8. Railtrack's entry into administration in October 2001 and ongoing disagreements between TfL and the Government about the PPPs illustrated the risks of costing asset maintenance and renewal when the condition is not well known, and highlighted the potential risks for lenders. The Government agreed to increase, from 90% to 95%, the amount lenders of £3.8 billion of senior debt would recover in the event of termination, leaving the lenders at risk for only £190 million. This increase was considered necessary to obtain the total amount of finance required from the bank and bond markets for all three deals. The original 90% was agreed because, unlike most PFI deals, in this case the senior lenders could not protect their investment by re-letting the contract to an alternative service provider.13
9. There are caps, caveats and exclusions to project risks borne by the Infracos. The risk of cost overruns in repairing assets of unknown condition, such as tunnel walls, is excluded because knowledge of their residual life and associated costs is incomplete. In the case of assets whose condition has been fully identified against specific engineering standards, the cost overruns that the Infracos have to bear are capped, so long as the Infracos can demonstrate that they are acting economically and efficiently. In the case of Metronet the limit in each 7½ year period is £50 million. Tube Lines carries £200 million in the first period and £50 million thereafter. There is no definition of economic and efficient behaviour in the contracts; an independent arbiter can make a ruling if asked. Exclusions to the risks borne by the Infracos include passenger demand, lower income with fewer users and capacity constraints in the face of increased use. These are borne by London Underground. Figure 3 summarises the financing for the deal and the limitations on the risks that each is bearing.14
Figure 3: Senior debt and shareholder financing, and risk limitations
Source of finance | Shareholder funds (£m) | Senior debt (£m) |
| |
| Tube Lines | Metronet (two Infracos) | Tube Lines | Metronet (two Infracos) |
Planned | 270 | 350 | 1,530 | 2,290 |
Standby | 45 | 60 | 273 | 360 |
TOTAL | 315 | 410 | 1,803 | 2,650 |
Risk limitations | If acting economically and efficiently | 190 maximum (at least 95% of senior debt is repayable by public bodies in the event of termination) | ||
| Repair costs for assets of unknown condition, e.g. certain tunnel walls | |||
| 200 (50 after first period) on other cost overruns | 100 on other cost overruns (50 each Infraco) |
| |
Source: C&AG's Report (HC 645) Figure 11, condensed, and paras 2.36, 4.12
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13 Qq 13-15, 45-47, 90-92, 121-122, 183-184; C&AG's Report (HC 645), para 2.36
14 Qq 6-11, 75-76, 86-87; C&AG's Report (HC 645), paras 2.15, 4.12; C&AG's Report (HC 644), Section C1, paras 12-13, Appendix 2