1 In the four years and four months between the start of the Metronet PPP contracts and Metronet's entry into administration, Metronet received approximately £3,060 million (2007 prices) from London Underground's payments of Infrastructure Service Charges. During Metronet's administration, London Underground paid £1,747 million to settle its guarantee to Metronet's senior lenders. In exchange, London Underground, and therefore the taxpayer, received services relating to the day-to-day operation of the Underground and Metronet's investment in capital works.
2 Metronet was inefficient in the way that it conducted some of its operational and capital investment activities. The cost of some of these inefficiencies was borne by the taxpayer. In this appendix, we have calculated indicative ranges for these inefficiencies (which are losses to the taxpayer), the value of efficiently executed capital works net of London Underground's settlement of Metronet's debt obligations and other direct losses associated with Metronet's entry into administration. Our calculation comprises six distinct parts:
a Losses associated with Metronet's inefficient and/ or uneconomic execution of its operational and maintenance activities.
b Losses associated with Metronet's inefficient and/or uneconomic execution of its business overhead activities.
c The loss associated with the greater rate with which Metronet used available debt relative to the expected delivery of completed works.
d The value of Metronet's capital works after netting off the taxpayer's payments for these works through London Underground's payment of Metronet's Infrastructure Service Charges.
e The payment made to settle Metronet's debt obligations.
f Other losses borne by the taxpayer comprising the costs of the administration and the unfulfilled value in the transaction costs that the public sector incurred establishing Metronet BCV and SSL.
3 In producing our estimate of the taxpayer's loss, we have had to make several major assumptions. The most notable include:
■ Metronet's expenditure during the last six months of its operations matched the projections in its last financial model;
■ The inefficiency rates of Metronet BCV's activities when compared to the PPP Arbiter's model of an efficient company for the BCV contract applied also to Metronet SSL (the PPP Arbiter had not conducted a similar exercise for the SSL contract); and
■ Metronet used revenues from London Underground's payments of Infrastructure Service Charges to fund its operational activities, business overhead activities and financing obligations, before using any remainder to fund capital works.
The assumptions are explained in greater detail below.
4 In our estimate of the taxpayer's loss, we have intentionally avoided reopening the debate about whether the PPP arrangements were better value for money than public sector alternatives. We have simply accepted the existence of the PPPs and assumed that the Metronet model was one of an infinite number of PPP arrangements. The losses to the taxpayer that crystallised following Metronet's entry into PPP administration, and associated extra costs that the taxpayer has had to bear, are those that we consider would not have existed had Metronet been able to continue trading.
5 We also decided not to compare future costs between the best alternative future arrangements and the costs that would have been incurred had Metronet performed its obligations economically and efficiently. There are two fundamental reasons why we made this decision:
■ Firstly, there has been no decision about what is the best alternative for the future of Metronet's business; and
■ Secondly, the model of a hypothetical Metronet that is efficient and economic cannot be used as a basis for a realistic comparison of future costs. Modelling the comparator based on the Metronet that existed would conclude with it entering administration. Therefore, the comparator would have to be the next best future alternative, but this too has yet to be determined.