Department of Health: The Paddington Health Campus Scheme

department of healthThe Paddington Health Campus schemeREPORT BY THE COMPTROLLER AND AUDITOR GENERAL | HC 1045 Session 2005-2006 | 19 May 2006

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DEPARTMENT of healthThe Paddington Health Campus schemeLONDON: The Stationery Office£10.75Ordered by theHouse of Commonsto be printed on 16 May 2006REPORT BY THE COMPTROLLER AND AUDITOR GENERAL | HC 1045 Session 2005-2006 | 19 May 2006

contentssummary 4This report has been prepared underSection 6 of the National Audit Act 1983for presentation to the House of Commonsin accordance with Section 9 of the Act.John BournComptroller and Auditor GeneralNational Audit Office12 May 2006The National Audit Officestudy team consisted of:Ashley McDougall and Will Palmer,under the direction of Karen TaylorThis report can be found on the NationalAudit Office web site at www.nao.org.ukFor further information about theNational Audit Office please contact:National Audit OfficePress Office157-197 Buckingham Palace RoadVictoriaLondonSW1W 9SPTel: 020 7798 7400Email: enquiries@nao.gsi.gov.uk© National Audit Office 2006Part 1There was a strong case for investment 10in the NHS in west LondonIntroduction 11There were strong clinical drivers supporting the 12proposed Paddington Health CampusThe original vision of the Campus fully addressed 12the main objectives of the Campus partnersThe report will consider why the Campus 13scheme collapsed and was cancelledPart 2The way the Campus partners 14approached the scheme exacerbatedthe risksThere were complex intrinsic project, 15organisational and policy risks for theCampus scheme

Part 3The Campus partners were unable to 22agree a deliverable schemeThe Campus partners were unable to secure 23adequate land for the schemeThe Campus partners, and others, differed over 26whether the scheme was affordableCapacity planning in 2005 indicated that the 27local NHS in north west London needed toreduce capacity by 500 to 600 bedsPart 5The way ahead is challenging for 36all partiesGlossary 38Appendices1 Chronology of the Paddington Health 41Campus scheme2 External reviews of the Campus scheme 44Part 4There was a lack of clarity in key 32accountabilities and rolesAccountability for the scheme was uncertain 33The 2002 NHS reorganisation disrupted 35the scheme3 Methodology 464 The opportunity cost of delay in taking 47forward the Campus scheme5 Relevant recommendations from previous 48Committee of Public Accounts’ reportsPhotographs and images courtesy of St Mary’s NHS Trust, Smoothe and Skidmore, Owings & Merrill.

summary1The principal organisations involved in the Paddington Health Campus scheme (2002–2005)Westminster City CouncilOffered to sell school site to scheme in October 2004 and inFebruary 2005 offered to assemble land package suitablefor schemePaddington Development Corporation Limited (PDCL)Owner and developer of land adjoining NHS land inPaddington. Offered land North of canal in April 2004and entered Collaboration Agreement with NHS Trusts inAugust 2004 to develop land deal.Department of HealthUltimate accountability for health spending and, fromOctober 2003, responsible for granting or withholdingapproval of the Outline Business Case. Private Finance Unitguides Trusts developing PFI schemesNorth West London Strategic Health Authority (SHA)(From April 2002 1 ) Performance manage local NHS and approveOutline Business Case (non-Voting member of Joint Project Board)St Mary’s NHS TrustAcute teaching hospital(Voting member) 2Royal Brompton andHarefield NHS TrustSpecialist and researchhospital (Voting member)Imperial College LondonUniversity Faculty ofMedicine (Voting memberfrom June 2003)Partnerships UKProcurement partner(Voting member fromNovember 2002)Principals’ Group 3(from August 2004)To facilitate rapid negotiationson land dealJoint Project Board(from May 2002)implementation and decisionmakingbody for schemeCommissioning Board(from March 2004)Chaired by SHA to resolvestrategic commissioning issuesand to secure supportfrom commissionersProject Executive Group(from March 2004)Chaired by Project DirectorWeekly running of projectSix local Primary Care Trustsresponsible for purchasinghealthcare for patientsfrom hospitalsSource: National Audit OfficeNOTES1 The project was initially sponsored by the West London Partnership Forum. The Forum oversaw the scheme through its Paddington Basin Project Boardfrom April 2000 to March 2002.2 The other non-voting members of the Joint Project Board were the North West London Strategic Health Authority and the Kensington and Chelsea,Westminster and Brent Primary Care Trusts.3 The Principals’ Group comprised the Chairs, Chief Executives, Finance Directors and nominated Non-Executive Directors of the two NHS Trusts, theProject Director, the Paddington Health Campus land negotiator, the Chief Executive and Chair of the North West London Strategic Health Authority, andrepresentatives from Imperial College London, the Department of Health (until January 2005) and Partnerships UK. It was chaired by the Strategic HealthAuthority. It was not a formal part of the Campus accountability framework but met every week.The Paddington Health Campus scheme

