London's £30 billion subway upgrade program, aimed at easing overcrowding and vital to the success of the 2012 Olympics, is at risk after its leading contractor applied for protection from creditors.

Metronet Rail, responsible for modernizing track and stations on nine of the London Underground's 12 lines, was put under the control of administrators from accountants Ernst & Young LLP after saying it lacked funds to honor contracts.

The overhaul of the Tube aims to boost capacity by 50 percent on a network that dates to 1863 and carries 1 billion people a year. Metronet's collapse is an embarrassment to Prime Minister Gordon Brown, who helped establish the project to shift risk away from the government to private companies. London Mayor Ken Livingstone had argued the arrangement would fail and opposed it in the U.K. courts.

Metronet's 30-year PPP agreement required the company to spend 17 billion pounds in return for annual payments of £600 million. The project began to fail after the contractor ran up £992 million of additional costs from work on the Bakerloo, Central, Victoria and Waterloo & City lines, blaming the bill on additional work requested by London Underground. Similar overruns on a further five lines would take the total close to 2 billion pounds, Metronet warned.

London Underground blamed the extra cost on Metronet and the matter was referred to state-appointed arbiter Chris Bolt. Bolt on July 16 awarded Metronet 121 million pounds, less than a quarter of the 551 million pounds it had sought to carry on operating, adding that the contractor's own inefficiencies had contributed to spiraling expenses.

Three of Metronet's owners, WS Atkins Plc, Balfour Beatty Plc and Bombardier Inc., had already written off their investment in the contractor. The decision to go into administration, a form of protection designed to give a company time to restructure, won't affect balance sheets, according to Atkins, the U.K.'s biggest engineering-design company, and Canada's Bombardier, the world's biggest trainmaker.

Successive U.K. governments have blamed each other for the shortcomings of London's transport system. Prime Minister Brown, who succeeded Tony Blair last month, was “the principle architect” of the PPP model, opposition Liberal Democrat MP Vincent Cable said when questioning him in parliament today. Mayor Livingstone, given control of the Tube by Blair in 2003, says passengers are paying the price for 30 years of neglect and may have to wait another 30 for the subway to be fixed.

From: London's Subway Overhaul Falters as Metronet Fails, Scott Hamilton and Brian Lysaght, Bloomberg, July 18 2007

More at: Bloomberg

See also: Fears that network could buckle under strain of 2012 Olympics, Dan Milmo, The Guardian, July 17, 2007 at; Metronet

See also 'I told you so' 16 July 2007: Christian Wolmar