6 Crucial to our analysis was some means of assessing the economy and efficiency with which Metronet conducted its activities. Under the PPP arrangements, the Arbiter had independent but limited rights to decide upon the economy and efficiency of Metronet's activities. We therefore sourced information from work done by him following Metronet's request, in 2007, for an Extraordinary Review of the performance of Metronet BCV.
7 Although the Arbiter did not complete his work, because London Underground and Metronet's administrators agreed to withdraw the Extraordinary Review reference, he had collected considerable information about Metronet's performance. Before the reference was withdrawn, the Arbiter had already received a report from Halcrow Group Ltd comparing Metronet BCV's capital and operational expenditure against that of a hypothetical economic and efficient company. He had also produced a report documenting findings from his separate investigations into the efficiency of Metronet's expenditure on business overhead activities. Both reports assessed the costs that the hypothetical company would have incurred had it, rather than Metronet BCV, executed the work that had to be done during the first 7½ years of the PPP contract, i.e. April 2003 to September 2010, the first review period. During the assessments, the Arbiter used information obtained from Metronet, Tube Lines and London Underground, including:
■ Metronet BCV's reports of actual expenditure;
■ Metronet's model of the costs that an efficient and economic company would have incurred;
■ London Underground's model of the costs that an efficient and economic company would have incurred; and
■ Cost data from Tube Lines' execution of its obligations.
8 To address uncertainty associated with the exercises, the Arbiter produced, for each category of expenditure, upper and lower bounds for the costs that an efficient and economic company would have incurred. When the operational and capital expenditure categories were aggregated together, the estimated range for economic and efficient expenditure was higher than that estimated by London Underground and lower than that estimated by Metronet (Figure 14).
9 The Arbiter did not conduct a similar exercise to determine the efficiency and economy of Metronet SSL's performance. On the basis of similarities between Metronet BCV and Metronet SSL and the fact that both companies were in difficulty, we have assumed in this analysis of the taxpayer's loss that Metronet SSL's inefficiency rates were identical to those of Metronet BCV.5
14 | Estimates of the operational and capital expenditure that an economic and efficient company would have incurred over the first 7½ years of the Metronet BCV contract | |
|
| £m |
London Underground's estimate | 2,900 | |
The Arbiter's lower estimate | 3,400 | |
The Arbiter's upper estimate | 3,500 | |
Metronet's estimate | 3,900 | |
Source: National Audit Office analysis | ||
NOTE The figures in the table are summations of cash for the first three years of the contract and 2006 prices for the projected costs for the following 4½ years. | ||
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5 We note that there were major differences between Metronet BCV and Metronet SSL both in terms of their work programmes and the infrastructure that they had to upgrade and maintain. Consequently, there were likely to be differences in efficiencies between the two companies for each category of capital expenditure. However, we did not have sufficient information to quantify the distinctions and, therefore, based our assumption of identical levels of inefficiencies on the assumption that Metronet SSL's overall inefficiency was the same as that for Metronet BCV.