summary8 While the Campus partners were rightly committed toovercoming obstacles, we believe the failure to have a criticalchallenge led to wasted and misdirected effort and expense.The Strategic Health Authority should have either requiredthat the Campus partners draw up a new OBC in early 2003or cancelled the Campus scheme. Cancelling the scheme atthat point would have freed resources and organisations todevelop other schemes. Developing a new OBC would, webelieve, have led sooner to the robust assessment of whetherthe partners could afford to build the scheme and address the:nnnmore than doubling of the forecast capital cost;absence of adequate land, in the light of planningconstraints; andlack of available funds to build the scheme.9 A further two years were spent exploring a variety ofalternative schemes. In 2003 the Campus partners, stronglyencouraged by the Strategic Health Authority, developedOutline and Full Business Cases to acquire The Point buildingbeside St Mary’s hospital in 2003. From Summer 2004onwards the Campus partners developed a new OBC forthe whole scheme, at the request of the Chief Secretary tothe Treasury. In the event, in May 2005 the Campus partnerscould not agree a revised OBC.Summary of key findingsThe scheme partners underestimated the risksto the scheme10 The Campus scheme faced a number of significantrisks, due in part to its intrinsic complexity and thetimescale over which it was being planned. The timescaleitself led to additional risks due to the impact on designassumptions of new national policies for the NHSintroduced while the scheme was being developed. Theserisks included project risks, in particular the mismatchbetween the size of the scheme and the land and fundingavailable, and the impact of ‘consumerism’ guidelines onspace in new hospital building schemes. There were alsopolicy risks because of the change in the structure of theNHS, with the creation of Strategic Health Authorities andPrimary Care Trusts, and the implications for this schemeof Payment by Results and patient choice that could nothave been foreseen by the Campus partners.11 The Department of Health (the Department) iscurrently reviewing how the commissioning of majorcapital schemes through PFI can be reconciled withlong-term affordability and policies on choice, Paymentby Results and the movement of care away from acutehospitals to the primary care sector.12 Any one set of the above project or policy riskswould have been challenging. However, the layering ofrisks upon risks without adequate mitigation or an effectiverisk management strategy made the scheme particularlyvulnerable and reduced its chances of success.13 The Campus partners failed to address some of therequirements of the Department’s Capital Investment Manualin developing an OBC. For example, they did not draw upa risk register as part of the 2000 OBC or carry out a formalreappraisal of the 2000 OBC when its estimated capital costincreased by more than 10 per cent. Whilst the Campuspartners drew up ‘snapshot’ risk registers on three occasions(summer 2001, autumn 2003 and autumn 2004), in summerand autumn 2004 the Project Director made a deliberatedecision not to embed risk management processes in thescheme as the scheme did not have sufficient resources orcapacity to do so at the same time as drawing up a newOBC. As a result, the lack of structured and integrated riskmanagement processes was a key contributor to the Campuspartners’ collective inability to realise fully and act earlier onthe threats to the viability of the scheme.14 The biggest single constraint throughout the lifeof the scheme, was that the NHS failed to identify anadequate land requirement before securing the originalOBC approval in 2000. As the Campus partners developedthe scheme, their land requirements became clearer andnew schemes emerged which had different land and spacerequirements. It was over two years after the 2000 OBCwas approved that the Campus partners realised they didnot own enough land to make the Campus work withinWestminster City Council’s planning policy. They thereforeneeded to acquire additional land.15 From early 2003 on, the Campus partners explored anumber of complex ways of addressing the scheme’s spacerequirements but without any satisfactory resolution. Thisincluded, in early 2005, exploring an offer from WestminsterCity Council to assemble a land package suitable for thescheme as required by the December 2004 OBC, althoughwithout any written parameters but ultimately subject toapproval by Trust Boards.The Paddington Health Campus scheme

