Committee of Public Accounts

DEPARTMENT FOR TRANSPORT: THE FAILURE OF METRONET

Publication of the Committee's 14th Report, Session 2009-10

Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:

"The taxpayer has lost up to £410 million as a result of the Department for Transport's inadequate management of the risks arising from the Metronet contracts for upgrading the infrastructure of the Underground.

"This Committee finds it unacceptable that the Department ignored the warning by the National Audit Office in 2004 to avoid a hands-off approach to overseeing the upgrades.

"The Department's assumptions were flawed from the outset. It was nave in assuming that Metronet would establish strong financial management and corporate governance. It wrongly assumed that the public bodies given the task of overseeing the devolved delivery of the project had the information and influence to do the job. And its assumption that Metronet's lenders would exert strong influence on Metronet's governance and financial health in order to protect their investment was undermined because the Department shouldered 95 per cent of the lenders' risks.

"The Department got itself into a position with the Metronet contracts whereby it was exposed to big financial risks which it had little scope or means of mitigating. These mistakes must never be repeated on future large contracts and government departments must establish and exercise the right to intervene where problems of this magnitude occur."

Mr Leigh was speaking as the Committee published its 14th Report of this Session which, on the basis of evidence from the Department for Transport (the Department), the Arbiter and the Treasury, examined their roles in the failure of Metronet.

In 2003, the Government entered into three innovative 30 year contracts with private sector contractors to upgrade London's underground rail system. Four years later, in 2007, two of the three contractors (Metronet BCV and Metronet SSL, known collectively as Metronet) went into administration when they could no longer meet their spending obligations. While some of the improvements they were contracted to deliver were completed on time and within budget, others have been delayed. The loss to the taxpayer arising from Metronet's poor financial control and inadequate corporate governance is some £170 million to £410 million.

We support well thought through innovation, underpinned by sound risk management. Nor are we adverse to devolved delivery, provided there is robust oversight to protect the taxpayer. But the Department's oversight and management of risk on the Metronet contracts were inadequate, especially given that it provided a £1 billion a year grant, was ultimately responsible for delivery and carried the majority of the risk of failure. These failings ignored a clear warning from the National Audit Office in 2004 that they should avoid taking a 'hands-off' approach to oversight.

The root causes of the loss to the taxpayer lay in the way the devolved delivery arrangements were set up and in the Department's flawed assumptions about how they would work. The Department's assumption that Metronet would put in place robust financial management and strong corporate governance was naive and, unsurprisingly in the circumstances, did not hold. The Department undermined its assumption that lenders would exercise strong oversight by assuring them that it would meet 95% of the outstanding debt in the event of failure. The Department's assumption that London Underground Limited (London Underground), Transport for London and the Mayor of London would exercise strong oversight also fell when the public sector parties to the contract were unable to obtain the information they needed to oversee the contract effectively.

A serious weakness in the arrangements was that the independent Public Private Partnerships (PPP) Arbiter (the Arbiter) set up by the Greater London Authority Act 1999 to provide insight into the contracts could act only if invited to do so by the parties. He was not invited to act at the earliest opportunity, rendering him largely ineffective. The Department had no formal right of access to the Arbiter and could not direct him to carry out an investigation. The Department has acknowledged that the Arbiter's powers were inadequate and has suggested alternative arrangements, although it will not be drawn on its plans to implement them.

The Department must learn from its mistakes, not just when formulating its plans with the public sector bodies for the long term arrangements to replace the Metronet contract, but also for the other private sector contract with Tube Lines, and longer term, for the Cross Rail scheme. More broadly, the Government needs to play a more proactive role in managing risk when it devolves the management of high value, long term contracts. Departments need, for example, to have the right commercial skills in place and perform robust risk analysis when negotiating such contracts, to monitor the risks thereafter, and be prepared to intervene where necessary.