National Audit Office Press Releases
Investigation into the rescue of Carillion’s PFI hospital contracts
The two PFI (Private Finance Initiative) hospitals that Carillion was building at the time it collapsed – Royal Liverpool University Hospital and Midland Metropolitan Hospital – are currently due for completion several years late.
However, the government has ensured that most of the increased construction costs so far have been borne by the private PFI investors and Carillion, rather than the taxpayer, according to a new investigation by the National Audit Office (NAO), published today.
The NAO’s report finds that the 646-bed Royal Liverpool, which was due to open in June 2017, is now forecast to be completed more than five years late, in the autumn of 2022, and the Liverpool University Hospitals NHS Foundation Trust has not yet set an opening date. It is now predicted to cost a total of £1,063 million to build and run compared to the original £746 million. The taxpayer is currently expected to pay £739 million of this, a reduction of 1% from what was originally planned.
The 669-bed Midland Metropolitan, which was originally due to open in October 2018, is now expected to open in July 2022. The hospital is due to cost at least £988 million in total to build and run – over £300 million more than the original £686 million. The taxpayer is currently expected to pay £709 million of this, an increase of 3% from what was originally planned.
The private sector has borne most of the cost increase: shareholders, investors, insurers and Carillion have lost at least £603 million on the construction of both projects. The government wanted to ensure the private sector honoured its contracts and rejected proposals that it should provide more public funding to ‘bail out’ the PFI schemes or reduce the risk that lenders were exposed to.
There were significant construction problems and delays before Carillion went into liquidation on 15 January 2018 but the contractor’s collapse created more delay. Work on both sites stopped while the hospital Trusts, government and the private investors attempted to rescue the projects. By September 2018, these attempts had failed; government decided to terminate the PFI schemes and provide public financing to complete the hospitals. It has then taken time to put in place new contracts and restart the projects.
The full extent of construction problems at Royal Liverpool began to emerge after Carillion collapsed and over the course of 2018. The new construction contractor has had to strip out three floors of the building and start major work to reinforce the structure with steelwork and additional reinforced concrete.
The Department of Health & Social Care (DHSC) paid £42 million compensation to Royal Liverpool’s investors to terminate the PFI contract. The contract required the Trust to pay compensation to the PFI company’s lenders, based largely on the estimated cost to complete the hospital, before the actual cost to complete the hospital was known. Had the Department and Trust better understood the cost to complete the hospital, they may not have paid anything to the lenders. The estimated cost of completing the hospital has risen from £117 million in September 2018, when DHSC agreed the termination payment, to £293 million now.
The new suppliers for both the Trusts were chosen without competition. After the termination of the PFI contract, in order to restart the Liverpool project without further delay, the Liverpool Trust agreed contracts with several new suppliers without a public procurement process. The Sandwell and West Birmingham Hospitals NHS Trust ran a public procurement for the contract to complete Midland Metropolitan taking 15 months, which only attracted one viable bidder.
There are significant risks of further delays and added costs at the hospitals, although their situations are different. Both Trusts are now directly managing the contracts with new construction firms. At Midland Metropolitan, the Sandwell Trust has negotiated a ‘target price’ for work by its new contractor, Balfour Beatty, and prices should not rise unless the Trust changes the scope of the project or there are unforeseen problems with Carillion’s work. At Royal Liverpool, the new main contractor, Laing O’Rourke, has no contractual incentives to control costs. NHS England and NHS Improvement has worked with the Liverpool Trust to develop additional oversight arrangements such as using an independent construction consultancy to advise on the appropriateness of costs.
Notes for Editors
1. The delay at Midland Metropolitan Hospital is 3 years and 9 months, and at Royal Liverpool University Hospital more than 5 years.
2. This includes £293 million for remedial work to the structure and to complete construction.
3. This includes £315 million still to be spent to complete the construction.
4. Under the calculation used for the compensation payment for the termination, the cost to complete is deducted from the amount due, so a rise to £293 million means no compensation would be paid.
5. Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.
6. The National Audit Office (NAO) helps Parliament hold government to account for the way it spends public money. It is independent of government and the civil service. The Comptroller and Auditor General (C&AG), Gareth Davies, is an Officer of the House of Commons and leads the NAO. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether government is delivering value for money on behalf of the public, concluding on whether resources have been used efficiently, effectively and with economy. The NAO identifies ways that government can make better use of public money to improve people's lives. It measures this impact annually. In 2018 the NAO's work led to a positive financial impact through reduced costs, improved service delivery, or other benefits to citizens, of £539 million.
NAO Press Office
+44 (0)20 7798 7400 or email firstname.lastname@example.org
Latest News from
National Audit Office Press Releases
British Tourist Authority’s annual report and accounts 2018-19 (trading as VisitBritain & VisitEngland)26/05/2020 09:10:00
The 2018-19 accounts of the British Tourist Authority (BTA), also known as VisitBritain and VisitEngland, have received a qualified opinion1 from the Comptroller and Auditor General of the National Audit Office, Gareth Davies, due to irregular procurement activities and payments of £1.115 million. This is the third consecutive year that irregular payments have been identified in the NAO’s audits of the BTA’s accounts.
Overview of the UK government’s response to the COVID-19 pandemic22/05/2020 11:15:00
Yesterday’s report by the National Audit Office (NAO) provides an overview of government’s wide-ranging response to COVID-19. It has found that between 31 January and 4 May, government made over 500 announcements.
Digital transformation in the NHS15/05/2020 11:25:00
This report was prepared before the Coronavirus pandemic. We recognise that the Department of Health and Social Care and the NHS have unprecedented operational priorities to deal with, and we have agreed with them to publish this report because it contains valuable information that will remain relevant and help with digital transformation in the NHS in the longer-term.
Environmental Sustainability Overview14/05/2020 11:15:00
The National Audit Office (NAO) yesterday reported that the Ministry of Defence (MoD) has made some headway in meeting its environmental sustainability objectives.
Improving the lives of women and girls overseas30/04/2020 13:33:00
The Department for International Development’s (DFID) 2018 Strategic Vision for Gender Equality is ambitious and well-researched but DFID needs to improve its management of the Vision’s implementation if it is to achieve its intended impact, according to the National Audit Office (NAO).
Palace of Westminster Restoration and Renewal Programme24/04/2020 15:43:00
If the Palace of Westminster’s Restoration and Renewal Programme is to successfully deliver a restored and working Palace in the early 2030s, and achieve value for money, the risks associated with complex major infrastructure programmes must be addressed now, according to today’s report by the National Audit Office.
Water supply and demand management25/03/2020 16:15:00
The government must take more concerted action now to prevent parts of southern England running out of water within 20 years, according to a National Audit Office (NAO) report published today.
Universal Credit advances fraud20/03/2020 12:20:00
The Department for Work and Pensions (DWP) has identified nearly 100,000 Universal Credit claimants that it suspects may have claimed an advance1 fraudulently, according to the National Audit Office (NAO). In total, these advances are worth an estimated £100-£150 million.