• Government and NHS handling of Carillion hospitals investigated by National Audit Office
  • Department of Health and Social Care agreed £42m deal with PFI investors amid contract termination
  • The £42m was based on flawed estimates of the cost of completing the hospital
  • Actual cost increase meant no termination fee was necessary

The Department of Health and Social Care repaid £42m to investors of a failed PFI scheme three months before it emerged the fee was not required, according to auditors.

A new report by the National Audit Office has set out the NHS and government’s handling of two major acute hospital building projects after construction company Carillion was liquidated two years ago.

The report also found:

  • The combined costs of the two schemes have risen by 98 per cent;
  • The private sector will end up paying most of the cost increase; and
  • The two trusts in question (Liverpool University Hospitals Foundation Trust and Sandwell and West Birmingham Hospitals Trust) will be better off after the schemes were re-financed, though both trusts face paying for further costs that may arise.

Carillion’s collapse has delayed the opening of the Midland Metropolitan Hospital and new acute hospital in Liverpool by nearly four and five years respectively.

At the time of the company’s demise in January 2018, bosses in Liverpool believed their new hospital could be completed that year under the existing private finance initiative contract.

But it soon emerged that there were structural problems with the building, and in July the lenders behind the PFI company managing the contract – The Hospital Company (Liverpool) – told the trust the estimated costs of completing the hospital had increased from £55m to £107m.

By autumn 2018 the government had ruled out using PFI to complete the hospital, and officials decided to terminate the contract.

Under the rules of the contract, a termination would require the trust to pay compensation to the lenders for loss of monthly payments by the trust during the contract’s lifespan.

The DHSC and Infrastructure Projects Authority suggested the trust therefore seek a “quick negotiated settlement of the compensation” in order to allow builders to restart the work as soon as possible.

According to the NAO, the DHSC had to use information provided by the PFI company, the lenders, and the lenders’ advisers to calculate the compensation amount – which was based on the estimated cost of completing the project.

However, the NAO found the value used was “highly uncertain” and that officials from the trust were only given a “limited opportunity” to review a draft report on the structural issues discovered at the site.

The DHSC and IPA ended up estimating the cost of completion at £117m, and subsequently provided £42m for the trust to pay the compensation when the contract was terminated in late September 2018.

But, just three months later after further assessments had been carried out at the site, the trust estimated the completion cost would be at least £164m.

Had this estimate been used by the DHSC, it would have “reduced the contractual compensation to zero” – the NAO reported.

Throughout 2019 the estimated cost of completing the hospital continued to rise, with the latest figures (December 2019) suggesting the project will cost an extra £293m.

HSJ asked the DHSC which official had signed off the £42m termination deal, but the organisation did not respond. The responsible minister at the time was Steve Barclay – the current Brexit secretary.

The NAO report stated: ”PFI contracts are not well designed for a termination during the construction stage. 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 properly known.

”It also allowed the lenders the option to delay construction for several months while compensation was negotiated. The departments decided to reach a quick consensual settlement with the lenders for the compensation payment so that the trust could take over the site quickly and continue the work.” 

In relation to the Midland Metropolitan Hospital, where construction was at a much earlier stage, the government opted against refinancing the PF2 scheme because it feared it would set an “unhelpful precedent” of “bailing out PFI companies” and would lead to the Office for National Statistics classifying all PFI debt as public sector net debt – the NAO said.

In July 2018 Sandwell and West Birmingham Hospitals Trust terminated the PF2 deal and – after failing to find a new PFI provider – favoured a public financing of the remaining costs of the project. This was subsequently endorsed by the government the following month.

The overall increase in costs for the two hospitals are (since the PFI/PF2 contracts were agreed):

  • Midland Metropolitan Hospital (estimated costs to rise from £350m to £663m); and
  • Royal Liverpool University Hospital (estimated costs to rise from £350m to £724m).

However, the NAO found the private sector will end up paying most of the cost increase, with the public sector only expected to pay 1 per cent more in real terms across both projects than was originally expected.

The trusts now face higher costs, but will receive additional support from the government and will therefore pay an estimated net £155m less than planned under the original PFI/PF2 contracts.

But both trusts will pay for any further costs arising from problems with Carillion’s work, the NAO said.

There are “particularly significant risks of further cost increases and delays” at the Royal Liverpool, the watchdog reported.

Both trusts have hired construction consultants Gleeds to manage the projects.

The DHSC deferred requests for comment to a “government spokesman”, who said: “To support staff and local communities in Sandwell and Liverpool, we’re giving both trusts the funding they need to minimise the delays caused by the collapse of Carillion and get these two new hospitals open.”