1.25 In March 2005 Metronet's lenders and London Underground permitted Metronet to waive the 2005 Arbiter's Annual Report on Metronet's performance, despite evidence that Metronet was underperforming. London Underground was concerned that the outcome of the Annual Report was uncertain and might have concluded, on the basis of defective information, that some of Metronet's extra costs were economic and efficient, resulting in extra costs for the public sector. Instead, London Underground and Metronet agreed to review information on Metronet's performance, and agreed that the Arbiter should carry out a confidential practice run later in the year.
1.26 London Underground was not satisfied with the quality or timeliness of information that was emerging from Metronet. In preparing for the practice run, the Arbiter indicated that he would consider using his statutory powers to require Metronet to disclose detailed cost information if it were not otherwise forthcoming. Metronet did provide data in response to requests from London Underground and the Arbiter. It later became apparent, however, that the quality of this data was not sufficient to allow London Underground to understand the projections adequately and to manage the contract effectively.
1.27 When the practice run got under way, the information provided by Metronet projected net extra costs across its work programme. In October 2005, Metronet informed the Arbiter and London Underground that it had identified £566 million of extra costs in the first 7½ years of the contract which it had not anticipated in its bid. These costs were offset by £416 million of identified savings and costs of additional work separately paid for by London Underground, as well as the use of £89 million of contingency.4 After such offsets, both Metronet BCV and SSL projected extra spending of £27 million and £35 million respectively, compared to the £50 million materiality threshold above which they could claim additional economic and efficient costs from the public sector (paragraph 1.16).
1.28 Within five months, Metronet's projected extra spending increased dramatically. In February 2006, Metronet updated its financial models for the first time for the expected higher cost of future work. As a result, its projected extra spending for the first 7½ years increased to £1.2 billion although, again, the reliability of this figure was uncertain.
1.29 In February 2006, Metronet approached London Underground to discuss how to fund the extra spending. Metronet had meetings with London Underground throughout 2006 without providing reliable information that would support any agreement. DfT chose to monitor developments by increasing its liaison with London Underground and TfL. But it chose not to be drawn into disputes between contracting parties, on the grounds that its involvement would lead to confusion and undermine London Underground's position. In May 2006, the Permanent Secretary of DfT refused an invitation from Metronet's Chief Executive Officer to discuss its work programme and progress "until there was clear evidence of improvement". He recommended instead that Metronet should focus its attention on discussions with London Underground and TfL. DfT looked to the Arbiter's 2006 Annual Report, due to be published in November 2006, to provide clarity on Metronet's overall performance, and the scale and nature of any projected cost increases.
1.30 In November 2006, the Arbiter's Annual Report was published, highlighting track and stations work as being areas of particularly poor performance. The Report projected extra spending of up to £750 million for Metronet SSL and BCV over the first 7½ years, but noted that there was substantial uncertainty over the figures. The Arbiter found that overall some of Metronet's costs had not been economically and efficiently incurred. He was not, however, in a position to provide clarity on the level of economic and efficient extra spending that would have to be met by the public sector, because Metronet had not asked him for direction on the issue. The Report also concluded, given the scale of the projected additional costs, that Metronet had grounds to trigger an Extraordinary Review for both its BCV and SSL companies.
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4 National Audit Office analysis of London Underground and Metronet data.