Collapse of Rail Industry Asset Management Giant Challenges Contract Maintenance Paradigms

London - 18th July Metronet Announces that it will voluntarily go into Administration

Metronet was the asset management organization that was created to manage two thirds of the London Undergrounds' physical asset base, it was a joint venture between WS Atkins, Thames Water, Bombadier, Electricite de France (EDF) and Balfour Beatty - all giants in the arena of asset management.

Chris Bolt, the Arbiter from the Office of the Rail Regulator, rejected their please for an additional $1.6 billion (USD) in funding to cover over spending on replacement and improvement programs. With banks withdrawing credit facilities, and the JV partners refusing to risk any further capital, Metronet was left with little choice.

The contracts outsourcing the maintenance and asset management of the assets of the London Underground was part of a broader government initiative to reduce government spending, transfer costs to the private sector, and to revamp the citys' underground rail infrastructure.

Great concept, unfortunately it has all ended in tears with british taxpayers set to foot the bill, the size of which is not fully known, and LUL faced with a politically charge decision over the future of the management of large swathes of their network. (The British PM has already indicated no change in course)

But did it all have to end this way? For those watching this issue the signs have been clear for a long time, particularly when comparing the failed Metronet to its smaller counterpart - Tubelines.

Tubelines has been a relative success story in the area of outsourced maintenance contracts. from the beginning of the controversial rail PFI (Publicly funded initiative) project Tubelines has been head and shoulders over its much larger sibling. In contrast to metronet it now appears as an example of well managed refurbishment plans, tightly controlled project and operational spending, disciplined operational management and fiscal responsibility.

Even the head of metronet has accepted that Tubelines use of the dispute resolution process is something that they should have adopted.

In hindsight there were a lot of indicators pointing to possible mismanagement within the colossus. The implementation of the companies enterprise asset management system was way overbudget and over time and delivered dubious results, whereas Tubelines bought in their project for far less cost and appear to be getting better returns from it.

While Tubelines subcontracted out their project work, rarely to the partners in it's JV, work for Metronet was perrformed by members of the consortium, a locked door to competition that has raised questions about excessive costs and a flawed strategy from the start. (Even with the collapse of Metronet its JV partners are still widely tipped to keep the multi-billion GBP contracts that for asset replacement and refurbishment.)

But the asset owner, LUL, must bear some responsibility in this mess also. They had the job of overseeing the PPP contracts, and making sure that everybody deal. So what happened? Why were the mechanisms for rigorous review, cancelation and other punitive measures not put into place?

Time will reveal all, particularly with the british media hot on the trail.

So is outsourcing dead for the rail industry? Despite disasters like the compulsory insourcing of Network Rails maintenance contracts and the metronet catastrophe - not likely.

But for other asset managers there are a lot of potential lessons in this cautionary tale:

1. Asset managers using a consortium approach, where competition is restricted to those within the consortium is a flawed strategy; and one that reduces the competitive nature of executing asset management contracts
2. Asset Owners need to be far more proactive in managing compliance to their agreed contracts, rather than taking a back seat and letting things develop. (Particularly given the potential for risk to life of these particular assets)
3. Good basic skills of administration, control, financial accountability and project management will always win over overblown beauracracies

Bu tthe great warning to come out of this is about how the company itself was managed. Metronet itself has been claiming all along, and media commentators seem to be agreeing, that it had been very customer focussed in meeting LUL's demands; while Tubelines rigorously used the dispute resolution procedures in place.

Basic stuff really, follow the contract and make sure that your message is "the customer is always right provided he stays within the boundaries of the agreement"