The Paddington Health Campus was always going to be problematic, but nobody expected it to take so long to do so little, or for costs to rise from £360m to £827m. We tell the inside story of the PFI hospital from hell
"Seldom has so little been done by so many at such great cost to the public purse," John Randall told parliament a couple of months ago. This was the Conservative MP's Churchillian summary of the Paddington Health Campus scheme so far, and even allowing for party political rhetoric, he has a point. The hospital is one of the country's most important PFI schemes. Yet, despite being conceived in the late 1990s, it is still on the drawing board – and its troubles are far from over.

In the four years since it received government approval, the scheme has run into severe problems with size, cost and planning permission. All of which has led to a review into the feasibility of the scheme at the start of the year, carried out by the Department of Health, the Treasury and the National Audit Office. Even if the scheme receives backing from that review, it still has to be submitted for planning permission. And by December 2003 the scheme had swallowed up £5.6m in consultants' fees, nearly a half of which was spent in the last nine months of last year.

The most recent change to the plans came last month, when the Paddington Health Campus team confirmed to Building that it was considering a 15% reduction in the size of scheme. There is also the unresolved issue of moving some of the trusts' facilities into an empty office block called The Point. These difficulties have led many health contractors and funders to wonder whether it is worth pitching for the scheme, especially given the amount of other PFI work in the market.

As the three bodies proposing the scheme – the St Mary's and Royal Brompton & Harefield NHS Trusts and Imperial College – await the outcome of the review, due out later this month, Building has gained access to key documents that map out its troubled history. The documents, ranging from briefing notes to letters and reports, that reveals the bureaucratic slough the project fell into. The next four pages looks at what went wrong with the project, and the prospects for turning it around.

The yo-yo effect: Changes to size and cost
In the late 1990s, three west London healthcare providers decided that they could best meet the needs of their local populations by pooling their resources in a "campus" of health facilities. The providers in question were The Royal Brompton & Harefield hospital in Chelsea and Hillingdon, St Mary's teaching hospital in Paddington and Imperial College's national heart and lung institute. They came up with a plan to build the campus on St Mary's site.

When the initial outline business case for the project was put forward for government approval in 2000, it put a total figure of £360m on the scheme. By the end of 2003, this had grown to £827m, before being pared down below the £800m mark in the past month. In size terms, the space started at 140,000 m2, jumped to 220,000 m2, and has now dropped to 190,000 m2. How did such a variance in price and size happen?

A briefing note issued in December 2003 and obtained by Building gave the first comprehensive explanation. The key reason for the increase in size was a failure to take into account a raising of the NHS' standards for space and privacy. The briefing document lists the key budget increases to the scheme between 2000 and 2002:

  • £63m was the result of unrealistic assumptions regarding space savings in non-clinical areas (such as facilities management and offices)

  • £79m was caused by underestimating the enabling, decanting and external works costs required to relocate the hospitals onto the Paddington campus

  • £82m went to pay for a complete refurbishment of two buildings in the estate

  • £160m was the result of additional clinical space required for higher level of activities and improvements to the patient and visitor environment.

The document goes on to list the changes instigated after a "fundamental review" by the project team between 2002 and 2003. It said the scheme now took account of:

  • Higher levels of clinical activity driven by higher population growth predictions in the 2001 census. This resulted in 18% more hospital activity than had been projected in the first outline business cost

  • An increase in critical care beds from 126 to 230

  • An increase in the average area of ward-based beds from 25 m2 to 37 m2 to uphold proper privacy and dignity for patients and visitors

  • Building cost inflation, which had increased 16% in the intervening period.

All these factors pushed the overall cost to £827m, which the campus team said was "not excessive when compared to the other PFI schemes" (see the cost comparison overleaf). The note added that the closest comparison in terms of size, complexity, location and timing was with St Bartholomew's hospital in Whitechapel, east London. It says that the higher cost per square metre of Paddington compared with Bart's was "due principally to the Paddington having considerably more complex below-surface ground conditions, as well as a higher ratio of new-build to renovation". The note concludes that "while Paddington has a higher headline capital cost than Bart's, it benefits from the fact that estate currently valued at around £150m will be released as a result of the redevelopment, bringing the net investment required down to £677m".

