Carillion PFI hospitals cost investors and insurers £603m

17 January 2020 | By Neil Gerrard

The Royal Liverpool hospital

The investors and insurers of two private finance initiative (PFI) hospitals that stalled when Carillion collapsed will end up losing at least £603m across both projects.

That’s the finding from a National Audit Office (NAO) report which found that the current expected total cost to the public sector of the delayed Midland Metropolitan hospital has risen by 3%, while the current expected total cost to the public of the Royal Liverpool has actually fallen by 1%.

The NHS Trusts in charge of the hospitals will face higher early costs as a result of the collapse of Carillion but will receive additional government support, so will pay an estimated net £155m less than planned under the PFI deals.

Cost overruns and delays

The 669-bed Midland Metropolitan was originally due to open in October 2018 but was only two thirds built when Carillion went into liquidation. Balfour Beatty has now taken over as contractor and the cost to build and run the hospital has risen by 44% to £988m. It is due to open three years and nine months late, in July 2022.

The 646-bed Royal Liverpool was originally supposed to open in June 2017 and was almost complete when Carillion collapsed. But it is now due to open in autumn 2022 with an expected build and running cost of nearly £1.1bn after structural defects were discovered in the building. Laing O’Rourke is now acting as a managing contractor for a fee. It has been forced to strip three floors out of the building and use additional structural steelwork and reinforced concrete.

Both projects were already running about a year late before Carillion’s demise in January 2018. On the Midland Metropolitan, designs for the mechanical and electrical fitout had delayed the completion date by 11 months. The Royal Liverpool was delayed by problems including asbestos discovered on the site and issues with the power supply, while cracks in structural beams were also discovered in 2017.

Design flaws

The NAO said in its report that it wasn’t clear on why design problems occurred at both hospitals, given that PFI arrangements are supposed to lead to better design and performance by transferring risk to the contractor. “We have not looked at the detail of what went wrong with the design process within Carillion and its subcontractors. NHS England and NHS Improvement and a few individuals involved in the construction projects told us that one of the causes may have been that Carillion’s original pricing was too low to meet the required specification,” the report said.

Once Carillion collapsed, the PFI companies running each project found they did not have enough money to complete them. The government held the private companies to their contracts and rejected plans to bail out the PFI schemes or reduce risks to lenders. By September 2018, after attempts to rescue the projects had failed, the government terminated the schemes and provided public financing to complete the hospitals.

Risk of increasing costs

The Department of Health & Social Care (DHSC) paid £42m 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. The NAO contended that had the Department and Trust better understood the cost to complete the hospital, they may not have paid anything to the lenders.

The NAO added that there were “significant risks” of further delays and added costs at the hospitals. It said: “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.”

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