Mowlem heads a consortium picked to build and run the hospital, and Shepherd had claimed that it was promised the construction work on the job. However, Mowlem now plans to build the hospital itself.
Shepherd had tried to get compensation for its removal as contractor on the project, but it is understood that it has now settled for a non-financial compensation after a series of top-level meetings between the companies.
Neither side would comment on the terms of the settlement but issued a joint statement this week that said: “The action brought by Shepherd Construction against John Mowlem has been withdrawn and the matter settled amicably.” It said relations between the two companies are now “excellent”.
There has been speculation that the project would be axed by the government – proving to contractors that they cannot expect PFI deals to be automatically successful.
However, South Tees Acute Hospitals NHS Trust this week said it hoped to end negotiations with Mowlem by the end of July.
The project is now six months behind the deadline set by former health minister Alan Milburn when he prioritised the first wave of PFI hospitals in the summer of 1997, but the trust said it had suffered difficult circumstances.
A spokeswoman said a new, 1000-bed hospital would be created on the site of the existing South Cleveland Hospital, rather than on a greenfield site that had made preparations problematic.
The plan is to fill gaps between the wings of the existing hospital, as well as relocating beds from the Middlesbrough General Hospital and North Riding Infirmary, which would both close. The new hospital is expected to open in 2003.
The British Medical Journal this week dubbed the PFI “perfidious financial idiocy, which could destroy the NHS”.
A study in the doctors’ weekly showed that “affordability” is governing spending on PFI hospitals. This means that the level of service provided depends on assets such as land rather than on medical need.
It also argues that the deals will tie up health spending for years to come, and that trusts will have to supply more private beds to raise the cash to cover PFI costs.
Next week, the Treasury is expected to launch UK Capital, a body aimed at reinvigorating the PFI.
The public-private agency will be responsible for injecting public money into PFI schemes. This is intended to give the government more control over the profits made by contractors and banks.