Despite such reasoning, the sheer jump in cost attracted criticism from the national press last year; some papers claimed that the eventual cost would hit the £1bn mark. No surprise, then, that the Treasury decided to review the value for money of the scheme. And no surprise, either, that the project team then considered making cuts. The team denied it was looking to ditch either the Brompton or Harefield hospitals from the scheme in February, but last month confirmed it was looking at a 15% cut in the size of the scheme, from 220,000 m2 to 190,000 m2. It put the drop down to "working towards a different model of care where ambulatory care and chronic disease are better managed in community settings". The price attached to this new size has yet to be finalised, but it is expected to be below £800m.

Delays to planning permission Outline planning permission was first sought for the scheme in June 2000. The radical changes to the size and cost of the scheme clearly changed these initial plans, leading Westminster council to express "significant concern" over the scale of the development and its potential impact on the surrounding area.

The full impact of the changes became clear last year. Graham King, the council's head of city planning, then wrote a six-page letter to Nigel Hodson, the Paddington project director on 11 July. He stressed that the extent of the changes in the layout and scale meant a new planning application was required. Although King said the council welcomed the redevelopment he added: "However, the current proposal raises serious concerns that throw into question the suitability of the site for the scale of development being proposed. It would appear that the proposal would constitute an overdevelopment of the site and could thus be impossible to justify in planning terms."

Last month's proposal by the project team to reduce the size may have gone some way to resolve these issues. Another way of reducing the threat of overdevelopment was suggested: to use a neighbouring site. Step forward The Point, a new nine-floor office block developed by Chelsfield just to the north of the St Mary's site. This had the potential to be a win–win proposition for Chelsfield and the Paddington sponsors. The 21,871 m2 building was in search of a tenant to replace telecoms firm Orange, which had just backed out of taking a lease. Another advantage was that the building was just a pedestrian footbridge away from the proposed construction site. A few weeks after receiving the critical letter from Westminster council, property consultants GL Hearn wrote back to request a change in use of The Point from office to healthcare.

The letter, sent on 31 July, proposed that only 25% of the building would be used for healthcare purposes – the rest would be for administration and training departments.

The deal would have allowed St Mary's Trust to acquire a 37-year lease on the building; Chelsfield would fit out, operate and maintain it. Negotiations had began and the option remained a real one until the new year, when King Sturge, the property agent for the building, made noises that they were fed up with waiting for a decision and were talking with other possible tenants.

Rumours that the project team was only looking to take a small chunk of the building, were last week confirmed by a statement to Building from the Paddington Health Campus. "The Point building remains a possible option for decanting services in the short term or taking space in the long term," it said. "Either way we would be considering only a few of the floors. We are no longer actively pursuing The Point building in its entirety."

Such a move threatens to undermine the project. A briefing note from the project team in December 2003 says that a lease of the entire building was crucial to the success of the development. One section of the briefing notes reads, "The consequences of failing to lease The Point Building are serious for the PHC scheme – so much so that it may prove to be the critical 'go/no-go' decision for the scheme as a whole". The note lists seven "significant" consequences of failing to lease the building, which include: n No feasible alternative decanting plan available. To find an alternative would take six months n The size and bulking of the main scheme would still remain n The only viable long-term solution, using an adjacent Royal Mail site, is uncertain n It could delay the whole scheme by as much as two to three years.

But could there be a different way of tackling the problem? Building understands one option discussed in the past month has been to use another Chelsfield-owned site further to the east of The Point and a new Marks & Spencer head office building. This is earmarked for a Richard Rogers Partnership-designed office building called the Grand Union. It has planning permission, is a simpler site, could link to the St Mary's site over the canal and would offer at least 50,000 m2 of space. Building asked the Paddington Health Campus to comment on this. Its statement says: "We continue to evaluate all the options available in terms of the configuration of the site in the long term and how services are provided during construction. On this basis, we continue to have discussions with all our neighbours, including Chelsfield, who are major landowners in the Paddington basin area. These discussions have covered options around The Point building among others."

Not surprisingly, given the changes to the scheme, the team has yet to seek planning permission. A statement from the campus does not give a specific date for when they would submit: "We have worked hard to be in a position of preparedness to re-submit the planning application during the past few months and we have been worked closely with Westminster council on this … We are focused on ensuring that we create high quality public space and also that the design of the development equates to the surrounding area. The council is working with us to develop our plans."

