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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.[1]

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.[2] 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.[3]  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.[4]

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.

Full report:  Investigation into the rescue of Carillion’s PFI hospital contracts

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.

Contact

NAO Press Office
+44 (0)20 7798 7400 or email pressoffice@nao.org.uk

Channel website: https://www.nao.org.uk/

Original article link: https://www.nao.org.uk/press-release/investigation-into-the-rescue-of-carillions-pfi-hospital-contracts/

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