NAO report on Carillion’s PFI hospital contracts

The National Audit Office (NAO) has released a report on the government response to the collapse of Carillion in 2018, while it was responsible for two hospital contracts.

The two PFI (Private Finance Initiative) hospitals under construction at the time the company collapsed – Royal Liverpool University Hospital and Midland Metropolitan Hospital – are currently due for completion several years late.

The NAO report states that the government has ensured that most of the increased construction costs have been borne by the private PFI investors and Carillion, rather than the taxpayer.

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 £1,063M to build and run compared to the original £746M. The taxpayer is currently expected to pay £739M of this, a reduction of one per cent 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 £988M in total to build and run – over £300M more than the original £686M, with the taxpayer currently expected to pay £709M of this, an increase of three per cent from what was originally planned.

The private sector has borne most of the cost increase: shareholders, investors, insurers and Carillion have lost at least £603M 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.

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.

Unite, the UK and Ireland’s largest union, said the report highlights the government failures to get the two flagship Carillion hospitals built, creating misery for patients and staff forced to cope with failing buildings.

Unite assistant general secretary Gail Cartmail 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.”