LUL’s PPP review process in question after Metronet probe

The ongoing extraordinary review of failed tube operator Metronet is to have a significant impact on London Underground Limited’s (LUL) periodic PPP contract review (, 24 September).

Last week, as part of the extraordinary review of Metronet’s £2bn cost overrun, PPP arbiter Chris Bolt ruled that the operator could have claimed between £140m to £470m on its Metronet BVC contract and between £230m and £600m on its Metronet SSL contract from Transport for London (TfL).

Despite cries from TfL and potential bidders for Metronet that a review of the contracts had not been requested by those with an interest, this ultimately means that as much as £1.1bn in additional payments has been owed to Metronet from TfL during the past seven and a half years.

Firms such as Allen & Overy, which scored the lead role advising administrator Ernst & Young on Metronet’s insolvency, and Clifford Chance, which is advising its lenders, are waiting for updates.

“We will be involved in any restructuring,” says Clifford Chance restructuring partner Mark Hyde. “But we have to wait for what comes out of the review process.”

With the lenders’ capital 95 per cent underpinned by the Government, there may be little motivation to restructure the debts.

CMS Cameron McKenna, which scored the lead role advising Metronet on its bid for the contracts, is less clear on its role.

“We’re not involved right now – but may still have an involvement at later stages,” says Camerons partner Andrew Ivison, who adds that the parties might opt to handle the legal work internally.

“It’s not a conventional restructuring opportunity to be involved in,” he says. “The London Underground team working on this is huge and consists of a variety of consultants. They’re well placed to use little or no support.”

Firms may also be keeping a close eye on the potential bidders for the contracts.

“Any bidder for Metronet can now expect almost £1bn in payments from TfL,” explains Ivison. Prospective bidders who have shown interest in Metronet’s contracts since Bolt’s ruling include Babcock International, which has instructed Ashurst in the past, and Ferrovial, which has a strong relationship with Freshfields Bruckhaus Deringer.

Macquarie Bank, which has appointed Travers Smith for UK acquisition work, and Tube Lines, which has previously used Simmons & Simmons for similar work, have also expressed an interest.

This all makes it more difficult for TfL to make a more attractive bid for Metronet, although so far it remains the only company to have formally expressed its interests in purchasing the contracts. A TfL purchase would place the contracts back in the hands of the public sector.

LUL managing director Tim O’Toole says he expects TfL to be the only bidder for the contracts.”[LUL and TfL] might just buy the contracts and repackage them to sell to the private sector,” says Ivison.

There is also the issue of an extraordinary review of Metronet’s SSV, the vehicle holding the third PPP contract, and the imminent release of NM Rothschild’s assessment of the value of Metronet’s contracts. A positive valuation may lead to increased interest in the contracts.

The outcome of the Metronet extraordinary review will have a direct effect on LUL’s scheduled periodic review in 2010. The main issues are due to the unusual nature of the PPP contracts.

“The PPP contracts are of a unique model, where each of them allows LUL to change any of the contract terms,” explains Lovells project finance partner Mike Matheou, who led the team advising Tube Lines on its PPP bid in December 2002.

Under the contracts, LUL is the only party that can impose any changes in terms following a periodic review. Infracos will examine the changes to decide whether they fall within LUL’s scope. The infracos will then assess the economic and efficient price for carrying out work under the revised terms and LUL may scale down the projects or engage in a repricing exercise.

“If they can’t agree on a price, then the arbiter will have to be brought in,” says Matheou. He added that the price can be changed with or without the terms being altered and that it will then remained fixed for the next seven and a half years.

The outcome of the review remains in limbo, with LUL’s O’Toole suggesting that the Metronet contracts could be divided into their constituent sections, such as track replacement and rebuilding stations, and subsequently resold to private companies or kept in-house.