When the boards of both Metronet Rail BCV and Metronet Rail SSL asked Ken Livingstone, Mayor of London, to seek the appointment of a PPP administrator for both companies it was no great surprise – particularly given the warnings PPP Arbiter Chris Bolt had given the company.

On Monday 16 July, Bolt announced that Metronet Rail BCV would receive only a £121 million ($247 million) increase in its infrastructure service charge – a much smaller sum than the £551 million that BCV had sought. BCV has no access to further funds to carry out its contractual obligations and therefore sought administration. SSL, which had lodged a claim for £441 million, opted for administration as it has similarly overspent, after applying the logic of the arbiter's decision to its own situation.

The vehicles have been put into a special kind of administration designed to ensure the continued smooth operation of the Underground while protecting creditors' interests. It will ensure Metronet's maintenance and renewal responsibilities are still carried out while Ernst & Young, which has been appointed administrator, London Underground, Transport for London and the project's creditors decide what to do with the concession.

At a meeting with the Greater London Assembly, Mayor Livingstone declared his preference for a Network Rail-style solution with the concession taken back into the public sector and broken up into smaller pieces to be retendered. Tim O'Toole, managing director of London Underground, had said previously that he would seek to rescope the project documentation if Metronet went into administration. The RMT union, which represents many of Metronet's workforce, has called for maintenance functions to be taken back by London Underground.

While the five Metronet shareholders – WS Atkins, Thames Water, Balfour Beatty EdF and Bombardier – have lost sums in the £100 million ballpark, holders in the £1.05 billion bond issue, which was used to part finance the initial phase of the PPP, are largely immune from the consequences since these were wrapped by Ambac and Financial Security Assurance (FSA). Even the monolines, the EIB and other senior bank lenders have limited exposure, as 95% of the existing £2.25 billion senior debt has a guarantee from Transport for London.

FSA has published a statement noting this and saying that it does "not expect a policy claim in the near future as the transactions have substantial liquidity resources to meet current debt service". The next payments are due on September 30. In addition to a liquidity facility of £115 million, Transport for London has the right to impose a debt service standstill for up to one year without triggering default.

Nevertheless, the administration order caused Moody's to downgrade both issuers' unguaranteed credit ratings from Ba2 to B1 with a negative outlook. While once again acknowledging the underpinning from TFL and the companies' short-term liquidity, the rating action highlighted future risks. "The longer term prospects for full debt repayment are currently uncertain," Moody's said. "However, prospects should become clearer as the PPP administration progresses and exit solutions for BCV and SSL are developed. A critical part of the exit from PPP administration will be either a repayment, restructuring or refinancing of the existing rated debt. There is no clarity as to whether debt will be repaid in full at this juncture."

The arbiter's decision was always likely to be the main factor in the two issuers staving off bankruptcy. It offered the clearest opportunity for Metronet to demonstrate that government, and not its own inefficiencies, were behind cost escalations on its two contracts. But the arbiter, Chris Bolt, said that "if Metronet BCV had delivered in an efficient and economic way, its costs would have been lower than baseline in the first four years of the contract". No increase in Metronet's BCV infrastructure service charge will occur until January 2008 and Metronet will only be paid if it is able to fulfill its obligations.

Both London Underground and Metronet have the ability to reprice the contract 7.5 years after the start of the concession, which is due later this year. To this end, the arbiter is currently undertaking a thorough review of the 30-year concession agreement. The report is expected at around the end off the year.

Administration would have been avoided with a preemptive injection of capital by Metronet's shareholders, WS Atkins, Balfour Beatty, Bombardier, EDF Energy and Thames Water, but Bombadier had already stated that it has written off its $164 million investment in the project. A contract with Bombardier for trains and signalling equipment is expected to remain unaffected.

Metronet's fate is in stark contrast to the Tubelines concessionaire running the remainder of the underground, which has completed the first 7.5 years of its concession almost to budget. Metronet's main area of overspending has been on station upgrades. Whereas Tubelines began upgrading earlier and carried out ongoing negotiations (including resolution proceedures) regarding the scope of the works, Metronet started later and is thought to have only formally questioned the scope of what London Underground was asking some way into the overspend.

Tubelines also differs from Metronet and most other large PPP in projects in that there were no long-life sub-contracts signed at the beginning of the concession. Rather Tubelines relies on continual tender procedures and entering into a number of rolling contracts over time.

Tubelines therefore offers a compelling alternative contractor for the stalled Metronet concessions. The two Metronet concessions have not yet experienced any significant changes in management or contractor personnel. But both Tubelines, and TfL's alternative provider framework, as well as its recently-signed contract with MTR and Laing, provide possible new partners.

Government, administrator and lenders will now have to come to an agreement as to how drastic the changes to the contractual structures of the concession will have to be.

Metronet BCV and SSL
Status: Closed April 2003
Concession period: 30 years
Concession awarder: London Underground
Sponsors: Metronet
Total debt: £2.65 billion
Bank debt: £1 billion
Lead arrangers: Deutsche Bank, CIBC World Markets, Royal Bank of Scotland and Abbey National
Arrangers: Banca Opi; Bayerische Landesbank; CDC Ixis; Bank of Ireland; Credit Agricole; Dexia; Depfa; HypoVereinsbank; ING; KBC; WestLB; KfW; NIB Capital
Co-arrangers: Helaba; NordLB.
Bond debt: £1.05 billion
Lead managers: Deutsche Bank; Royal Bank of Scotland; UBS Warburg
Monoline bond wraps: FSA; Ambac
EIB debt: £600 million