The stricture – disclosed yesterday by the Financial Times – came in a letter sent on June 29. It helped to ensure that Metronet, the main contractor maintaining and upgrading London Underground track, trains and stations, lost any hope of being bailed out this week. The company went into administration on Wednesday after being awarded only £121m of £551m it had sought in emergency funding.

London Underground faced substantial risks if Metronet tried to launch a doomed rescue bid which consumed large sums of cash because it had previously guaranteed 95 per cent of all the company’s debt. According to people involved, the letter warned that any new debt the company took on would not automatically count as approved debt – the debt backed by London Underground and TfL, its parent.

Stephen Allen, TfL’s managing director of finance, said the organisation’s priority had been to protect the interests of the travelling public and the taxpayer.

“If we were to undergo the same process again, we would send a similar letter in the blink of an eye,” Mr Allen said. “It’s very clear that what pushed Metronet into administration was the financial difficulties created by the company.”

It was because the company was already in substantial financial difficulty that its lenders had barred it from drawing on its lending facilities for several weeks before the June 29 letter was sent, Mr Allen added.

The letter prompted Metronet on July 12 to increase its demand for emergency funding from London Underground for one of its subsidiaries from £400m to £551m. Chris Bolt, arbiter of the 30-year, £30bn Underground public-private partnership deal, rejected all the extra financing costs and awarded Metronet only an extra £121m over the next year to cover overspending on its upgrade programme.

The company – which was projecting an overspend of about £2bn in the first 7½ years of its contracts – could have survived Mr Bolt’s finding only if it had had access to bank facilities and its shareholders had been willing to inject £650m in fresh funding.

Metronet executives were angry over the letter.

The controversy illustrates the complexity of the Underground PPP. The contracts between LU and its contractors – Metronet and Tube Lines – commit London Underground to back 95 per cent of the contractors’ approved debt. But Tim O’Toole, LU’s managing director, said on Wednesday there had never been a specific agreed definition of approved debt. The June 29 letter was intended to make clear the limits of what LU saw as approved debt.

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London's Underground overhaul falters as contractor fails

International Herald Tribune: July 18, 2007
By Scott Hamilton and Brian Lysaght Bloomberg News

Dating from 1863, the London Underground is the world's oldest subway and already carries three million passengers a day. (Carl Court/Bloomberg News)

LONDON: London's £30 billion subway upgrade program, aimed at easing overcrowding ahead of the 2012 Olympics and beyond, is at risk after its leading contractor applied for protection from creditors Wednesday.

Metronet Rail, responsible for modernizing tracks and stations on nine of the London Underground's 12 lines, was put under the control of administrators from the accountants Ernst & Young after saying it lacked funds to honor contracts.

The $62 billion overhaul of the Underground, or "Tube," aims to expand capacity by 50 percent on a network that dates from 1863 and carries one billion people a year. Metronet's collapse is an embarrassment to Prime Minister Gordon Brown, who helped establish the project to shift risk away from the government to private companies.

The London mayor, Ken Livingstone, had opposed the contract in court and argued it would fail.

"This is such a political football that it's become hard for any of the parties to back down," said Alastair Stewart, an analyst at Dresdner Kleinwort in London. "London has to upgrade the Underground in time for the Olympics and one option will be re-nationalization - though I haven't seen one scrap of evidence that doing that would improve things."

Livingstone said Wednesday that while work to increase the Tube's capacity will continue, station refurbishment may be delayed by several years, describing such upgrades as "a luxury."

On Tuesday, the mayor warned of firings at Metronet and said that "an awful lot of people at the top will go."

Brown, answering questions in Parliament, rejected assertions that the Tube upgrade had failed, putting the future of public transport in London in doubt.

In his former job as chancellor of the Exchequer, or finance chief, Brown was responsible for establishing the contract as a public-private partnership in which companies, not the state, provide capital funding and carry the risk of overspending.

"If Metronet pulls out, another company will be found to take its place," he said. "The number of stations already refurbished, the number of additional trains and the number of projects under way shows our commitment to invest."

The London Underground already carries three million passengers a day. The network will face further strains as the Olympic Games attract an estimated 500,000 spectators a day to venues across London in five years. The city's population also is projected to grow by 600,000 by 2016.

The Underground is one of the world's oldest subways and also one of the largest, with 253 miles, or 407 kilometers, of track. The upgrade is intended to be its biggest overhaul since World War II.

"There are bound to be some slippages," a transport consultant, Christian Wolmar, author of two books on the Tube, said of Metronet's collapse. "Some things may get delayed, such as station upgrades, though most of the work will continue."

