House of Commons - Transport

Select Committee on Transport Second Report

5 COSTS TO THE PUBLIC

70. The collapse of the Metronet PPP Agreements will inevitably have an impact on taxpayers and Tube passengers. As Tim O'Toole of London Underground told us:

None of our witnesses was able to provide an estimate of the total public cost of Metronet's failure. However, on top of liability for 95% of Metronet's overspend, which was projected to reach some £2 billion by 2010, Transport for London has made available a £900 million loan facility to Metronet's Administrators to cover its operating deficit of around £13 million a week in the absence of further funding from the banks.[95]

71. In September 2007 the Office for National Statistics reclassified Metronet and Tube Lines from the private sector to the public sector for the purposes of the National Accounts and Public Sector Finances. Hence, according to the Secretary of State, the entry into administration does not, of itself, change the public expenditure treatment for Metronet's existing debt, and so does not represent a net impact on the public purse.[96] To the extent that the loan of £900 million is utilised (the Administrator has previously indicated that he expects to use the entire amount),[97] this would also have been borrowed by Metronet anyway to cover its operating deficit and would have been classified as public expenditure, less the additional cost of administration.[98]

72. The additional costs to the public purse are made up of Transport for London's liability for the additional cost of administration and the cost of inefficient work by Metronet. Otherwise, Transport for London's liability for Metronet's efficient overspend and for the additional cost of administration represents a transfer of liability from central Government to Transport for London. In any case, the actual total cost overrun, whoever is liable, is unlikely to amount to the figure that Metronet were projected to overspend by 2010 if future work can be delivered more efficiently than Metronet were expected to, and some of the additional expenditure would have been necessary in any case, even if the work had been delivered efficiently.[99] As Mr O'Toole put it, "The issue is how much of that debt did not deliver work that now has to be delivered by somebody else and that is the cost to us."[100] Additionally, the equity written off by Metronet's shareholders, some £300 million to date, will contribute to paying for its overspend.[101]

73. The Arbiter's report of September 2007 made public the results of his initial analysis of Metronet BCV's Extraordinary Review (subsequently suspended) and sheds some light on the likely scale of inefficiently undertaken work.[102] While Metronet BCV identified a likely overrun to 2010 of £1,047 million, the Arbiter's view was that the appropriate figure for Net Adverse Effects for an efficient company would be in the range £140-470 million. The Arbiter had also reviewed the financial model for Metronet SSL, which shows a projected cost overrun of some £1.15 billion to 2010, and considered that the potential scale of recoverable Net Adverse Effects would likely be £230-600 million. The Arbiter's figures therefore put the cost of Metronet's projected inefficient overspend to 2010 in the range of £1.1 billion to £1.8 billion.

74. Mr O'Toole told us that the Mayor of London has asked for an assessment of additional costs and the resultant impact to the future programme by late spring, although he noted that the results will be partly dependent on negotiations with the Government and other stakeholder as to the particular vehicle to deliver Metronet's upgrade work.[103] He was not confident that there would not be any scaling back of the investment programme:

Everyone will do everything to protect the line upgrades because to not deliver that is simply unthinkable. This system, as I said, is bursting at the seams and it is becoming ever more important to London and it has to be renewed. We already know as a result of Trans4m just cancelling and walking off that the stations programme has kind of sat down. We are trying to continue the work that is on site right now so that at least there is not a compounding of waste, but the starting of new jobs has definitely fallen behind the original schedule, so at a minimum some of that work is going to be pushed into the future—at a minimum.

104

75. On the delay to the station programme, Mr O'Toole explained that, although the analysis was not yet complete, the schedules for at least 50 station refurbishments have had to be changed, which represents a separate cost in lost utility to passengers.[105] He confirmed that he had only two potential sources of funding to cover the costs of Metronet's inefficiency and other cost increases: fares and a grant from central Government.[106] Discussing a potential Government contribution to the costs of Metronet's failure, he said that the Government had been "very constructive" in its approach but had "not signed a blank cheque".[107]

76. While expressing an aspiration to minimise additional costs to the taxpayer or passenger,[108] the Secretary of State would not confirm how much of the additional cost central Government would be willing to cover:

109

77. It was always recognised that efficiently expended increases in costs—for instance, due to the unexpected condition of assets—would need to be assessed at the first Periodic Review in 2010. Unless additional funding can be secured such cost increases in the first review period will have to be offset by reductions in scope in the second review period.

