The government declined to bail out two PFI schemes being built by failed construction firm Carillion for risk of setting a precedent that the taxpayer would bear the risk of future PFI projects that ran into trouble, a report published last week by the National Audit Office has found.
The investigation into the fate of the PFI contracts to build the Royal Liverpool University Hospital and Midland Metropolitan Hospital found that the respective PFI companies involved did not have enough money to complete the construction of the hospitals without the main contractor, Carillion, which collapsed in January 2018. Companies set up to build PFI schemes usually do not have significant contingency reserves as the financial risk is usually borne by the main contractor for the project.
However, the project had been subject to significant cost overruns and on attempting to replace Carillion the Government found that potential investors and contractors would not accept any financial risk of a problem later arising due to Carillion’s work, which made a new PFI scheme or any normal fixed-price contract impractical without a substantial injection of public funds.
This was rejected by the government departments and agencies involved - HM Treasury, the Cabinet Office, the Department of Health & Social Care, and NHS Improvement – because they felt it would create provide a precedent that the taxpayer would also pay for any future failures in PFI schemes.
They therefore terminated the PFI schemes and agreed to provide additional public funds to the Trusts to finish the hospitals instead using public funds.
Overall, the cost of both projects rose from £1.4bin to just over £2bn. According to the report the public sector is only expected to pay between 1% and 3% more in real terms than was originally budgeted, with the remainder of the losses being borne by the schemes’ original investors and insurers.
New contractors have been appointed to the projects, which are both expected to open in 2022.
A copy of the full report can be downloaded here.