The cost of completing two hospitals that were under construction by outsourcer Carillion when it collapsed has doubled and the projects are now running several years late, says the public spending watchdog.
Most of the increase in building costs has been borne by private finance initiative investors and Carillion, rather than the taxpayer, according to an investigation by the National Audit Office.
But although shareholders, investors, insurers and Carillion have lost at least £603m on both projects, the watchdog warned in its report that the hospital trusts will be liable for any further costs arising from problems with the failed outsourcer’s work.
The two hospitals — one in Liverpool, the other in Birmingham — were being built under the private finance initiative, which enabled companies to set up special purpose vehicles and borrow funds to construct infrastructure such as hospitals, schools and roads, and then maintain the assets over their lifetime.
Criticism of the controversial financing scheme intensified after Carillion’s collapse in January 2018, and PFI was abolished by the then-chancellor Philip Hammond in September that year.
The 670-bed Midland Metropolitan Hospital Project in Sandwell, near Birmingham, was six months behind schedule and beset by engineering problems when Carillion collapsed. The contractor had asked the government for a £125m bailout of the hospital project as part of a rescue package just days before its liquidation.
It is now expected to open nearly four years late in 2022, at a cost of at least £988m, including maintenance — more than £300m more than originally planned, said the watchdog. The taxpayer is expected to pay £709m of this, an increase of 3 per cent from the original figure.
The 646-bed Royal Liverpool, which was due to open in 2017, is now due to be completed more than five years late, though no date has been set, said the NAO.
It is predicted to cost more than £1bn to build and maintain the hospital, up from £746m, with the taxpayer expected to pay £739m, a reduction of 1 per cent from what was originally planned, said the watchdog. It warned that the project faced “particularly significant risks of further cost increases and delays”.
Although the private sector has suffered losses, the Department of Health and Social Care paid £42m compensation to Royal Liverpool’s investors to terminate the PFI contract. Under the terms of the contract, compensation to the PFI company’s creditors was based largely on the estimated cost to complete the hospital, before the actual amount 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 NAO said.
Work on both sites stopped while the hospital trusts, government and the private investors attempted to rescue the projects.
The government was keen to avoid setting a precedent so rejected proposals that it should provide more public funding to “bail out” the PFI schemes or reduce the risk to which lenders were exposed, the watchdog said.
Although the government sought fresh construction or private investors to set up new PFI schemes to take over the contracts, they found none were willing to take on the risks, so the hospitals are now being completed using public finances.
The firms chosen to continue construction on both hospital projects were selected without competition and the hospital trusts are now directly managing the contracts.
At Midland Metropolitan, the Sandwell Trust has negotiated a “target price” for work by its new contractor, Balfour Beatty, so costs should not increase unless there are unforeseen problems with Carillion’s work. At Royal Liverpool, Laing O’Rourke, now the main contractor, has no contractual incentives to control costs, the NAO concluded.
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