78. It was the Government that insisted on the PPP structure for the modernisation of the London Underground in the face of opposition by the Mayor of London. Now Metronet has failed, it is unclear how much of the financial responsibility the Government is prepared to bear. Both the Mayor and the Secretary of State have insisted that transport in London will benefit from a favourable settlement from the Comprehensive Spending Review but money for Crossrail and the Olympics obscures the scale of central Government's contribution to the cost of Metronet's collapse.

79. We recommend that the Government, as a matter of urgency, make a full assessment of the additional costs that have been incurred as a result of the failure of Metronet—including the cost of work that has been inefficiently undertaken and the cost of administration. The Secretary of State should then come to the House to make a statement on what proportion of these costs are to be met by central Government and what proportion she expects residents of London and Tube passengers to pay. The Government should also consider its contribution to efficient increases in costs as a result of the unknown condition of the infrastructure, in order that London Underground is not forced significantly to reduce the scope of the upgrade programme during the second Review Period from 2010.

80. When Metronet entered administration on 18 July 2007, the Prime Minister told the House that, "If Metronet pulls out, another company will be found to take its place"[110] In August the PPP Administrators engaged an advisory investment bank, N M Rothschild & Sons Limited, to carry out an independent valuation of the Metronet companies in order that the market might be tested for interest from potential purchasers. However, no private sector interest was forthcoming. As Alan Bloom, Metronet's PPP Administrator, told us

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This negligible prospect of finding buyers persuaded the Administrator that continuing with the Extraordinary Review of Metronet BCV or requesting a Review of Metronet SSL, which could have increased the companies' values by establishing London Underground's liability for the cost increases, would have been unproductive. The request for an Extraordinary Review was therefore withdrawn on 31 October 2007.[112] London Underground supported this withdrawal. The Review, in the view of Tim O'Toole, was "a proceeding that was not going to tell [London Underground] anything, seemed a complete waste of time and, quite frankly, from our point of view, was vexatious."[113]

81. The failure to sell Metronet to the private sector means that the costs of operating Metronet during administration and of the overspend will ultimately be paid for entirely by the public. Although we are not surprised that a buyer could not be found, it is regrettable that the Extraordinary Review was not completed, particularly because the Arbiter expected to publish his results less than two weeks after the Review was called to a halt. Not only did the cessation of the Review effectively eliminate any private sector competition to London Underground's bid to take over the Metronet Infracos, but it curtailed an in-depth analysis by the Arbiter of exactly what led to Metronet's cost overruns and eventual collapse. It is at least possible that the Review could have pointed out some of the lessons that needed to be learned from the experience. Nonetheless, the Arbiter's September report,[114] along with his draft determination on additional interim payments of the Infrastructure Service Charge[115] and the 2006 Metronet performance report,[116] provide a useful commentary on Metronet's failure.

82. We hope that, in its discussions with Transport for London as to the future of Metronet's PPP Agreements, the Government makes full use of the Arbiter's analysis for the partial Extraordinary Review of Metronet BCV and for a potential Extraordinary Review of Metronet SSL, and that his insights are utilised to minimise the chance that further unexpected and wasteful costs to the public purse might be incurred.

94 Q 309 Back

95 Q 298 Back

96 Ev 74 Back

97 For example, at the London Assembly Transport Committee evidence session of 11 September 2007. Back

98 Ev 74 Back

99 Ev 74 Back

100 Q 295 Back

101 Ev 74 Back

102 PPP Arbiter, Initial Thoughts, 21 September 2007 Back

103 Q 283 Back

104 Qq 284-285 Back

105 Q 311 Back