APPENDIX THREE Cost to shareholders

1  Metronet's shareholders' equity investment should have ensured that they would monitor risk closely to protect their investment as well as their reputations. Metronet's shareholders did not, however, have a significant amount of equity at risk in comparison to the size of the PPP contracts. This section calculates their loss from the failure of Metronet in July 2007 and compares this to the value of invoiced work they had received from Metronet to that point. This is used to estimate the gross margin shareholders would have had to have made from their invoiced work in order to break even.

2  The shareholders all invested £30 million equity and a further £40 million in Metronet's subordinated debt, and lost these amounts when Metronet went into administration. The four shareholders who formed Trans4m, the company they set up to carry out stations and civil engineering contracts, made further losses from contractual penalty payments. The amounts shown in Figure 21 are estimates because the finalised Trans4m accounts were not available at the time of publication.

3  Under the tied supply chain, shareholders sold goods and services to Metronet worth a value of almost £2 billion up to March 2007 (See Figure 22 overleaf). The profit margins the five shareholders made on these sales are unknown. Figure 23 overleaf therefore shows an estimate of the gross margin the five shareholders would have had to make in order to break even. In order to break even by July 2007, given the losses they faced, we estimate that the shareholders would have had to make gross margins ranging between 15 per cent and 82 per cent up until administration (see Figure 23).