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London tube contractor loses funding row

Ferrovial-owned Tube Lines, responsible for upgrading London’s underground rail, has lost a compensation claim of £327m for overruns incurred in works for two of the underground’s lines. The decision is another blow for the PPP contractor, which was told in December that its capex programme for the next seven years was £1.35bn too expensive.

Tube Lines, the consortium mandated to upgrade the London underground, has been told by an independent adjudicator that it is not entitled to compensation for the extra costs it has incurred in its refurbishment works.

The consortium – owned by Ferrovial-subsidiary Amey and San Francisco’s Bechtel – was seeking £327 million (€373 million; $528 million) in compensation from underground operator London Underground (LU) for cost overruns in upgrading two lines. But the recent ruling dismisses Tube Lines’ claim as “labyrinthine, artificial and unconvincing” and tells the concessionaire it must foot the bill for the £327 million plus whatever legal costs LU incurred.

For Tube Lines, the ruling delivers another blow after  UK PPP arbiter Chris Bolt told the consortium in December that its capital expenditure programme for the next seven years was £1.35 billion too expensive. The consortium wanted LU to pay it £5.75 billion in public funds and fare payers’ money to cover the works, but Bolt said that amount should be no more than £4.4 billion. LU had wanted to part with the even smaller sum of £4 billion.

However, the PPP arbiter told the consortium in its December draft ruling that it could seek to raise additional funds to plug the gap by claiming costs against LU. But the adjudicator’s ruling now casts a shadow on the viability of that strategy. Tube Lines has not yet decided if it will appeal the ruling.

The question now is whether Tube Lines can remain solvent in light of these setbacks or if it will go the same route as original PPP contractor Metronet. Metronet was part of the 30-year PPP to upgrade the world’s largest underground system but went bankrupt in 2007, forcing the City of London to take it over.