Press Release - The termination of the PFI Contract for the
National Physical Laboratory
10 May 2006
The Department for Trade and Industry successfully transferred
risk in the PFI contract to build and manage new facilities for the
National Physical Laboratory and protected the taxpayer from
bearing the majority of the costs of the project’s problems. Delays
during the construction of the new facilities meant that the DTI
did not secure the full benefits it wanted, when it wanted them.
The DTI, however, prevented the construction problems from
affecting the quality of scientific research. A National Audit
Office report published today finds that the fundamental reason for
the problems was that the original private sector design of the new
buildings was deficient and a modified PFI procurement process
might have avoided this.
In July 1998 the DTI and Laser, a special purpose company
jointly owned by Serco Group plc and John Laing plc, signed a PFI
contract for new facilities for the National Physical Laboratory,
the UK’s national standards laboratory for measurement of physical
properties such as time, length and mass. Laser sub-contracted the
design and build of the new facilities to John Laing Construction
Limited.
Laser’s sub-contractor had problems meeting the stringent
specifications for temperature and noise levels within the
laboratories. These and other problems caused delays averaging over
two years for each construction phase. Laser solved many of the
problems but a shortage of cash and its concern that it faced a
financially open-ended design issue led it to propose early
termination of the contract. The DTI agreed to the proposal and the
parties terminated the contract in December 2004.
This is the first termination of a major PFI contract in which
there were serious deficiencies in contractor performance. The
project should have been finished in 2001; it is now not expected
to be finished until 2007. So far progress with the remedial and
outstanding works is on schedule and within budget.
The NAO found that the risks to the project could have been
reduced in advance. Before agreeing to the contract, the DTI did
not resolve its concerns about Laser’s design because it believed
that Laser would surmount them and it wanted to stay true to the
principles of PFI. Following the award of the contract, the DTI did
not impose a design solution on Laser, despite continuing concerns
about the Laser’s design. This was because the DTI wanted to ensure
that responsibility for delivering buildings that met its
specification would remain unambiguously with Laser.
The contract and the way it was managed by the DTI were
effective in transferring risk to the private sector. This means
that, while the public sector has lost some of the benefits from
the use of the buildings, it has not borne the full cost of making
good deficiencies in them. The DTI has also avoided the problems of
the project affecting the quality of scientific research at the
National Physical Laboratory.
By the time the project is complete the DTI’s total investment
in the new facilities will be about £140 million. This compares
with an estimate of around £130 million for the total capital
investment in the project at the time of contract signature. The
private sector reported that it incurred a loss of at least £100
million during the construction of the new facilities.
Sir John Bourn, the head of
the National Audit Office, said today:
"The Department for Trade and Industry handled the
termination of the contract well. But different handling of the
project by all parties at the early stages might well have avoided
the problems which led to the termination."
Notes for Editors
- Press notices and reports are available from the date of
publication on the NAO website, which is at www.nao.org.uk. Hard
copies can be obtained from The Stationery Office on 0845 702
3474.
- The Comptroller and Auditor General, Sir John Bourn, is the
head of the National Audit Office which employs some 800 staff. He
and the NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 36/06
All enquiries to Barry Lester, NAO Press Office:
Tel: 020 7798 7937
Mobile: 07748 181 692