Underground row changes tack

Ruling fixing second phase costs at £4.46bn sparks new dispute over raising finance

The row over funding for the London Tube upgrade switched to a new, but equally incendiary tack yesterday after the independent Arbiter settled the value of the next slug of work at £4.46bn and immediately faced a threat of a legal challenge from Transport for London (TfL).

The decision on the upgrade of the Northern and Piccadilly lines by Tube Lines came in £65m higher than the draft proposal published in December. It is £1.39bn lower than the £5.75bn costing put forward by Tube Lines, but £460m higher than the £4bn that TfL's London Underground (LU) division says it can afford.

The final determination from Chris Bolt – the Arbiter appointed to rule on disputes in the public private partnership (PPP) binding Tube Lines and LU together – closes one set of arguments, over the headline costs of the second seven-and-a-half-year tranche of upgrade work, starting in July.

But it starts another spasm of disputes over who pays what to make up the shortfall. And LU is threatening to take legal action to prove that the draft proposals on financing put forward by Mr Bolt and open for consultation until 29 April are "exceeding his powers".

The arrangements are of dizzying complexity, not least because LU is not only Tube Lines' customer but also its comparator, having taken over the upgrade of the rest of the Tube network after the 2007 collapse of Metronet.

The two sides have already been at each other's throats for months over costs, culminating in a furore over the Victoria line upgrade. It took a Tube Lines' Freedom of Information request to prove that the £2.3m/km cost put up by LU to inform Mr Bolt's decision on a fair price for Tube Lines was far short of the £4.25m/km reality. Mr Bolt was convinced and his upward revision of the allowance for Tube Lines (from £2.5m to £2.7m) formed part of the increase in yesterday's determination.

But now that the price for the contract is fixed, the row is simply shifting on to a new axis. LU is deeply unhappy about Mr Bolt's provisional ruling that the extra £460m should not be raised by Tube Lines. Although LU agrees that it is cheaper for the public sector to raise finance, its managing director, Richard Parry, says both the risk transfer and the process of requiring Tube Lines to satisfy lenders of its credibility are the whole point of the PPP. The suggestion that LU cut back the scope of the contract is equally unpalatable. "If we dilute or defer the upgrades then we have the unhappy outcome of being left with all the PPP's excesses in terms of complexity and so on, but losing the purpose of it," Mr Parry said.

LU is also questioning the Arbiter's right to force LU to raise the finance. "The Arbiter is choosing to interpret the contract in that way but we think his grounds are very thin," Mr Parry said. "We don't think he can sustain his position through full scrutiny of a judicial review."

Boris Johnson, the Mayor of London, added his voice to the fracas yesterday. "In other countries this would be called looting, here it is called the PPP," he said. "We will fight this to the last and are seeking urgent advice on the Arbiter's idea to pass Tube Lines' obligations to raise finance on to London's fare and taxpayers."

But Mr Bolt gave the criticisms short shrift, stressing that Londoners will have to pay for the extra finance regardless of which organisation raises it. "Tube Lines doing it is just like putting it on a credit card," he said. Mr Bolt also said that LU needed better legal proof that he is overstepping his remit. "If LU can come up with new legal argument that they haven't so far, then I will change my position," he said. "But even if I did, the issue about affordability remains."

Meanwhile Tube Lines says that the final ruling on costs should draw a line under the rhetoric, and that the only way to deliver the contract, for £1.39bn less than the company's estimate, was to build a better relationship with LU. Andrew Cleaves, the acting chief executive, said: "We will have to have a sea change in the way we work. But that is not something we can do by ourselves, it has to be done with LU."

ABC of PPP: Money down the Tube

*2003: A public-private partnership (PPP) is created under which the Underground infrastructure is maintained by private contractors but the service is operated by TfL, through London Underground Limited (LU). Tube Lines wins the contract for the Jubilee, Northern and Piccadilly Lines. The rest go to Metronet.

*2005: The first signs of trouble start to surface. Metronet is massively behind and executive chairman John Weight is sacked.

*2007: Metronet collapses, costing taxpayers £2bn. Its work goes to LU.

*2009: Tube Lines' Jubilee Line upgrade misses its deadline. LU and Tube Lines fail to agree the value of the second tranche of work.

*March 2010: The Arbiter sets a £4.46bn value on the second contract period, £1.39bn under Tube Lines' estimates and £460m more than LU says it can afford. A new dispute starts over how the shortfall will be raised.

*July 2010: Second seven-year review period starts.