A source at TfL told The Times that officials expected Metronet to call in administrators “at some point this week” after regulators yesterday rejected the company’s calls for £551 million of emergency funding.

The source said: “We are planning on the basis Metronet will go into administration.”

Short-term measures would see Metronet’s workforce continuing to carry out maintenance and repair work but under the direction of TfL. In the longer term, TfL would look to draw up a new agreement with a private sector firm.

Metronet, which is in charge of revamping nine out of twelve London Underground lines under a Public Private Partnership (PPP), would admit only that administration was possible as its board held a series of crisis meetings with shareholders yesterday.

The meetings followed a decision by Chris Bolt, the PPP Arbiter, to allow Metronet just £121 million of the £551 million it requested to cover cost overruns for the next year.

In a stinging verdict, Mr Bolt said Metronet would not have needed extra money if it had been run in an “efficient and economic way”. He added that the £121 million would only be available from January.

A Metronet spokesman said the judgment “did not come very close to the aspiration we had”.

He added: “We need to talk to our shareholders but clearly, if there is no funding from them or the banks then administration has to be an option.” Metronet is seeking a total of £992 million to cover overruns on the Bakerloo, Central, Victoria and Waterloo & City lines. It claims that London Underground has pushed up costs by repeatedly asking for work beyond the scope of an initial 30-year deal.

The company has given warning that it also needs a further £1 billion to cover overruns on the Circle, District and Hammersmith & City lines.

Metronet’s five shareholders include WS Atkins, Balfour Beatty, EDF Energy, Bombardier, the aircraft manufacturer, and Thames Water. Bombardier yesterday wrote off its £81.5 million investment. WS Atkins and Balfour Beatty have already written off a combined £221 million.

Metronet’s bankers, led by Deutsche Bank, barred access to a £1.6 billion loan facility earlier this year.

Tim O’Toole, London Underground’s managing director, welcomed the Arbiter’s verdict. He said: “I’m determined to make the case that the public should not be forced to pay a penny for Metronet’s inefficiencies.”

TfL has continually held up Tube Lines, the private contractor working on the remainder of the Underground, as an example of how Metronet should have been run.

Bob Crow, general secretary of the RMT trade union, urged that Metronet’s contracts be taken in-house. He added: “Very few people will shed any tears if Metronet goes to the wall.”

See background:

Metronet demands £992m compensation for extra Tube work

The Times: June 30, 2007
Joe Bolger

Metronet, the company responsible for maintaining and upgrading two thirds of London’s Tube network, has requested £992 million in compensation for extra work it is carrying out, claiming London Underground has been too demanding.

The contractor, which is working on nine Tube lines, said that the transport operator was rendering its upgrade programme “unaffordable” because of the high specifications it was demanding.

The claim, which was made to Chris Bolt, the PPP Arbiter, came as Metronet detailed its call for compensation for work it is carrying out but which is not included in the original contract it signed.

It has two Public Private Partnership (PPP) agreements. The claim covers the work of Metronet Rail BCV, which is carrying out work on one of the agreements that covers the Bakerloo, Central, Victoria and Waterloo & City lines.

The company claims it has been forced to do extra work because of the demands of London Underground and difficulty in creating a precise contract at the time of its award.

The nature of the Underground system means it was also too costly to define precisely the state of assets at the time of the award. Metronet has been forced to pick up costs where it was initially unclear whether work was needed.

Graham Pimlott, Metronet’s chairman, yesterday conceded that the group had made mistakes, but said that its shareholders would bear the cost where it was responsible. “The PPP terms are clear ? where additional spending is required to meet London Underground’s demands, then we are entitled to be paid. It’s disappointing that we have been unable to reach a mutually acceptable solution,” he said.

Ken Livingstone, the Mayor of London, has indicated that he does not want the contractor to receive any more of the taxpayers’ money.

Metronet called on Mr Bolt to carry out an extraordinary review of the cost overruns and to reach an interim judgment under which London Underground would be forced to increase its payments to Metronet immediately. An interim judgment could be made within a few weeks.

Some £550 million of the £992 million claim relates to work already carried out, or due to be carried out in the next 12 months. The remaining claim relates to work due to take place beyond June 2008.

Mr Pimlott said London Underground was still in a position to reduce the need for extra spending by reducing the scope of its upgrade work.

“Our shareholders remain fully supportive and we are confident of a large recovery from London Underground,” he said.

The company accuses London Underground of acting as if the PPP contract is a fixed-price contract, prompting the transport group to increase demands on its contractors.

Metronet said it had already funded about £350 million of additional costs, with its shareholders set to pick up 50 per cent of the tab, acknowledging its own inefficiencies.

Concerns over the future of Metronet were highlighted this week after WS Atkins and Balfour Beatty, two shareholders, both wrote down the value of their stakes in the company.

The shareholders are talking to Metronet’s banks over the uncertainty caused by the dispute with London Underground. Its banks have withdrawn lending facilities.

See also:

Down the tubes

The Guardian: July 16, 2007
Aditya Chakrabortty

Barring some kind of miracle, or at the very least a lifeline from the Treasury, the company in charge of a £17bn upgrade of the London underground will go into administration today. And the fallout from the collapse will lead all the way back to Prime Minister Gordon Brown.

Metronet is one of two companies charged with maintaining and improving the tube, in the largest public-private partnership (PPP) of its kind. The sums for the deal are enormous: it cost £30bn for 30 years of service and the consultancy fees alone totalled over £500m. Opposition to it was just as huge. MPs were hostile; transport experts (both in the industry and in academia) had grave misgivings; and mayor Ken Livingstone had his own ideas.

None of this had much influence on the chancellor at the time, Gordon Brown. He, along with the then boss of the UK transport system, John Prescott, preferred to listen to the likes of PricewaterhouseCoopers and Freshfields and all the other management consultants, briefs and business people ready to give their advice and billable hours. The PPP deal that was eventually pushed through had three great advantages for New Labour:

• It moved a chunk of spending off the government balance sheet - always useful and vitally important if the chancellor was to meet his tight fiscal rules;
• It involved the private sector - apparently always and ever a good thing to New Labour;
• It limited the freedom to manoeuvre of London's new mayor and Labour's old maverick, Ken Livingstone.

They may have thought the tube PPP good politics at the time, but Brown and co now stand to be heavily embarrassed by it. The PPP arbiter, Chris Bolt, thinks there has been "poor delivery" of maintenance and renewals and that Metronet has failed to carry out its business "in an overall efficient and economic manner in accordance with good industry practice". This is a man with no ideological axe to grind, merely charged with ensuring PPP delivers value for money.

Metronet has been saying that to keep going it will need a big bailout to keep going. Today Mr Bolt awarded Metronet only a fraction of that cash. The company is holding a meeting today and it looks likely it will fold.

Ever since the tube PPP came into being, the Brown camp has found it a troublesome creature and tried to distance itself from its own creation. Today, however, the new PM faces some serious questions about why he put into practice an idea questionable even on paper.