19 The Departments and the Trusts assumed that the PFI companies would complete the hospitals, as contractually required, by replacing Carillion. As we reported in June 2018, government had contingency plans for the collapse of Carillion, but focused on operational service contracts to ensure that services to the public continued, and not Carillion's construction projects. The PFI companies' plans assumed work would pause while they found a new construction company (paragraphs 1.8 to 1.10).
20 Following Carillion's collapse, the PFI companies assessed the status of the projects and found that they did not have enough money to complete them. In line with the usual PFI model, both PFI companies would have been relying on Carillion to absorb the rising cost of completing the hospitals and had been designed with very little contingency funding of their own. They thus found that with Carillion no longer guaranteeing to deliver the hospitals at the set price, and large costs to correct and complete the hospitals, that they had insufficient funding from investors to complete the projects. At Midland Metropolitan, the PFI company notified the Sandwell Trust in January 2018 that it could not complete the hospital without additional money from the Trust. At Royal Liverpool, which the Liverpool Trust believed was within a few months of completion, the project seemed deliverable with the money available from the investors until July 2018, when the extent of the problems with the structure, internal fire protection and cladding emerged (paragraphs 2.3 to 2.6).
21 The Departments wanted to hold the private sector to its contractual liabilities and avoid any 'bailout' that would set a precedent. The Department of Health & Social Care, the Cabinet Office and HM Treasury were concerned that additional public funding would not be value for money and would set a precedent for similar bailouts of other PFI contracts, by breaking the principle that PFI investors bear the risk of their projects. It also feared that a bailout could lead to not only the two hospitals but all the government's PFI debts being reclassified as National Debt. In May 2018 the Departments rejected the Sandwell Trust's proposal to rescue the Midland Metropolitan PFI company through additional government funding, although the Trust believed this could have led to the completion of the hospital 18 months earlier than under public financing. In September 2018 the Departments also rejected a similar rescue package proposed by the PFI investors for Royal Liverpool (paragraphs 2.7 to 2.12, 2.18 and 2.19).
22 The Departments explored whether new PFI schemes could be set up but found no interest from potential investors or construction contractors. The Department of Health & Social Care worked with NHS Improvement, the Infrastructure and Projects Authority in the Cabinet Office, and HM Treasury in a 'recovery group' to coordinate work to restart the hospital projects. The group contacted potential private investors in a new PFI scheme for Midland Metropolitan, while the Sandwell Trust researched whether construction contractors would be interested. They 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 PFI scheme or any normal fixed-price contract impractical (paragraphs 2.11 and 2.13 to 2.15).
23 The Departments were left with terminating the PFI schemes and using public finance to complete the hospitals with new contractors. The Sandwell Trust terminated the Midland PFI company's contract in July 2018 and, following discussions about the extent of the structural problems at Liverpool, the Liverpool Trust terminated its PFI company's contract in October 2018. This avoided any 'bail out' of the PFI companies or reclassification of other PFI debt. The Departments agreed to provide additional public funds to the Trusts to finish the hospitals instead. HM Treasury approved the new business case for Midland Metropolitan in October 2019 (paragraphs 2.12, 2.22 and 2.29).
24 The Department of Health & Social Care funded the Trust to pay £42 million compensation to Royal Liverpool's lenders to terminate the contract. 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 of the PFI company's construction contractors. This avoided the lengthy contractual termination process that may have led to a lower compensation payment but would have led to more delay and its associated cost. But going for a quick settlement meant the Departments had to rely on the available estimate of the cost to complete, provided by the PFI company, its lenders and their advisers (paragraphs 2.20 to 2.27).
25 Had the Departments better understood the cost to complete the Royal Liverpool, they may not have funded the Trust to pay any termination payment to the lenders. At the time of the settlement in September 2018, the Departments used an estimate of the cost of completing Royal Liverpool of £117 million present value based on information provided by the lenders and their advisers, but this was subject to a lot of uncertainty. By January 2019 further work on site led the Trust to increase this estimate by £47 million to £164 million, which was sufficiently high to mean no termination payment would have been due under the contract. The current estimate of the cost to completion is £293 million (paragraphs 2.25 and 2.26).
26 To restart the projects, the Liverpool Trust agreed contracts with several new suppliers without a public procurement process, while the Sandwell Trust ran a public procurement which only attracted one viable bidder. This meant that new suppliers for both the hospitals were chosen without competition. The Liverpool Trust transferred contracts from the PFI company without going through a procurement exercise and has then appointed further work to smaller contractors without competition to prevent further delay to the project and to maintain warranties. The Trust told us that it estimated the costs of delay at more than £2 million per month. Its board was advised that some of the contracts could be subject to legal challenge because they were not properly procured or advertised, but given there was no market for the work that the likelihood of this was low. The Sandwell Trust signed a construction contract with Balfour Beatty in December 2019. Balfour Beatty was the only viable bidder and had started work on site under an 'early works' contract while the Sandwell Trust was putting together a business case for completing the hospital and running a public sector procurement for a new contractor (paragraphs 2.29 to 2.40).