"We have spent months preparing for this,'' the mayor said at a news conference today. "There will be an awful lot of people at the top who will go.''

Metronet Rail, which signed a 30-year contract in 2003 to upgrade two-thirds of the railroad, has run up extra costs on the project and its banks froze access to loans. An arbiter yesterday awarded the company less than a quarter of the emergency funding it had sought.

Metronet's difficulties have threatened the biggest investment since World War II in the 144-year-old railroad. The London Underground carried a record 1 billion passengers last year. Livingstone said Transport for London, which operates the railway, aims to run Metronet's projects more effectively.

"The key thing is to increase capacity,'' said Livingstone, who urged Metronet employees to continue reporting to their jobs. "You'll be working for us for a while, while we get this sorted out.''

The city is negotiating with Metronet over how to proceed, and isn't interested in bringing the work "in-house,'' he said. Metronet will make an announcement about its plans by July 19, a city spokeswoman said.

Safe Operations

Transport for London wants to ensure that the refurbishment of trains, tracks, stations and signals continues and that the railway operates safely, a spokesman for the agency said today.

The Rail Maritime and Transport union, which represents London Underground drivers and station workers, said Metronet's contracts should be taken over permanently by the city.

Finding new private contractors to do the work would "risk catastrophic network failures,'' Bob Crow, general secretary of the union, said in an e-mailed statement.

Metronet said it has run up costs of 992 million pounds ($2 billion) for additional work on the Bakerloo, Central, Victoria and Waterloo & City lines. It blamed the overspending on contract changes by London Underground and the lack of information about the state of the railroad's assets when it took over.

The railroad says the higher costs resulted from Metronet's failure to operate efficiently.

Arbiter's Decision

Chris Bolt, the state-appointed arbiter of the company's contract with London Underground, said yesterday that the company should be paid an extra 121 million pounds to help fund the shortfall. Metronet had asked for 551 million pounds.

Bolt said that "if Metronet had delivered in an efficient and economic way, its costs would have been lower.''

Metronet is a joint venture owned by WS Atkins Plc, Balfour Beatty Plc, Bombardier Inc., Electricite de France SA and Thames Water Plc.

Metronet's so-called public-private partnership agreement requires the company to spend 17 billion pounds in return for annual payments of 600 million pounds. It was prepared by the U.K. Treasury, then overseen by Gordon Brown, now prime minister.

The contractor said it will ask Bolt to review a second dispute over extra costs on the Circle, District, Metropolitan, Hammersmith & City and East London lines. Metronet says it has run up a similar amount of added costs on those routes, taking the total to almost 2 billion pounds.

See also:

Partnership leaves taxpayer liable for 95% of bill

The Guardian: July 17, 2007
Dan Milmo

The taxpayer could be hit by a bill of nearly £2bn if Metronet goes into administration, a debt rating agency has warned.

Although PPP projects are supposed to transfer financial risk from the public sector to the private sector, the Metronet contracts are designed to make Transport for London liable for the programme's borrowings.

According to the Moody's ratings agency, Transport for London could be forced to pay back £1.9bn to creditors - or 95% of the company's £2bn debt - if Metronet goes into liquidation.

Andrew Blease, a Moody's analyst, said TfL had the option of paying off creditors or attempting a refinancing. He added that a refinancing was the best option if TfL wanted to avoid lobbying the Treasury for a further cash injection. It already receives £2bn a year in direct government funding. "Otherwise they will have to go to the Treasury and say, 'Guys, we need £2bn to repay this.' By negotiating a refinancing solution they will save themselves a large cheque."

Under the terms of Metronet's bank loans, TfL can implement a "standstill" order, which prevents senior creditors - led by the European Investment Bank - demanding their money back immediately. However, that payment freeze elapses after a year, after which TfL or its subsidiary, London Underground, has to pay back the lenders.

Tim O'Toole, managing director of London Underground, told the Guardian that a refinancing was the most likely option. "It's very expensive debt. There are different ways to drive a more efficient structure and that's one of the things we will be looking at."