summary16 The Comptroller and Auditor General has expressedhis concern that the need to have transactions off balancesheets was inappropriately distorting decision making. 2This was a contributing issue in the struggle to develop anaffordable Campus scheme as the Campus partners believedthat the Department would not accept any OBC if the OBCor supporting land deal was on balance sheet. However,the Campus partners’ December 2004 OBC was supportedby an embryonic land deal which, at that stage, was onbalance sheet. The Department did not have the resourcesat that time to fund such a deal and the NHS Trusts couldnot afford to put it on their own balance sheets. The landdeal supporting the OBC had to be developed and improvedto reflect this view and other matters relating to the overallaffordability of the deal.17 All Campus partners agreed that the scheme had tobe affordable within local NHS resources. In early 2003they had a gap of £53 million between available revenueand the expected running costs of the scheme. Although allparties agreed that the December 2004 OBC was affordableunder the existing funding regime, they also recognisedthat short-term support would be required to support theland deal. However they could not agree that the May 2005Addendum to the OBC was affordable. Constantly changingforecasts of revenue, based on evolving Departmentalguidance, and the cost of the land deal also underminedthe confidence of the North West London Strategic HealthAuthority and Royal Brompton and Harefield NHS Trust.Concern over whether the scheme was affordable was oneof the reasons the Royal Brompton and Harefield NHSTrust Board was unable to recommend the final OBC to theStrategic Health Authority for approval.The way in which the scheme partnersorganised and carried through the schemedid not maximise their chances of success18 When it entered the Campus scheme in 2000, theRoyal Brompton and Harefield NHS Trust set out, as apre-condition, that a merger with St Mary’s NHS Trust wasnot an option. It was concerned that a merger between thetwo Trusts would undermine its capacity to provide thevery different patterns of service it delivered to patients.St Mary’s set no such condition. Whilst the NHS CapitalInvestment Manual assumes a single sponsor for capitalinvestment projects, the then London Regional Officeof the NHS sanctioned the joint arrangements whenapproving the OBC. The Department believed a mergerwas desirable and inevitable once contracts for theCampus scheme had been signed, but did not press fora merger because it recognised that such a request at thestart of the scheme would have brought it to a halt.19 Although there were three Campus partners, thescheme did not have a single sponsor or single AccountableOfficer. In 2004 the Department stated that the ChiefExecutives of St Mary’s and Royal Brompton and HarefieldNHS Trusts and the Rector of Imperial College were eachAccountable Officers for expenditure incurred by their ownorganisations on the scheme. The Campus partners thoughtthere were two (or three) Senior Responsible Owners andthe Chief Executive of St Mary's considered he was theAccountable Officer for the scheme. At the time, therewas no resolution on who, if anyone, was the AccountableOfficer for the scheme.20 The Committee of Public Accounts has expressedconcern in the past on the risks to capital investmentschemes of complex partnership arrangements 3 , and hasrecommended that capital projects should have clearaccountability arrangements and a single project sponsor.The lack of clear leadership and authority for decisionmaking was one of the factors that undermined thescheme’s progress.2 Public Accounts Commission, Twelfth Report of Session 2003-04.3 Committee of Public Accounts The English National Stadium Project at Wembley, Eighth Report 2003-04, HC 254; The Millennium Dome, Fourteenth Report2001-02, HC 516; The Cancellation of the Benefits Payment Card Project, Third Report 2001-02, HC 358; Department of Health: Cost Over-runs, FundingProblems and Delays on Guy’s Hospital Phase III Development, Twenty-eighth Report 1998-99, HC 289.The Paddington Health Campus scheme