Team of external consultants

The Paddington Health Campus has already swallowed £5.6m in fees up to 31 December 2003 – as was revealed in a parliamentary answer by health minister John Hutton to his Conservative shadow Andrew Lansley at the end of March. The list of more than 20 external consultants advising on the scheme includes:

Finance Pricewaterhouse Coopers, Flaxman Associates
Legal Berwin Leighton Paisner Lead technical consortium adviser/services engineering Integrated Building Services
Quantity surveyor Davis Langdon
Architects Sheppard Robson/Studio 4/Tangram
Imperial College services engineering Norman Disney Young
Structural engineering WSP
Town planning GL Hearn/Savel Bird & Axon/Arup Environmental
Outline business case Hornagold & Hills
Hard and soft facilities management EC Harris
Staff accommodation Hunter & Partners

An uneasy market: Who’ll do the job?

Contractors expressed concern last year that the Paddington job would overheat the PFI market. Carillion and Mowlem ruled themselves out of the bidding and others expressed doubts over whether they had the staff to do the work. Bill Tallis, the director of the Major Contractors Group, summed up the problem last August. “Markets do not cope well with peak flows,” he said. “In the rush hour, you don’t get a seat on the Tube.”

The uncertainty raised by the changing scope and three-way review into the project has done nothing to lessen that concern. When other schemes are available around the country, why bother with one wracked by such unpredictability?

Building understands that Bovis Lend Lease will not be bidding for the scheme. “There’s a limit to how many jobs we can bid for in terms of resources,” a source at the contractor said.

Skanska and Bouygues, which bid for the Bart’s scheme, still seem to be hedging their bets. Bouygues is “still considering it”, according to a source, and Skanska is monitoring events, but some raise doubts about the firm’s ability to take on two major London hospital projects. The political sensitivity surrounding the job – there is a protest group opposing the Harefield Hospital closure as well as union opposition – is also putting bidders off, according to one PFI consultant. “The risk is every time something goes wrong on the job it will be on the front page of the Evening Standard,” he says.

Contractors feel uncertain about the future of the scheme. One who has been monitoring the project says: “In terms of timing, nobody seems to know now. It was always close to the horizon until a couple of months ago – now it’s gone slightly beyond that.” A statement for the health campus dismisses such fears, claiming that there are interested bidders. It says: “We are currently in discussion with providers about the project. The providers we have spoken to are excited about this opportunity as a flagship development for health in the UK. The market soundings from our advisers Partnerships UK and Pricewaterhouse Coopers are very positive.”

The politics game: Who backs it?

The government appears convinced that the project is the best option. In December 2003, health minister John Hutton (pictured) wrote to Karen Buck, the Labour MP for Regent’s Park and Kensington North, to confirm that there was to be a review into the outline business case for the scheme. The letter said: “I remain confident that this analysis will show that the project has been properly managed, and that all the changes to date relate to legitimate NHS-led service considerations. We believe that this work will demonstrate that the Paddington Basin Campus remains the best value for money and should proceed.”

The next best option, or “do-minimum option”, laid out in the team’s briefing note of last December, is to base the scheme in Fulham Road in Chelsea. It puts the cost for that at £697m, but the proceeds from sale of land would be £40m compared with £150m for the Paddington option. The net investment would be £647m compared with £677m at Paddington. The note concludes that despite this being less, the operational costs at Fulham Road would be higher and the non-financial benefits would be less. Speaking in parliament on 23 March, Hutton said that he strongly agreed that the “do-nothing option is not a serious possibility for us”.

The expectation among sources close to the project team and government is that the scheme would receive backing from the review with strict and tight boundaries. A source close to the Treasury said last month that the project had been tarnished.

He said: “There is a feeling that it got a little bit out of control – which may or may not be true. But perception is everything in politics.”

The Paddington team’s response

Building asked the Paddington Health Campus team to respond to the perception among many in the marketplace that the whole process of getting the scheme out to the market has been mismanaged. This is its response:

“PHC is a large and complex scheme scheduled for completion more than 10 years hence. By definition, plans must evolve to reflect:

  • New requirements for space and facilities.

  • Changing trends in clinical management of certain conditions (for example, chronic disease, ambulatory care, and so on), which mean that acute hospitals will work differently in the future.

  • The development of the models best suited to the integration of clinical and research work between the three organisations.

  • The evaluation of options to support the decanting of working services during the construction period.

  • The work to update the outline business case demonstrates our commitment to reach consensus on the best scheme, with maximum flexibility. The work we are doing and the project team itself have been supported in this throughout by the North West London Strategic Health Authority.”