Treasury rethinks PFI as Barts hangs in the balance

The Treasury is set to radically reform PFI procurement as industry disquiet grows over the Barts and Royal London hospital fiasco.

Contractor Skanska was due to find out today from the Department of Health whether the £1.2bn scheme would be given the green light, restructured or scrapped. The department has put several hospital PFIs on hold while it assesses if they represent value for money.

Meanwhile, it is understood the Treasury is likely to accept proposals by RIBA that PFI hospitals should be designed before they go out to tender. This follows criticism that the model now used is wasteful.

Fresh recommendations are expected to be included in a paper on best practice that is being drawn up by the Treasury. The paper will be published in the spring at the same time as the Budget statement.

The about-turn would be a change of heart after the Treasury's head of PFI recently dismissed the RIBA's proposal to hire designers before contractors on PFI projects. Richard Abadie told Building that the RIBA's idea was not possible because there would be too much focus on contractors and price.

Other recommendations being looked at by the Treasury are understood to include a move towards using standardised components in buildings in an effort to reduce costs.

A more realistic approach to benchmarking hospital costs, reflecting the fact that hospitals are often multistorey blocks in city centres rather than two-storey buildings on greenfield sites, is also expected to be adopted.

The shift in thinking has been caused by the need to reduce the cost of PFI hospitals, the spiralling bids costs, and wasted effort in design. A survey by the Construction Confederation found average bid costs for PFI hospitals was £11.5m.

Meanwhile, it is thought that the government could write off £200m if it decided today to ditch the £1.2bn Barts and Royal London Trust PFI scheme.

Sources close to the project said the fee, which is the sum of all costs and fees accrued so far, would be lost if health secretary Patricia Hewitt decided to axe the project in her review of PFI schemes, due to be completed today.

The fee includes about £100m spent by Skanska, millions spent on lawyers and by the trust, as well as bidding costs by Bouygues and Skanska.

Hewitt commissioned a review of the scheme after fears that the combined cost of revamping the Royal London in Whitechapel, east London, and St Bartholomew's in Farringdon, north London, could not be borne by the trust, which must pay a monthly charge to Skanska. The trust has suggested removing the £400m St Bartholomew's part of the scheme.

Sources close to the project and in the industry at large have dismissed this idea. They said the financing model for the biggest PFI hospital to date cannot be changed without derailing the whole project.

One source on the team said the scheme could not just be changed around. He said: "There's very heavy financing involved in this deal and it would be just crazy to pull it now. The whole thing's about two hospital sites carefully put together. This would affect the mix on the rest of the project. London and Bart's were together; if you scrap one then you affect the other too."

John Spanswick, chairman of Bovis Lend Lease, said Skanska should be entitled to get its money back.

He said: "I have absolutely no doubt that Skanska will be reimbursed reasonable costs. If they cancel the project there might be a case for loss of profit as well. It has never happened before.

Sources said even if the project could go ahead as just the Royal London, it might have to be tendered again. Contractor Bouygues lost out to Skanska two-and-a-half years ago and could ask for the project to be put out to tender again because it has been changed so much.

A spokesperson for the Barts and Royal London NHS Trust said that it had an agreement with Skanska that allowed the consortium to leave the project on 31 January and pick up £100m in fees.

The Hewitt review has had a knock-on effect on planned projects. The £338m scheme at Hillingdon in north-west London, which has not yet been put out to tender to the private sector, was this week put on hold.

The trust's chief executive, David McVittie said: "We have been informed that the Department of Health is now reviewing PFIs to ensure they are financially viable for the NHS as a whole. Unfortunately this means we are unable to proceed any further until this is completed."

The fate of several other planned PFI schemes hangs in the balance. Large schemes include the £696m Birmingham scheme, won by Balfour Beatty and AWG, and the £380m St Helen's scheme, where a Taylor Woodrow-led consortium are set to reach financial close but may now be delayed.

A spokesperson for Taywood said: "We are still waiting for approval but have no reason to believe that circumstances regarding St Helen's have changed in any way."

Others which are further behind in terms of financial close include the £574m Leicester scheme and the £391m North Staffordshire.