10 Despite the fungible nature of funds available to Metronet to meet its obligations, we assumed that Metronet cascaded the revenue it received from London Underground's payment of the Infrastructure Service Charges. First call on the revenue was meeting the costs, in full, of Metronet's operational and maintenance activities. The next portion of revenue covered costs associated with Metronet's overhead activities, with the exception of paying bid costs. A third portion of the received revenue covered Metronet's financing obligations, with the exception of one off debt arrangement fees at the start of the project. We assumed that Metronet invested any residual revenue in its capital works programme.
11 Starting, therefore, with Metronet's execution of its operational and maintenance activities, we obtained, from the cash flow in Metronet's most up to date financial model, expenditure for four cost lines (Rolling Stock, Signals, Stations and Track6) for each six-month period from financial award to 31 March 2007. For the remaining 109-day period, through to Metronet's entry into administration, the entries in the model were projections for the full six-month period. We have assumed that the actual rate of expenditure for the foreshortened period was equal to that suggested in the model.
12 From the Arbiter's report on capital and operational expenditure, we extracted, for each period, the upper and lower cost estimates for each of the four cost lines. For the last 109-day period, we apportioned the Arbiter's estimates on a pro-rata basis.
13 By subtracting the Arbiter's estimates from Metronet's figures, we obtained upper and lower values to a range for Metronet's inefficiency in each period. To bring all the annual estimates of inefficiency to a constant price basis, we inflated them to July 2007 prices using the Office of National Statistics' retail prices index, CHMK. The sum of the inflation adjusted annual values of inefficiency amounted to between £32 million and £41 million (2007 prices) (Figure 15). We classed this sum as a taxpayer's loss on the basis that we had assumed that Metronet had used revenue from London Underground to fund its operational and maintenance activities, irrespective of efficiency.
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6 Metronet's financial model includes additional operational and maintenance activity for work on civil engineering structures, for example, tunnels, bridges and embankments. The Arbiter included these works as part of Metronet's capital investment and we decided to adopt the Arbiter's position rather than disaggregate the Arbiter's assessment of the cost that an efficient company would have incurred investing in civil engineering infrastructure into capital expenditure and operational expenditure.