Following the signing of the PFI contract in 1998, construction commenced but 1 year into the project, JLC encountered problems in completing the mechanical and electrical systems in the first-phase modules. The conse-quent delays knocked on to other phases so that some were delayed by up to 45 months (NAO 2006b). Two technical problems proved particularly intractable. The design of the environmental control systems in 29 labora-tories was problematic and it became clear that design would take a long time. As a result, the public sector agreed to withdraw these requirements from the contract but, nevertheless, delays amounted to between 38 and 46 months. Secondly, subaudible noise requirements clashed with require-ments for temperature control and it was concluded by the contractor that the conflict could not be resolved. The independent certifier concluded that the fact that the noise requirements could not be met did not result in a loss of beneficial use of the modules and these areas were regarded as complete.
As the project progressed further problems emerged. Among those listed in the NAO report are unsafe gas extraction systems, ineffective fume hoods, ineffective water dilution tanks, incorrect humidifiers and a multiplicity of
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other technical defects. In spite of the defects identified, the independent certifier was able to issue completion certificates for the laboratories that presented defects but the department called for adjudication and the adju-dicator found for the department as non-compliance prevented beneficial use of the buildings. The design and build contract meant that JLC could not pass on cost increases to Laser and Laser was running short of funds.
Laser, the PFI consortium, had access to £100m of funds to pay its predicted capital expenditure of £96m. It intended to use revenue from the completed facilities to fund part of its payments to JLC. The financing structure of the project was as follows:
Laser’s source of funds £ Use of funds £
Prepayment from governments
Sale of land pre project 8.8m Fixed price contract 82.0m
Senior debt 81.8m Fees, preparation of 17.6m
Mainly Abbey National FM contract, debt interest, working capital
Junior debt 4.6m
Abbey National Treasury Services
Shareholder’s equity 4.4m Serco and John Laing plc
Total 99.6m 99.6m
Adapted from NAO Report diagram 7.
As a result of losses on this project and the Millennium Stadium, Cardiff, John Laing plc sold its construction business including JLC. Although Laser had parent company guarantees for the construction contract, the delays meant that the income it should have received for the completed buildings was not available. It became clear that the design as envisaged was not going to meet the specification required by the department and John Laing plc estimated that the cost to complete the new buildings would be £45m. The company had already been paid £76m of the agreed fixed price of £82m.
The predictable result was that the Laings considered walking away from the project and the department’s interests would not be best served if this was allowed to happen. A supplemental deed was therefore agreed between Laser and JLC, whereby the stringent performance requirements would be relaxed and the buildings would be completed based on specified inputs rather than performance outputs. Any outstanding work that was required post contract would be project managed by Serco.
Although the supplemental deed was not accepted by the department, the work went ahead but further difficulties led to serious cash flow problems for Laser and it was eventually sold to Serco by John Laing plc. Laser’s bankers kept its debt facilities open but it became clear that the company would not be able to complete the buildings to the specification required. Finally, an
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agreed termination of the contract resulted in serious monetary losses for the private companies involved in the deal, summarised as follows.
Private sector investment £ Outcomes £
Equity investors 4m Lost
Serco+ John Laing plc
Bank of America 85m 67m
Abbey National Treasury Recovered
Services plc
Subcontractors Not known 79m loss
Total private sector investment 89m Total private sector loss 101m Adapted from NAO, para 13.
In dealing with the problems listed here, the Department of Trade and Industry was advised by a number of legal and technical consultants. Eight major companies were paid a total of £8.53m in fees between 1998 and 2004 when the contract was terminated. Prominent among these payments were over £1m to Herbert Smith for legal advice, £3.3m to HDR for engineering advice and £2.1m to Turner & Townsend for quantity surveying advice. In summing up the causes of the problems experienced with the project, the NAO cites the following:
1. A complex specification where the client, as required by PFI, provided an output specification. The solutions were ‘very demanding’.
2. Of the two bids received for the project neither bidder demonstrated satisfactorily how the demanding specification was going to be met.
3. There is evidence that the PFI contractor, after Laser had been appointed the preferred bidder, tried to make design drive the outputs rather than the required output drive the design.
4. There was little competitive tension in the project. There were few expressions of interest and only two bidders, one of which ‘hardly merited being considered a reserve bidder’ (para 2.14).
5. None of the parties realised that meeting the stringent requirements of the specification would prove so difficult but the department, in accordance with PFI procedures, kept design risk with the contractor.
6. By maintaining the design risk with Laser, the department hoped that the incentive imposed on the contractor would result in a solution to the design problems. As the NAO laconically put it ‘the Department was mistaken in this expectation’ (para 2.20).
7. Construction of the facility commenced before detailed designs of the mechanical and electrical systems were available. The shell and the footprint of the building were therefore fixed before the contents were understood or fully designed.
8. Contractual arrangements with the various private sector companies concerned with the project were too loose to allow a sufficient measure of control when problems were encountered.
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9. The department refrained from relaxing the output specification in case this was regarded by the contractor as a variation that would have passed some of the design risk to the department.
10. Upon termination of the contract, the department was obliged to meet the value of the contract and did so, after considerable negotiation and advice, with the sum of £75m.
11. The department was left with buildings that are largely complete and its £122m investment exceeds the £85m valuation carried out by King Sturge in 2004–2005 (para 4.3).
12. An £18m completion package was agreed and specified although the original subaudible noise requirements will still not be met and at the time of writing this requirement, which proved so damaging and problematical for the original PFI contractor, had not been resolved.