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Construction costs have doubled on Carillion's PFI hospitals

17 Jan The two private finance initiative (PFI) hospitals that Carillion was building at the time it collapsed – one in Liverpool, one in Birmingham – will open several years late and hugely over budget but at no substantial extra cost to taxpayers.

Construction of the Royal Liverpool is now expected to cost £724m compared with £350m in the original business case. It is running five years late.
Construction of the Royal Liverpool is now expected to cost £724m compared with £350m in the original business case. It is running five years late.

Construction costs on the two projects have doubled but most of the increased costs have been borne by the private PFI investors and Carillion itself, an investigation by the National Audit Office (NAO) has confirmed.

Carillion lost at least £603m on the construction of both projects, the NAO report says.

The NAO’s report* finds that the 646-bed Royal Liverpool University Hospital, which was due to open in June 2017, is now forecast to be completed more than five years late, in the autumn of 2022.

The Royal Liverpool is now predicted to cost a total of £1,063m to build and run compared to the original £746m.  The taxpayer is currently expected to pay £739m of this ultimately, which is a reduction of 1% from what was originally planned.

The 669-bed Midland Metropolitan Hospital, which was originally due to open in October 2018, is now expected to open in July 2022, a delay of three years and nine months. The hospital is due to cost at least £988m in total to build and run – over £300m more than the original £686m.  The taxpayer is currently expected to pay £709m of this, an increase of 3% from what was originally planned.

On construction costs alone, the NAO finds that the currently expected total cost to all parties of building the two hospitals has risen 98% since the original PFI contracts were signed.

The construction of the Midland Metropolitan is now expected to cost at least £663m compared with £350m in the original business case. This includes £315m still to be spent to complete the construction.

The construction of the Royal Liverpool is now expected to cost at least £724m compared with £350m in the original business case. This includes a currently estimated £293m for remedial work to the structure and to complete the construction. The cost of maintaining both hospitals has also risen due to changes in the market since the PFI contracts were signed.

Most of the cost increase has been borne by private sector shareholders, investors and insurers, as well as Carillion. The government wanted to ensure the private sector honoured its contracts and initially rejected calls to bail out the PFI schemes with public money.

As has become widely known, there were significant construction problems and delays before Carillion went into liquidation on 15th 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.

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The full extent of construction problems at Royal Liverpool began to emerge after Carillion collapsed. The new construction contractor, Laing O’Rourke, has had to strip out three floors of the building and start major work to reinforce the structure with steelwork and additional reinforced concrete.

Carillion’s design work (by subsidiary TPS Consult) was found to be at fault. In April 2018, after Carillion collapsed, the PFI company commissioned consulting engineer Arup to review the structural design, including the safety concerns indicated by cracked beams. Arup produced 3D models of the building and discovered that the original design had significant shortfalls. Arup identified serious problems with the structure of the building and that it needed strengthening in several locations.

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. Had the DHSC and the trust better understood the cost to complete the hospital, they may not have had to pay anything to the lenders, the NAO says. The estimated cost of completing the hospital has risen from £117m in September 2018, when DHSC agreed the termination payment, to £293m.

The NAO says that 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.

Gail Cartmail, assistant general secretary of the Unite  trades union, said: “The report makes for grim reading and endorses what hospital patients and NHS staff in Liverpool and the West Midlands already knew.

“Two desperately needed hospitals are going to be years late and in the meantime local communities are left with facilities that are no longer fit for purpose.

“The responsibility for these delays has to lie squarely at the door of the government, which consistently failed to prioritise the overriding need that these hospitals had to be built.

“While the report notes the financial cost of the projects the human cost of the delays of completing the hospitals has not been recognised.”

* Investigation into the rescue of Carillion’s PFI hospital contracts is available at www.nao.org.uk

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