3 Other costs
14. Transaction costs for the deal were £455
million, or 2.8% of the net present value of the deal. London
Underground's own costs were £180 million. It also reimbursed
bid costs of £275 million. The Department said that it had
learned a lesson about controlling bid costs.[18]
London Underground costs
15. London Underground's own PPP costs amounted to
£180 million. These costs included external advice on legal,
commercial advice and internal costs such as those of the corporate
reorganisation that preceded the PPPs (see Figure 4). Contract
negotiations took longer than anticipated, which increased the
costs for all parties. Without the PPP, the Department said that
London Underground would have had to negotiate separately a potentially
very large number of other contracts, each with its own transaction
costs.[19]Figure
4: London Underground's costs
| £ million
|
| 1. Advisers to London Underground
|
| Freshfields (legal) |
29.2 |
| PriceWaterhouseCoopers (commercial)
| 21.4 |
| Arthur Anderson (re-organising operations)
| 13.8 |
| PA Consulting (re-organising engineering activities and dynamic simulation model)
| 12.5 |
| Ove Arup (engineering) |
6.0 |
| Other firms (project management, audit, insurance, property, pension and miscellaneous technical advice)
| 26.5 |
| 109.4
|
| 2. London Underground internal costs
|
| 61.0
|
| Effect of discounting |
10.0 |
| TOTAL | 180.4
|
Source: London Underground
Bidders' costs
16. Winning bidders expect to recover bid costs in
their originally bid contract prices. In this case the costs became
a specific item that, after the extended negotiating period, increased
the Infrastructure Service Charge that London Underground pays
the Infracos. Total bidder costs, including those for unsuccessful
bidders, amounted to some £275 million (Figure 5).[20]Figure
5: Bidders' costs
| Unsuccessful bidders (£m)
| Tube Lines (£m)
| Metronet (£m)
|
| Lawyers for bidders |
- | 13.6
| 14.0 |
| Advisers | -
| 13.1 | 16.4
|
| Lawyers for banks and funding bodies
| - | 7.8
| 6.2 |
| Banks technical advisor, modelling, etc
| - | 4.4
| 2.5 |
| Other 3rd party advisers' costs to end 2002 - tax, audit, VAT
| - | 4.2
| 3.4 |
| Balance of 3rd party costs forecast for remaining period to close
| - | 5.4
| 3.0 |
| Bid team resources |
- | 16.6
| 14.3 |
| Transition team resources
| - | 21.5
| 2.4 |
| Project office expenses
| - | 1.4
| 3.2 |
| Unsuccessful SSL bid |
- | 7.0
| - |
| Success fees | -
| 39.0 | 50.6
|
| Unsuccessful bidders |
25.0 | -
| - |
| TOTAL (£m) |
25.0 | 134
| 116 |
Source: London Underground and Department for Transport
17. The bidders' costs included success fees to compensate
them for the use of staff and other resources which might otherwise
have been used profitably elsewhere. Tube Lines received £39
million of success fees and Metronet £51 million. In total,
success fees amount to over 30% of overall bid costs. The Department
said it had learned a lesson and that it ought to have established
from the outset what was a legitimate bid cost in relation to
this element. Faced with a similar situation again it thought
there was a strong argument to disallow success fees from bid
cost reimbursement.[21]
18. Excluding success fees, Tube Lines was reimbursed
£95 million of bid costs and Metronet was reimbursed £65
million of bid costs. Tube Lines concluded one deal, while Metronet
concluded two. Allowing for £7 million reimbursement for
a bid that Tube Lines did not win, the immediate cost for one
Tube Lines contract was £88 million. This was £23 million
higher than the amount that Metronet was reimbursed for two contracts.
The Department gave the following reasons for the differences:
- Earlier deal closure (December
2003 for Tube Lines, compared to April 2004 for Metronet). As
the Tube Lines contract was negotiated, developed and completed
earlier, the company incurred greater costs than Metronet in being
the first to agree contract principles. The Tube Lines contract
work was incorporated into the two remaining contracts, thus reducing
transaction costs on the Metronet bids where agreed terms could
be incorporated from the Tube Lines deal.
- Metronet was a single bidder for two contracts,
avoiding some inevitable duplication in costs had separate bidders
been selected.
- Different pre-operational contract activities
and the creation of business plans. These costs were some £21.5
million for Tube Lines, compared to £2.4 million for Metronet,
reflecting the different make-up of the two consortia. Tube Lines
was required to prepare supply contracts for sub-contractors before
deal close and build up resources capable of letting these contracts.
Metronet, with a supply chain that formed part of the consortium,
was not required to undertake a similar level of preparation before
deal close because contracts had already been arranged with suppliers.
The Metronet supply chain will have incurred substantial costs
pricing their respective obligations and in particular performing
the necessary due diligence to offer fixed prices. These costs,
while recoverable through the Infrastructure Service Charge, are
not separately identifiable but included in the overall fixed
prices offered to Metronet by suppliers.
Some of Tube Lines' costs covered design work that
should already have been covered by the Infrastructure Service
Charge. There is, therefore, the risk of double payment.[22]
18 Qq 75, 131, 160, 162 Back
19
Qq 12, 80-81, 84; Ev 35-39 Back
20
Qq 131-134, 166-167; Ev 35-39 Back
21
Q 131 Back
22
Qq 169-171; C&AG's Report (HC 645), para 3.18 Back
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