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Next stop, Fawlty Towers

An 'inefcient and uneconomic' approach to work has left Tube contractor Metronet's shareholders facing a massive £750M bill, says Mark Hansford.

'IN SUMMARY Metronet has delivered significantly less than was expected in its bid, at higher unit costs. Based on the evidence available to him, the arbiter has concluded that neither Metronet BCV nor Metronet SSL has carried out its activities in an overall efcient and economic manner and in accordance with good industry practice.' Chris Bolt, Public Private Partnership arbiter, 16 November 2006.

As far as statements go, it's pretty damning for Metronet and its shareholders Atkins, Balfour Beatty, Bombardier, EDF Energy and Thames Water.

Especially when that statement comes with a possible £750M bill attached.

Bolt's five-month root through the Tube contractor's performance revealed breathtaking failings, leading to work lagging well behind schedule - despite London Underground (LU) paying out according to the planned schedule.

'Metronet has paid its supply chain over £1bn, broadly in line with original budgets. But delivery has not been in line with original budgets, ' the report says.

'The concern, therefore, is that Metronet may not have slowed its payments to suppliers to match delayed delivery to the extent that it should.' Metronet has a tied supply chain with almost all work up to now being done by its shareholders.

Who foots the cost overrun is down to the arbiter, who must assess whether these extra costs are 'economic and efficient and in line with industry best practice'.

From the tone of Bolt's first annual report, it doesn't look good for Metronet and its ve - equal - shareholders, who could, by the seven and a half year review, find themselves in hock to LU for £750M.

Bolt's views on the reasons behind the £750M overrun are stark. Station modernisations are costing almost four times that promised in its bid, with only 14 out of 35 delivered so far.

Indeed, the report reads like the Basil Fawlty guide to refurbishing stations. 'The principal causes of delays appear to be poor planning and delivery.

Examples include poor quality assurance in works execution leading to avoidable rework.

'Metronet appears to have passed responsibility for planning and quality control to the supply chain. Leaving this to Trans4m [a joint venture between Metronet's shareholders Atkins, Balfour Beatty, EDF Energy and Thames Water, with all works subcontracted for design, mechanical, electrical and premises work] without any evident supervision or control shows a lack of project governance, ' it says.

The regulator is equally scathing on track works, where renewals are costing up to twice that promised and just 35km out of a promised 49km delivered.

'Problems are evident with poor productivity, high staff turnover and poor supply chain performance. Delivery has also been constrained by a lack of technical officers. One of the benefits that Metronet cited for its tied supply chain (with station work going to Trans4m and track work to Balfour Beatty) was security of supply. That benefit does not appear to have been realised.' Balfour Beatty's track renewal contract was also held up by Bolt as typifying the problems of a tied supply chain. It committed the contractor to carrying out a fixed amount of track replacement. However, track condition surveys led to changes in work required and the contractor was not resourced to deal with this. 'The existing track contract appears to lack exibility to react to different volumes of work as information on condition improves, ' the report says.

But it is management failings at the highest level that take the brunt of the blame with a lack of independent members on the board; a high turnover of senior executives; little evidence of a sound system of internal controls; and apparent difficulties in providing details of cashows and risk contingencies all cited as areas of weaknesses.

'Given the amount of public money that it is receiving, the arbiter would have expected the operator to be able to demonstrate high standards in corporate governance and to avoid suggestions of conict of interest at the shareholder level, ' the report says. 'This might include, for example, having an independent nonexecutive chairman.' Metronet is headed up by Atkins chief executive Keith Clarke. So far Atkins has not responded to calls for Clarke to be replaced by an independent.

Bolt's report does offer some encouragement; Balfour Beatty's fixed rate track contract is being renegotiated as an alliance and some station contracts are being competitively tendered (Embankment and Baker Street so far). On the management front, LU managers are being parachuted in and two independent advisers have been appointed to the board.

And Bolt does acknowledge that it is not all Metronet's fault - disputes with LU over the scoping of station work are now a matter for dispute resolution.

But unfortunately for Metronet the same problems also face Tube Lines, which is managing its programmes broadly on time and on budget. It, of course, has no tied supply chain and puts all contracts out to competition.

The net result is a sorry mess that Bolt is clear will cost Metronet shareholders dear.

'There are two key elements of risk for Metronet: the rst £50M of overrun on each infraco ?£100M total - it bears; and they only get funded costs above that which are efcient, economic and in line with industry best practice.

'The fact that I have said they have not been, means that there are costs that shareholders will need to bear rather than LU, ' he says. 'How much is another process.' That process is an extraordinary review, which can only be called by Metronet. Bolt expects this to happen in January and that it will take him six months to produce a denitive verdict.

And worryingly for Metronet, Bolt has two main sources of reference - Tube Lines, which is performing broadly on budget and Network Rail, which has slashed costs since taking maintenance in-house. And with Bolt there is no appeal. 'If Metronet disagrees with my verdict, the redress is a judicial review.' hareholders in Metronet have remained tight-lipped.

Atkins has 'noted' the report.

Balfour Beatty said Metronet and its owners have been 'addressing these issues for some time' and that they are 'well advanced in introducing new organisational and process arrangements to improve its performance in line with the Arbiter's criteria'.

It may be too little too late.

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