Taxpayer's loss

3.2  Our estimate of the direct loss to the taxpayer is based on the difference between the public sector costs incurred and the value of the work carried out by Metronet. It ranges from £170 million to £410 million. To produce this range, we had to make several extensive assumptions to bridge gaps in the data. Appendix 2 sets out our calculations and our assumptions in more detail. This estimated loss is equivalent to between four per cent and ten per cent of the cost of performing the same work economically and efficiently (see paragraph  3.10 and Figure 11).

3.3  We estimate the total costs incurred by the public sector as between £5,040 million and £5,100 million (see paragraph 3.9(i)). The majority of this is accounted for by the payment to Metronet of £3,060 million infrastructure service charges and payment to Metronet's lenders of £1,750 million in February 2008 as a result of a guarantee by London Underground (see paragraphs 24-29, Appendix 2). Other costs included the costs of Metronet's administration and a proportion of the cost of procuring the PPP contracts. The cost of financing was originally expected to be repaid over the 30 year life of the contract. Although unexpected, the payment is not the same as the net loss because of the benefit of the work carried out by Metronet.

3.4  We estimate the value of the work carried out by Metronet on the basis of the costs that an economic and efficient business would have incurred. Metronet spent £5,020 million in total - £1,260 million on operating and maintenance, £590 million on business administration, £330 million on servicing its debt, and £2,840 million on its capital works programme. Some of this spending was not, however, economic and efficient and the cost of some of these inefficiencies was borne by the taxpayer.

3.5  The Arbiter found that Metronet BCV had been inefficient in the execution of its operation, maintenance and business administration activities. Using the Arbiter's assessments of Metronet BCV's levels of inefficiency and applying these levels to Metronet SSL, we estimated that Metronet's inefficiencies in operating and maintenance activities cost the taxpayer between £30 million to £40 million. Similarly, we estimated that the taxpayer lost between £50 million and £100 million from inefficiencies in Metronet's business administration activities.

3.6  The taxpayer also bore losses associated with the capital works and the related debt financing that we estimate to be within the range £0 to £120 million. Overall inefficiency on capital works, as calculated by the Arbiter, was higher. The loss to the taxpayer shown in Figure 10 is lower than it would have been because Metronet's shareholders and lenders also absorbed losses.

3.7  We have reduced the estimated loss to take into account £90 million for debt related payments which were incurred prior to Metronet's failure. We have also taken into account some benefits deriving from the availability of private finance, which we estimate at some £60 million (paragraphs 26 and 27, Appendix 2).

3.8  London Underground also incurred other costs and losses associated with Metronet's failure:

i  £40 million for the costs of administration; and

ii  up to £110 million of the costs of setting up the Metronet PPP contracts.

3.9  An alternative way of presenting our calculation is to deduct the estimated costs that an efficient and equivalent infrastructure company should have incurred from costs incurred by London Underground.

i  Costs incurred by London Underground and TfL - Our estimate of total costs was between £5,040 million and £5,100 million. This estimate comprised: £3,060 million of paid infrastructure service charges; £1,750 million of repaid debt; £180 million of other costs incurred by London Underground, including administration costs and its procurement costs. Also included in the total are up to £110 million of anticipated benefits of the PPP contracts which were not received.

ii  The estimated costs that an economic and efficient infrastructure company should have incurred - From the same data, we estimated that the aggregate cost that an economic and efficient infrastructure company should have incurred was between £4,070 million and £4,250 million (Figure 11)

iii  The estimated costs of setting up a debt funded business. We then added the costs of setting up a debt funded infrastructure company: £110 million in respect of bid costs; £90 million for establishing debt service facilities; and debt servicing costs, including accrued interest at the time of administration of £420 million.

3.10  Total estimated costs incurred by the public sector were between £5,040 million and £5,100 million and estimated costs of an efficient debt funded infrastructure company between £4,690 million and £4,870 million. The estimated loss to the taxpayer, therefore, ranges between £170 million and £410 million. This is a loss to the taxpayer of between four per cent and ten per cent of the cost that an economic and efficient infrastructure company would have incurred in the execution of its capital investment, operating and business administration functions (Figure 11).