WORKING for Metronet, the firm responsible for upgrading two-thirds of London’s underground rail network, could be a nightmare. “It would drive you insane,” the chief executive of a leading subcontractor told The Sunday Times last week. “A complete shambles,” said another.

Metronet collapsed into administration on Wednesday. As The Sunday Times revealed last month, it had been living on borrowed time since March, when its banks refused it any more money.

Faced with an estimated eventual cost overrun of £2 billion and short of cash, the group’s last chance was an emergency appeal to Chris Bolt, the independent arbiter of its contract with Transport for London (TfL), the government agency. When Bolt said on Monday he would give only a fraction of the £551m demanded, and then only in January, the company had no option other than administration.

The outcome was little surprise to those who had worked closely with Metronet, and who had become frustrated with its lack of ability to organise an ambitious and complicated programme of works.

Metronet, a company jointly owned by Balfour Beatty, the contractor, Atkins, the consultancy, Thames Water, Electricité de France and Bombardier, the Canadian train maker, was the big winner when the Tube was part-privatised in 2003. It took over the operation and maintenance of two-thirds of the network. Operation of trains stayed with London Underground. Metronet planned to spend some £17 billion over 30 years on upgrading stations, replacing track and signalling and introducing new rolling stock.

At the time, the deal was hailed as a ground-breaking public-private partnership (PPP), showing that private capital and expertise could be brought in to improve the provision of public services. Politicians were still haunted by memories of the Jubilee Line extension, London Underground’s last large capital project, which ran £1.4 billion over budget and was late.

But Metronet proved unable to coordinate some of the basic aspects of its work, its subcontractors said last week. “One of the big issues all suppliers had was underground access. You couldn’t get it. Priority always seemed to be given to the wrong people, or you would find there was time available but no work was being done. This meant contract milestones were continuously having to be revisited,” said the managing director of one large supplier to Metronet, who asked for anonymity because his contract is still in place with the administrator.

It is understood labour rates on some subcontracts were 40% higher than forecast because of unproductive time due to problems with access.

The other major gripe was with Metronet’s “approvals” regime,” he said. For a piece of equipment to be used or installed in the Tube, it has first to be formally approved by Metronet’s “asset engineer”.

“The problem was that these people had absolutely no responsibility for the delivery of the programme, and would make decisions without regard to it,” he added. “There was no downside for them in asking for endless engineering changes before they would give their approval.” It is understood, for example, that Bombardier was asked for costly and time-consuming changes to its first prototype train for the Metronet contract.

Insiders say the stories illustrate Metronet’s fatal flaw: its shareholders were also its main suppliers. Rather than award work through competitive tender, Metronet used a “tied” supply chain – in essence, a system that gave the largest chunks of work to its five shareholder companies. Balfour Beatty, for example, had the job of doing track and major engineering work, while the station upgrades were done by Trans4m, a company jointly owned by four of the five Metronet owners (the odd one out being Bombardier.)

Tubelines, the infrastructure firm that manages the remainder of the London Underground lines, does not use a tied supply chain, and has so far avoided problems.

“It’s not a failure of the PPP, it’s a failure of structure and of management. There is a basic conflict of interest,” said one senior government adviser.

“But I think Transport for London also has to hold its hand up. People there must have known things were going wrong, and should have stepped in. They might have wanted it to go wrong because they had a poor relationship with Metronet, but now they have the likelihood of extra cost and delay,” the adviser said.

The potential problems with the “tied” relationship had come to the attention of the company’s regulator long before the funding crisis. In a report on Metronet published last November, Bolt pointed out the pitfalls.

On the station upgrade programme, which accounts for the largest part of the cost overruns, Metronet had in effect passed responsibility on to Trans4m. “Metronet appears to have passed responsibility for planning and quality control to the supply chain. Leaving this to Trans4m and affiliates without any evident supervision or control shows a lack of project governance,” Bolt’s report said.

Bolt also found Metronet was lagging a long way behind its targets for putting down new track, with less than half the forecast volume of work done at the time of the report. Despite this, Metronet was still having to pay out to its rail contractor, Balfour Beatty. “The arbiter does not consider the contract with Balfour Beatty to be good industry practice. Furthermore, the arbiter considers that this could have been identified at the time it was entered into . . . Metronet appears to have been slow to recognise this and address the issue.”

The future of this tied supply chain is one of the issues that will confront Metronet’s new owner. Alan Bloom, the partner at Ernst & Young who has been appointed as receiver, is understood to be planning to sell the business, having first made sure that it is on a sufficiently firm footing that Tube services are not threatened. TfL has provided an emergency loan of up to £750m to keep the company running.

City sources say potential buyers include Bechtel, which is part-owner of Tubelines, or possibly one of the large infrastructure funds that has recently sprung up to invest billions in ports, air-ports and other transport projects. There is also speculation that TfL may push for a reorganisation of the contract to give it a more hands-on role, although Gordon Brown last week indicated he wanted to see the project stay in the private sector.

Explore Industry Sectors

• Banking & Finance

• Construction & Property

• Consumer Goods

• Engineering

• Health

• Industrials

• Leisure

• Media

• Natural Resources

• Retailing

• Support Services

• Technology

• Telecoms

• Transport

• Utilities

Times Recommends

• Mervyn King warns the 'nice decade is behind us'
• UK unemployment rises for third straight month
• Barratt stuns with its latest housing warning