2.9 Investors transfer many of the risks that can arise during the operational phase to contractors, but continue to manage contracts actively to monitor their retained risks because they stand to lose money if service performance is not satisfactory.
Figure 4 Examples of projects where equity losses were incurred relating to construction or refurbishment | |
Project National Physical Laboratory (2004) | Outcome Equity holders lost their £4 million investment, and senior debt suffered an £18 million write-off. Contractors' losses: £67 million by John Laing Construction Limited and £12 million by their subcontractors. On termination after three years' delay, the Authority was left with an unfinished asset worth £85 million (after investment of £122 million). Public sector losses were mitigated by risk transfer to the investors, but the private sector failed to deliver the agreed facilities to specification. |
Various Jarvis contracts (2004) | Several projects involving Jarvis companies were delayed and others halted when construction costs exceeded those anticipated during the bidding process. Jarvis plc, and PFI investors, bore the costs of filling the £120 million funding gap and saving PFI projects which included: Whittington Hospital, Tyne and Wear fire stations, Lancaster University and Wirral schools. |
Dudley Group of Hospitals (2004-05) | Extra work required during the construction phase resulted in McAlpine losses of around £100 million. The costs of six months delay were incurred by all parties involved in the project, including the equity investors. McAlpine later recovered £23.2 million damages from the Authority. |
Metronet (2007) | When Metronet, the company that won two of the three Public Private Partnerships from London Underground collapsed, investors lost their £350 million equity investments. A major contributing cause was delay and cost overrun refurbishing a large number of stations, including lifts and escalators. |
NOTES 1 Public reports of losses do not always distinguish between investor losses and contractor losses. In some cases, contractors have incurred losses to rescue the project company. 2 There are examples in Wales and Scotland, such as the collapse of Ballast plc while refurbishing East Lothian schools, dealt with by the equity investors in 2003. Source: National Audit Office document review and past reports | |