The payment made to settle Metronet's debt obligations

24  When Metronet entered administration, the public sector effectively received Metronet's investment in the Tube but had to pay off 95 per cent of Metronet's outstanding debt obligations. These obligations included not only outstanding principal, but also accrued interest, indexation of index-linked bonds and costs associated with termination of financing agreements that the lenders had incurred (Figure 18). The accrued interest and the indexation of the index-linked bonds were incurred in the normal course of Metronet's business and were, in our opinion, neither losses nor amounts that should be used to offset the value of the transferred capital works. We, therefore, did not include these amounts in our calculations of the taxpayer's loss.

25  Offsetting the value of the non-revenue funded capital works transferred to the taxpayer are, therefore, the repaid portion of the debt principal and 95 per cent of the costs of terminating Metronet's financing agreements. Taking the repayment of the principal first, we have assumed that Metronet used its debt to reimburse its bid costs, to pay one-off debt arrangement fees and to fund its capital expenditure programme (Figure 19).

26  The debt used to reimburse bid costs and pay one-off debt arrangement fees, delivered benefits in terms of secured private sector investment and risk taking over four years and four months. In the case of reimbursed bid costs, we have assumed that in 2003, when the contracts were let, the amount reimbursed equalled the present value of the future benefits over the 30-year duration of the contracts, discounted at Government's discount rate of 3.5 per cent. We assumed that the annual value of the benefits, over the life of the contract, was constant in real terms and calculated that it was approximately £6 million (2003 prices). Converting the benefits received between 2003 and 2007 to July 2007 prices and summing them together gives a total of £30 million. On the basis that the taxpayer effectively paid £111 million to settle 95 per cent of the debt used to fund repayment of Metronet's bid costs, and after netting off for the benefits, we calculated the taxpayer's associated loss was £81 million.

27  We applied a similar logic to Metronet's one-off payments for debt arrangement fees, but discounted the benefits over the average loan life of the debt, which we assumed to be 20 years, rather than the contract duration. We therefore estimated that the value received between 2003 and 2007 was £32 million. On the basis that the taxpayer effectively paid £94 million to settle 95 per cent of the debt used to fund Metronet's one-off debt arrangement fees, and after netting off for benefits, we calculated the taxpayer's associated loss was £62 million.

28  We have treated the reimbursement of 95 per cent of costs attributed to the breakage of Metronet's financing arrangements ("breakage costs") as a £253 million loss to the taxpayer. Therefore, the amount of London Underground's settlement of Metronet's debt obligations that contributes to the taxpayer's loss net of benefits is £1,595 million (£1,199 million + £81 million + £62 million + £253 million).

29  DfT believes that some of the £253 million of breakage costs incurred may be offset by improvements in conditions for long term borrowing that lower the cost of funds to the public sector.