Metronet Workers adjust ties and rails on metro line.

Two joint ventures handling nearly $35 billion of maintenance and upgrade work on London's metro, the Underground, are seeking court protection from creditors.

Both Metronet Rail consortiums, owned by the same companies, ran out of funds after failing to secure huge payments for cost overruns that the contractors claimed were due from London Underground Ltd. (LUL). They sought bankruptcy protection on July 18.

A judge appointed Ernst & Young LLP to manage Metronet BCV Ltd and Metronet SSL Ltd. The companies have 30-year contracts, from 2002, to finance, maintain and upgrade fixed infrastructure and rolling stock together covering nine of the Underground's 12 lines.

The two contracts were together running at around $4 billion over the roughly $20 billion budget for the first 7.5 years, say Metronet officials.

Metronet's five owners will lose the roughly $140 million equity they have each spent on the project. However, the lending banks are exposed to only 5% of Metronet's multi-billion debt as the rest is guaranteed by Transport for London. Metronet is owned equally by the contractor Balfour Beatty Group, the design firm W.S. Atkins, Canada's Bombardier Transportation and two utilities.

Metronet's collapse comes two days after it failed to secure interim payment for cost overruns from the contract's arbitrator. Metronet had sought over $1.1 billion for one contract alone, but got around $240 million.

Having failed to secure extra pay from LUL after months of negotiations, Metronet triggered arbitration late last month. The company asked for the urgent interim payment to continue funding work.

The companies were not only investors but also handled all the work directly. For that reason, their performance was measured by the arbitrator against that of a notional, efficient contractor.

"After careful analysis of the evidence, in the limited time available, I have concluded that this increased (payment) is at the appropriate level for an efficient and economic company performing in line with good industry practice," reports the arbitrator, Chris Bolt.

Pointing out that the contract was not fixed price, Metronet claimed the scope of work required by the owner warranted extra payment.

Upgrading of stations was the main problem, for which Metronet accepted some initial responsibility. Before its collapse, Metronet had 24 stations undergoing upgrades while work on over 50 more was being designed.

"We will be working...to ensure that the renewal of the (system) is delayed as little as possible," says Tim O'Toole, LUL's Managing Director. "Our priority is the delivery of a safe and reliable...service".

On the remaining one third of the Underground, the consortium Tube Lines is keeping on track. Owned mainly by locally-based Amey plc and by Bechtel Inc., San Francisco, Tube Lines has outsourced most of its work.