Metronet's 30-year, public-private partnership agreement required the company to spend £17 billion in return for annual payments of £600 million. The project began to fail after the contractor ran up £992 million of additional costs from work on the Bakerloo, Central, Victoria and Waterloo & City lines, blaming the bill on additional work requested by London Underground.

Similar overruns on a further five lines would take the total close to £2 billion, Metronet warned.

London Underground blamed the extra cost on Metronet and the matter was referred to a state-appointed arbiter, Chris Bolt. On July 16, he awarded Metronet £121 million, less than a quarter of the £551 million it had sought to carry on operating. Bolt added that the contractor's own inefficiencies had contributed to spiraling expenses.

Three of Metronet's owners, WS Atkins, Balfour Beatty and Bombardier, had already written off their investment in the contractor. The decision to go into administration, a form of protection designed to give a company time to restructure, will not affect their balance sheets, they said.

Shares of Atkins, Britain's biggest engineering-design company, rose as much as 8.3 percent. Balfour, the country's largest construction company, was little changed. Électricité de France, Europe's biggest power generator, and the British utility Thames Water also own 20 percent stakes.

Options for the Metronet contracts may include their takeover by the government, the formation of a new public-private partnership, or the transfer of work to Tube Lines Ltd., the second Tube contractor.

But the Tube Lines chief executive, Terry Morgan, said in an interview that he had no desire to take over the Metronet contract, describing it as "a very demanding program."

The venture, owned by Grupo Ferrovial of Spain and Bechtel Group of the United States, is revamping the Northern, Piccadilly and Jubilee lines and spending an initial £4.5 billion over seven and a half years. Work is on schedule, it said June 27.

Subsequent investment may take total spending from the two contractors close to £30 billion.

"The objective is to keep the system going," said Peter Hendy, commissioner for Transport for London, which oversees the capital's transport infrastructure on behalf of Livingstone. The body said in a statement that the administrators are obliged to transfer the business to a new owner "in due course."

Still, Metronet's work is not regarded as key to staging the Games and was scheduled to be completed after 2012, a Transport for London spokesman, Stuart Ross, said. Work on a 35 percent capacity increase on the Jubilee Line, which will serve the main Olympic Park in east London, is being undertaken by Tube Lines and should be completed in 2009, he said.

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Tories call for NAO investigation into PPP

Guardian Unlimited: July 19, 2007
David Hencke

The Conservatives today called for an investigation by the National Audit Office into public-private partnerships on the London Underground following the financial crisis at Metronet.

The consortium, which was responsible for maintenance and renewal of two-thirds of the London Underground network, went into administration yesterday after failing to secure £550m extra cash from the taxpayer. Transport for London will now have to fund the work directly and it could lead to delays for some station refurbishments.

The Tories want Parliament's financial watchdog to look at the public-private partnerships again following a critical report by the audit body last year on their cost to the taxpayer.

Shadow transport secretary Theresa Villiers has written to the auditor general, Sir John Bourn, to call for an investigation into the operation of the PPP contracts. She said it should also cover Metronet's rival, Tube Lines, because of complaints from her constituents in Chipping Barnet about the running of the Northern and Piccadilly lines.

"The unfolding crisis at Metronet is a personal failure for Gordon Brown. He forced this flawed PPP on London in the teeth of strong opposition from the capital. He received many warnings at the time of the problems that the structure would involve, yet he disregarded them all, despite the fact that there were a range of other options that could have been considered. Now the chickens are really coming home to roost.

"During their first investigation of PPP, the NAO highlighted that nearly half a billion had been spent on consultancy fees. ... It is now vital that lessons are learned from the wind-up of Railtrack and that costs are not allowed to escalate as they did disastrously in that case."

Metronet was one of two private companies contracted to maintain and renew the underground in a 30-year PPP plan that was bitterly opposed by the London Mayor, Ken Livingstone.

The consortium wanted London Underground to pay an extra £551m over the next year to cover some of its cost overruns, but Tube PPP arbiter Chris Bolt ruled this week that Metronet should receive only £121m. Metronet argued that LU had asked it to do more work than was specified in its contract and that LU should pick up the cost overrun.

The demand for an inquiry by the Tories drew a wry comment from the unions. Bob Crow, general secretary of the RMT union, said : "This is a bit rich coming from the arch-privatisers who smashed our railways into a thousand pieces. I am sure that any audit will tell us what every Tube and public service worker already knows — that PPP and PFI projects fail to deliver services, but shovel huge sums of public money into a few private pockets."

A spokesman for the NAO said that it was "being kept abreast of developments at Metronet".