Monday, July 16, 2007

Metronet Meltdown


Good at PR... less good at doing the job on budget

Taxpayers should be very concerned about the parlous state of Metronet. That's the company that has £17bn of Public Private Partnership contracts to maintain, renew, and upgrade nine of London's Underground (LU) lines. And today it's teetering on the brink of bankruptcy.

Metronet has only been going since 2003, when Gordon Brown forced the London Mayor to accept a PPP structure for running the LU. As always, Brown's motivation was to remove debt financing from the public balance sheet. Everyone agreed the decrepit tube network needed a packet spending on it, but Livingstone's plan to fund it via US-style municipal debt issuance would have blown Brown's tricksy Golden Rule fiscal targets (see many previous blogs, eg here).
Hence Metronet, a special purpose company (an "infraco") set up specifically to do this job, but jointly owned by the five major contractors who are doing the actual work- Atkins, Balfour Beatty, Bombardier, EDF Energy, and Thames Water (Thames Water? you ask: that's down to their tunnelling business and London's rising groundwater level- see here for shareholder rationales).

Now the thing about special purpose companies like this is that their parent companies' financial exposure is limited to the initial equity injection- in this case £350m in total. True, these companies have taken on additional "trade" exposure through the contracting work they've been awarded by the infraco. But there is no recourse to the parents in the event of the thing going belly up, like Metronet now looks like doing.

So will the parents simply walk away? Atkins Finance Director Robert MacLeod, says: "That's a hypothetical question I am not going to answer." But we know he's already been forced to write down Atkins' £70m stake to zero, and take an additional charge of £30m against over-runs on their station refurbishment contracts. We also know that Balfour Beatty has done the same thing. I reckon we all can draw our own conclusions.

And then what?

Mayor Ken has said he will step in- a great comfort to us all. To prevent that, Brown may order Darling to mount a rescue from No 11.

Either way, I'm afraid we taxpayers are once again on the skewer. Remembering of course that improvements to the tube network formed a key element of that wretched deal to secure the 2012 Olympics. Britain has to do the work by 2o12, whatever it costs.

What's more, in the real world, there aren't that many people who can actually do the work. They inevitably include Atkins, Balfour Beatty, etc. So while their special purpose infraco may go under, they will then be free to renegotiate the terms on which their work actually gets done. We schmucks will just have to write the cheque.
PS There is another PPP infraco working on the tube, which doesn't seem to have the same problems. That's Tube Lines, owned by Bechtel and Amey. The difference seems to be that they are project management companies rather than contractors, so they put the work out to proper tender rather than carve it up among themselves. Since the latter approach sounds like a surefire recipe for poor value, the obvious question is who decided that was the way to go?

PPS We've blogged many times on how our Simple Shopper government routinely gets ripped off when confronted with commercial contractors and other suppliers (eg see here). The BBC's File on Four has just investigated bid rigging in the construction market (see report and listen again here). Among other things, it reports an OFT investigation involving £30m of potentially crooked contracts at the Queens Medical Centre in Nottingham. An industry expert is quoted as saying "Fraud in the construction industry is widespread and this covers all sorts of new-build contracts, refurbishment contracts, and maintenance contracts, where overcharging can be disguised within invoices." So how well do we reckon the Simple Shopper deals with it?

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