The policy behind Liverpool’s empty hospital

The failure of a funding model that costs the NHS more than £2bn a year, and has left two hospitals empty and unfinished in the wake of the Carillion collapse.

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On the final day of this year’s party conference in Liverpool, Labour’s vision of publicly-owned public services was branded “economic madness” by Conservative critics, who described it as a rehash of “failed ideas that didn’t work in the past”. At the Conservatives’ own conference in Birmingham, Philip Hammond described “the socialist manual” of Labour policy as a “discredited ideology that will never solve real-world problems”.

But in the hospitals of both cities, Hammond’s words did not ring true. Less than a week before Hammond’s speech, the Department of Health spent around £120m bringing Liverpool’s biggest hospital back into public ownership. The renationalisation of the Royal Liverpool Hospital project was less an act of “economic madness”, than one of necessity; the scheme had ground to a halt when the company paid to design and build the hospital under a £335m Private Finance Initiative (PFI) agreement, Carillion, collapsed. 

The same had happened in Birmingham. In August, the government agreed to bring the Birmingham Midlands Hospital, also being built under a Carillion PFI scheme worth £350m, back onto the public books. In both cities, major new hospitals remain unfinished. 

The contract for the building of the new Royal Liverpool Hospital was agreed in 2013 by the local NHS Trust and the Hospital Company, a PFI investment vehicle with investors including multinational financial services firm Legal & General and the European Investment Bank. On the same day, Carillion was awarded a five-year deal worth £235m for the design and construction of what was billed as a state-of-the-art facility to replace the original Royal, a monolithic 1970s brutalist block once described by Andy Burnham as “a little piece of Eastern Europe” on Merseyside.

Five years later, on 15 January 2018, Carillion became the subject of the largest ever trading liquidation in the UK’s history, reporting liabilities of £7bn and cash holdings of just £29m. Carillion employees were left in limbo, subcontractors were left unpaid, and Liverpool was left with a multi-million pound building, frustratingly close to completion but standing empty, as the inadequate facilities in the original Royal Hospital came under ever greater pressure. Louise Ellman, the MP for Liverpool Riverside, where the hospital is situated, says the new Royal is “around 90 per cent complete. Most of it is built, there’s equipment in what will be some of the wards. It’s an impressive building. But unless that 10 per cent is finished, none of it can be brought into use.”

Carillion employed a business model that was described by a parliamentary report into its failings as “a relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers”. With its “complicit” accountants and auditors, it had misrepresented its accounts with “increasingly fantastical figures” while increasing its dividends every year. Rachel Reeves MP, chair of the Business, Energy and Industrial Strategy Select Committee and co-author of the report, said that “it was impossible to get a true sense of the assets, liabilities and cash generation of the business.”

Carillion’s external auditors, KPMG, were told by one MP on the BEIS committee that they couldn’t be trusted “to audit the contents of my fridge,” while the chair of the Work and Pensions Committee, Frank Field, described the incomplete shell of the new hospital as a “creaking monument to greed”. “The mystery wasn’t that Carillion collapsed,” concluded the parliamentary report, “but that it lasted so long.”

As the local NHS Trust, the Hospital Company, its investors, the Department of Health, the Treasury, and the official receivers scrambled to find a way to continue work on the building, an engineering firm was employed to identify what was needed to see the scheme through to completion. They found that Carillion had used combustible cladding, similar to that used on the Grenfell tower block, on much of the building’s exterior, breaching regulations for the design of healthcare premises. They also found that cracked concrete beams in the building threatened it’s structural integrity, raising costs and complicating the process of finding another contractor to complete the project. On 25 September it was announced that the government would step in and publicly fund the remaining work on the hospital, with an estimated completion date of 2020.

As a specialist in PFI-financed capital projects and “facilities management” in the public sector, Carillion had established itself as an auxiliary provider of public services ranging from the upkeep of military barracks to hospital catering and cleaning trains. Grace Blakeley, a research fellow at the Institute for Public Policy Research, describes the model as a “system of arbitrage in which the government outsources contracts to huge oligopolies – Carillion, Capita, Serco,” which “subcontract the real work to the real contractors down the line. As well as outsourcing public services themselves,” she explains, “we’ve outsourced government procurement.” 

PFI began under John Major and flourished in the Blair and Brown era, but its effects will extend far into the future. The National Audit Office (NAO) has found that over the next 25 years, the taxpayer will spend more than £200bn effectively servicing the debts incurred by PFI and its successor, PF2.

Frank Field recalls that during the New Labour years in the Wirral, “schools were being built by PFI with 18.3 per cent rate of interest, plus management charges.” At a time when government could have borrowed at less than a third of that rate, huge amounts were being handed to the private sector, often spread over decades.

So why would any fiscally prudent government countenance PFI? Blakeley says it’s chiefly about making the debt another government’s problem. “The level of borrowing the government is undertaking is kept off the books for a long period of time,” she explains. “Rather than saying £5bn now, the government is able to say it’s paying £100m a year for however many years.” The taxpayer pays for these figures to be massaged through “much higher interest than if the government had borrowed the money upfront,” Blakeley explains, but for the government, PFI remains attractive because the debt “doesn’t appear in the deficit figures, initially”. 

PFI is as an accounting trick, then, and an incredibly expensive one: according to the NAO, the cost of privately financing public projects can be 40 per cent higher than when projects are financed by direct government borrowing.

Despite the massive, long-term bill it incurs, proponents of PFI and PF2 say that taking the real levels of debt incurred through capital projects onto the government balance sheet would have its own ramifications. A massive increase in the official levels of sovereign debt could threaten the country’s credit worthiness, raising the future cost of borrowing. In this reading, governments that use PFI engage in creative accounting, get themselves into larger amounts of debt, long term, but in doing so they also ensure that they – and businesses within the state – are able to borrow money more cheaply, which balances the cost within the overall economy. 

Blakeley, however, says this argument “doesn’t hold much water, both because we have a fairly good credit rating and because interest rates have never been lower than they are now. In fact, the government can effectively borrow at negative real rates of interest, so public borrowing is incredibly cheap. And public borrowing for investment is generally not frowned upon by investors because you’re creating excess capacity in the economy down the line as well as boosting demand now. Borrowing to invest will pay for itself as long as it’s not done to a silly extent. So, most of the things done under PFI or that sort of contract could be done by public borrowing now. Not only would it be cheaper, but the government could also run those services or contracts based on considerations about environmental and economic impact, rather than the narrow profitability that they’re run on now.”

“I argued with Gordon Brown to do this [when Labour were in government]” says Frank Field, “but he wouldn’t.”

If there is an upside to the empty corridors of the Royal Liverpool, then, it is that Carillion’s collapse may make it more difficult for governments to justify the use of PFI in future. Nor is the story of the hospital unique. A thirty-year obsession with outsourcing, privatisation, competition and marketisation of the public realm has created a situation in which the government has been forced to step in and run services where the private sector fails, from the 14 hospital trusts that had relied upon Carillion for services, to the HMP Birmingham, the East Coast Main Line, and even security personnel at the 2012 London Olympics. If Philip Hammond seeks a “discredited ideology that will never solve real-world problems,” he may find it in the more than 700 PFI deals that remain operational.