Acclaim to recover US$2bn of extra spend has been launched in an arbitration process by one of the two Metronet companies working on the PPP contract to upgrade and refurbish parts of the London Underground (LU).
Metronet Rail BCV has also called for an interim solution to recover up to US$800M of the money within 12 months. Both claims – for the Extraordinary Review and the Interim Determination, respectively, have been put to the official PPP Arbiter as allowed for in the 30-year concession contract.
The company claims that LU has been asking for more than was priced at the bidding stage, which has resulted in significant extra costs and financial concerns. However, it claims that the client has acted as if the PPP concession was a fixed price contract. Metronet said it was ‘confident of a large recovery’ and suggested that the client should reduce costs ‘through such measures as de-scoping’.
In late May, credit ratings agency Standard & Poor’s (S&P) put the financial vehicles behind the PPP concessionaires – Metronet Rail Finance BCV and Metronet Rail Finance SSL – on notice about possible downgrades over debt quality due to concerns over the financial performance during the capital upgrade works. S&P cited concerns about cost overruns and also the ‘tied supply chain’ of work placed with the concessionaire’s shareholders. However, it did note that part of the delays in station upgrade was due to changes in scope required by LU.
T&TI reported recently that downgrades on both companies had already been enacted by another credit ratings agency, Moody’s, due to concerns over performance and funding (T&TI, May, p12). Moody’s view on the firms had switched from stable to negative about nine months ago, but even more recently – just as the arbitration process was getting started – it added that more downgrades were possible.
The financial companies borrow to fund the concession contract works, the works being undertaken by their respective infrastructure companies.
Metronet has been negotiating a revised business plan and financial plan, and S&P said clarity on forecasts and recovery would help remove the risk of a downgrade in its credit rating. It added that the potential emergency review by the PPP Arbiter would be another key factor in deciding its ratings view, and so too would the extent to which additional support comes from funders and shareholders.
Shareholders have already been feeling the pain of the financial difficulties being experienced by Metronet. Last month, one of the partners, Atkins, announced in its full year results to 31 March it had suffered an exceptional loss of US$242.6M on the Metronet Enterprise 4 infrastructure work. This sum included an impairment writeoff of its stake in the Metronet companies, and provisions for supply chain losses.
Another partner, Balfour Beatty, in its half year trading update said it had taken an exceptional charge of US$200M against its Metronet involvement. It added that the sum covered included its valuation of the equity stake and profits recognised in earlier years.
The JV partners, which also include Bomardier, EDF Energy and Thames Water, have said they would be prepared to take a financial hit of half, or US$350M, against early ‘inefficiencies’ of Metronet Rail BCV. The concession firm operate the Bakerloo, Central, Victoria and Waterloo & City tube lines.
Metronet Rail SSL may initiate a similar arbitration process. The company is responsible for the improvement on the Circle, District, Metropolitan, Hammersmith & City, and East London lines.
Tube Lines, the other concessionaire working for LU, has published its Q4 performance report for FY2006-7, which said performance beat contractual targets. Capital spend was just over budget at US$202.8M. By late June the company expects to have completed upgrades on 47 stations. The company runs the Northern, Piccadilly and relatively new Jubilee lines.
