GEC ready to go underground

GEC ALSTHOM and engineering group Brown & Root have teamed up with construction company Amec to bid for the contract to own and manage London Underground trains, tracks and stations. The consortium is likely to be financed in part by Innisfree, a special-purpose fund set up to invest in joint public and private sector projects.

The consortium is the first to emerge after Deputy Prime Minister John Prescott put forward proposals in March to generate pounds 7bn of private investment in London Underground over 15 years from 2000. The running of services will remain with London Underground while bids will be invited from the private sector to maintain and modernise the track, tunnels, signalling, stations and rolling-stock.

Mr Prescott said three separate infrastructure contracts will be awarded, though he said he would be happy to give all the business to a single bidder if that offered best value for money. His dream of a modern and mainly privately funded system had a further boost this week with the emergence of pounds 200m of private sector funding willing to back the consortium bidding to run the network.

Innisfree's involvement, with GEC and Brown & Root, is the first sign of investors coming forward to take advantage of Mr Prescott's initiative. Innisfree, a special-purpose fund, has so far invested pounds 50m in PFI projects for hospitals and roads. It will shortly close a second fund with around pounds 200m from investors including Hermes, AMP and Norwich Union, and intends to use that money to finance the underground project.

David Metter, chief executive of Innisfree, said: "Not enough use has been made of the commercial potential of underground stations. Three consortia will own the track, the trains, run the stations and develop the stations. Each of these consortia will be a pounds 1bn project and each will need at least pounds 100m equity, and that's where the second fund will come in. The institutions see it as a real opportunity to invest in infrastructure."

Mr Prescott's plans may have run into trouble with the unions - they have called a strike over the issue - but that doesn't worry the financial institutions who contemplate millions of captive customers.

The private sector involvement is set to turn tube stations into shopping malls that will see key-cutting booths and cobblers swept away to be replaced by supermarkets and convenience stores. Groups bidding to play a part in the regeneration of London underground are now being formed. Innisfree is talking to rivals of GEC and Brown & Root, in case the consortium breaks down. Other construction companies include Taylor Woodrow, Balfour Beatty and Kvaerner.

The tube carries 1.6 million people a day but has a pounds 1.2bn backlog of repairs and is unable to cope with demand. Mr Metter said the investment should create a virtuous circle of station and service improvements allowing more people to use the Tube. This will generate more revenue from retail outlets at stations, in turn paying for more investment. "The underground is in a bad state of repair but lots of people are moved around and there's huge retail potential. We will be a core player in providing the equity but there will be a role for the retail developers and property companies."

Price Waterhouse advised on the plans, and is bidding to be the Government's financial adviser on awarding contracts.