4.4 To conclude the contracts the Department, on the advice of in-house lawyers and London Underground's legal team, took steps to defuse issues surrounding a further possible legal challenge. The main step consisted of an indemnity from the Secretary of State to reassure PPP lenders and investors that they would be paid out in full in the event of a further legal challenge overturning the PPP.
4.5 Concern about outstanding legal issues was also mitigated by an unusual drawdown arrangement whereby private debt funding would not be drawn down until the second half of 2003-04. Although the investors' initial injection of equity and mezzanine funding at financial close remained unchanged and funded the start of work, all other work in the early months of the contracts was funded by accelerating the payment of infrastructure service charge. The Department saw this as a practical solution - in essence, the full year infrastructure service charge due in 2003-04 was paid to the PPP companies by London Underground during these months. In return, the investors were committed to funding all of the work over the second half of 2003-04 from drawn down debt.
4.6 Following these two sets of last minute changes to accommodate lender concerns about political risks, the Department and London Underground expect the deal to deliver the original objectives. We note that obtaining private sector expertise, one of the objectives, usually includes scrutiny by private lenders when they bear substantial exposure to the risk of default by the private borrower. In this case, although equity investors bear project risk, the exposure of lenders to default risk carries less consequence at the start as well as later on if the PPP contracts were to terminate prematurely. The negotiations on refinancing do, however, provide evidence that lenders want to retain the normal controls they started out with in order to monitor their loans closely.