On 31 July 1998, the Department and Laser - a special-purpose company jointly owned by Serco Group plc and John Laing plc - signed a 25 year PFI contract. Under the contract, Laser would build and manage new facilities for the National Physical Laboratory (NPL) comprising 16 linked modules containing more than 400 laboratories, and replacing many existing buildings.
The planned cost of the new buildings was approximately £96 million, financed mainly by loans from the Bank of America, NA and Abbey National Treasury Services plc (the lenders). The department would pay Laser a unitary charge of £11.5 million (1998 prices) a year once the new buildings were ready. The charge would be increased annually by a factor based on the increase in retail prices. At the end of the contract, the charge would cease and ownership of the buildings would pass to the department.
As the building continued, problems emerged, which translated into delays to the completion of all phases, which for three phases amounted to nearly four years. Because construction of the new laboratories took longer then planned, Laser could not afford to complete the new facilities.
In precarious financial position, Laser proposed a negotiated termination of the contract, which the department considered would achieve a better outcome than relying on its termination rights under the contract. The termination was the first termination of a major PFI contract in which there were serious non-performance issues.
The termination of the PFI contract for the NPL can be directly attributed to deficiencies in John Laing plc's original design for the new buildings. The department identified concerns about the design, but during the procurement, the department considered Laser would overcome these concerns and so did not insist on Laser demonstrating its design could work. Following the award of the contract, the department did not seek to resolve its concerns by imposing a design solution on Laser because it wanted to ensure that responsibility for meeting its specification remained unambiguously with the private sector. The department's aim was to maximise incentives for the private sector to solve any problems, avoid costs falling on the taxpayer, and (initially) keep the value of its building off its balance sheet.