Supplementary memorandum from the Department
for Transport (PPP 08a)
METRONET—THE
COST TO
THE PUBLIC
PURSE
Following my appearance before you at the Transport
Select Committee hearing on Metronet on 7 November, I wanted to
clarify some points about the cost of the collapse of Metronet.
At the hearing it was suggested that the combination
of Metronet's debts and the administrator's loan facility represented
a net impact on the public purse of about £3 billion. This
is emphatically not the case.
As Metronet's contracts were "on balance
sheet", public expenditure figures take into account external
borrowing, and following the reclassification of Metronet and
Tube Lines in September this by the Office of National Statistics,
the existing debt scores directly against Public Sector Net Debt
(PSND). The entry into administration does not, of itself, change
the public expenditure treatment of Metronet's existing debt,
and so does not represent a net impact on the public purse.
What administration does is to change the way
in which funds are provided for the work that is being carried
out. A number of Committee members suggested that the £13
million a week that Metronet, in administration, requires on top
of their ISC payments is new and unplanned spending, totalling
the £900 million loan facility that has been provided to
the administrator. This is not correct.
First, the current rate of spend by the administrator
is falling well short of exhausting the six month, £900 million,
loan facility provided by TfL.
Second, much of this funding simply replaces
planned cashflows that Metronet would, outside administration,
have borrowed As described above, this borrowing would have scored
in PSND as public expenditure, and so the new form of funding
does not represent an increase in planned public expenditure.
It is also not wasted spending as it ensures that Metronet can
continue to keep the tubes running and maintain safety standards.
We do recognise that some of the £13 million
per week spending does reflect the additional cost of administration.
In addition, some of the work may be more expensive than previously
anticipated owing to remaining inefficient and uneconomic activity
by Metronet; but the Administrator and LUL are working together
to rectify these areas. This is why securing an early exit from
administration, an objective all share, will help minimise these
costs.
That said, it is clear from the work of the
PPP Arbiter to date that the cost of delivering PPP outputs under
the two Metronet contracts in the first period would have been
higher than expected at the time of their bid. The Arbiter's view
is that a proportion of these would have been faced by a company
operating economically and efficiently.
It is also clear from the Arbiter's work that
Metronet had delivered less, in terms of outputs, than expected
at the time of the bid. There was clearly uneconomic and inefficient
behaviour and notable failings of their internal financial controls
and corporate governance.
These costs will impact Metronet's shareholders.
As I said when giving evidence, three of Metronet's shareholders
have already written down over £300 million as a result of
Metronet's failure.
What we do not yet know is the true extent to
which Metronet's delivery had slipped behind their spending. That
will take London Underground some time to establish, when and
if they take control of the Metronet assets from administration.
The extent to which these costs exceed shareholder's equity losses
will have implications for the public purse. My view is that in
the short term there will be costs. As Tim O'Toole stressed, our
capacity to recover lost outputs will then link directly to the
decisions we take about the best delivery vehicle for the longer
term.
We will continue to work to learn the lesson's
of Metronet's failure and I look forward to reading the Transport
Select Committee's views on these matters.
November 2007
| 
