Tube Lines faces funding gap

Arbiter slashes proposed bill for next phase of London Underground upgrade work
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Tube lines faces a £1.35bn shortfall in the next phase of its contract to upgrade and maintain the London Underground's Jubilee, Northern and Piccadilly lines.

Yesterday's draft determination from Chris Bolt – the arbiter of the Public Private Partnership (PPP) between Tube Lines and its customer, London Underground (LU) – puts a price tag of £4.39bn on the next seven and a half years' work, far below the £5.75bn requested by Tube Lines, and £500m higher than LU's proposal.

Tube Lines is bracing itself for a "robust" challenge to findings it describes as "disappointing". Not only is LU a difficult customer, claims Tube Lines, it is also unfair, allowing itself far more time on the nine lines it maintains than is granted to Tube Lines.

Meanwhile, LU is "frustrated" by Tube Lines' performance on the delayed Jubilee Line upgrade, disputes claims that it is cheaper, and has been outspokenly critical of the PPP arrangement ever since its creation in 2003.

Tube Lines' case to the arbiter will focus on its problems with LU as a client. The company has made claims totalling £727m against LU in its first contract period and another £500m worth are pending resolution, though LU says it will fight them hard. Tube Lines factored such issues into its pricing for the new deal. But, so far, Mr Bolt is taking a different view, leaving Tube Lines to make claims on a case-by-case basis, rather than putting up its price from the start.

Andrew Cleaves, the commercial director at Tube Lines, said: "The draft determination is disappointing. We put in costs we think are required given the actual circumstances we face. The arbiter's figures are based on a good client and a good partnership, and point to claims as the way to bridge the gap."

Transport for London (TfL), which runs LU, has always made clear that it views the PPP structure put together when Gordon Brown was Chancellor of the Exchequer as an expensive and inefficient way to maintain and upgrade the capital's Tube network. The other private contractor, Metronet, collapsed in 2007, to be brought out of administration with £2bn of taxpayers' money and absorbed back into LU.

But the transport operator disputes Tube Lines' claim that it is trying to close down the partnership. A TfL spokesman said: "What we are interested in is the delivery of the improvements we've been promised, on time and at a price that is value for money – and the arbiter has come down significantly closer to our figures than those produced by Tube Lines."

Boris Johnson, the London Mayor, also weighed into the debate yesterday. "I welcome the arbiter's rejection of Tube Lines' view of costs, and his recognition that they should be much closer to London Underground's," he said. "I also urge Tube Lines to work with LU to focus on the job in hand – to complete the delayed Jubilee line upgrade as soon as possible."

Both parties will submit their responses to the draft determination in January, at which point the next stage of negotiations will start.

If no agreement can be reached between them, Mr Bolt's final ruling will be made towards the end of April, in time for the start of the new contract on 1 July.

If the decision does not go its way, Tube Lines will be forced to borrow the money to cover the shortfall. Ultimately, if it was unable to do so, the remaining three lines' maintenance and upgrade would also revert to LU. Both organisations play down the chances of such an outcome.

Tube Lines is a consortium of Bechtel and Amey, a subsidiary of Spain's Ferrovial, which also owns the airports operator BAA.