground also held a series of workshops to analyse the extent of risk and uncertainty faced in this programme. As a result of this analysis, in March 2000, the public sector comparator forecast a wide range of risk adjusted net present costs, between £12,600 million and £17,200 million. This wide range was indicative of the uncertainty surrounding the costs of modernising the Tube.
1.21 In proceeding with the PPP, the Department concluded that this cost uncertainty could be managed by building in: appropriate incentives into the Infraco contracts; and a mechanism to ascertain that future costs, where unknown at the outset, would be re-based on the economic and efficient price for the outputs. As set out in more detail in the following section, the Department and London Underground saw a way of dealing with the uncertain infrastructure condition by aligning payment with delivery of the desired outputs.