summary21 Ultimately, in addition to the land and affordabilityissues, it was the differing financial and clinical interestsof the two NHS Trusts that led to St Mary’s NHS Trustapproving the revised business case in 2005 and theRoyal Brompton and Harefield NHS Trust declining torecommend it for approval. This reflected, in part, the lackof confidence on the part of the Brompton in St Mary’sability to deliver savings and manage a forecast deficitwithout compromising the Campus vision.22 Throughout the development stage, the scheme washandicapped by the Campus partners’ failure to provideor secure adequate funding to develop the scheme.Available development funding was based on a proportionof the original estimated OBC cost of £360 4 million,not the approximately £894 million it would have cost.The scheme relied on funding from the Strategic HealthAuthority and Primary Care Trusts. However, between2002 and 2005 the scheme was unable to secure sufficientproject funding from them and the Trusts themselves feltunable to find funding from within their own resources.Instead, the continuation of the scheme was reliant on£4.9 million in funding from co-sponsor PartnershipsUK. As a result of the earlier inadequate funding anduncertainty about the future of the scheme, it was severelyunder-resourced in manpower and capability.The strategic support for the PaddingtonHealth Campus vision was unsatisfactory23 The Department provided support andencouragement to the Campus partners – mainly on thefinancial challenges facing the scheme – both through itsmembership of the Principals’ Group and access to thesenior responsible official at the Department. It also setout its assessment of the conditions necessary for successon numerous occasions and offered limited capital andrevenue funding to support the scheme.24 However, the Department had no strategic positionon the desirability to the NHS or ’UK plc’ of a successfulhealth Campus. It did not share the Campus partners’ viewthat this was a scheme of national importance. As a matterof policy the scheme was treated as the responsibility ofthe local NHS to resolve, as budgets had been devolvedto local NHS organisations. The two NHS Trusts,Partnerships UK and Westminster City Council told usthat they had been uncertain whether the Department didin fact want the Campus scheme to succeed, while theDepartment has explained that it was willing to supportan affordable scheme.25 The Department was clear that its two roles inrespect of the scheme were a) to offer advice on schemeparticulars and development and b) to consider the FullBusiness Case. Approval of the 2000 OBC was delegatedto the London Regional Office of the NHS and theDepartment played no role at that stage. The Department,from mid-2004, expressed its concerns as to the viabilityof the scheme. At no point did it ask the Campus partnersto carry out further work on the scheme but it respondedpositively to requests that the scheme be allowed time toexplore new opportunities.26 The Campus partners believe the Departmentplayed a more active role than this suggests. Nosubstantive steps were taken by the Campus partnersfrom April 2004 to May 2005 without the consent of thesenior responsible official at the Department. The Campuspartners believed they had political strategic support foran affordable scheme.4 The development funding was based on the full £360 million cost of the 2000 OBC, but £27 million related to other hospitals and £33 million to equipmentcosts so the capital construction cost of the Paddington scheme was only £300 million.The Paddington Health Campus scheme

ecommendations27 The circumstances under which the PaddingtonHealth Campus scheme collapsed were unique. It facedscheme-specific constraints on site, size and complexity ofgovernance arrangements for three sponsors. Nevertheless,we consider that there are lessons for all NHS capitalinvestment schemes which need to be reflected in anyguidance used by Trusts. We recommend that:abcdThe Department should implement its own CapitalInvestment Manual guidance on reassessing OBCs ifestimated capital construction costs rise more than10 per cent above approved OBC values.No capital investment scheme in the NHS shouldproceed without the formal identification of a singlesponsor, even if this means Trusts must merge priorto starting a procurement.No OBC should be approved where it has beensubject to conditions imposed by an NHS Trustwhich explicitly constrain the development ofoptions or limit value for money that may be secured.Any approval conditions on OBCs should be subjectto a formal review timetable under which theapproving authority will review and document thecontinued viability or acceptability of the scheme.efghiNo scheme should proceed without formalconfirmation from commissioners, who wouldbe expected to support the scheme, and theNHS Trusts themselves, of assured funding for fulldevelopment costs.Third parties negotiating on behalf of NHS Trustsshould only do so under written instructions.The Department should ensure that formal timetablesare drawn up and followed for the identification andtransfer of scheme responsibilities and commitmentsin periods of NHS reorganisation.The Department should ensure that the lessonslearned above are incorporated into the CapitalInvestment Manual.The Department should consider and performancemanage capital investment schemes with a nationaldimension within the context of a national strategyfor NHS capacity planning.The Paddington Health Campus scheme

part onePart oneThere was a strong case for investmentin the NHS in west London10The Paddington Health Campus scheme

part oneIntroduction1.1 The Paddington Health Campus scheme, firstproposed in 1998, was aimed at bringing together,on a single Campus in the Paddington Basin, theclinical services of St Mary’s NHS Trust and theRoyal Brompton and Harefield NHS Trust – alongsidenew research facilities for Imperial College’s Facultyof Medicine, moved from the Royal Brompton andHarefield campuses. These three organisations arereferred to collectively in this report as the Campuspartners (Figure 2).2The Campus partnersSt Mary’s NHS Trust is a large teaching hospital employing3,300 staff. It is a multi-site Trust which largely occupies outdatedand run-down accommodation in and around Paddington.More than 60 per cent of the buildings at the Trust were longoverdue for decommissioning with many failing to meet Healthand Safety and Disability Discrimination Act requirements. Thebasic remedial maintenance required to correct unchecked estatedegradation had a cost of almost £74 million and the estimatedcost to update buildings to modern standards was £465 million.The Royal Brompton and Harefield NHS Trust was created by aTrust merger in 1998 and provides a complete range of specialistheart and lung services through its 2,300 employees. Doctors andscientists working at the Trust and the National Heart and LungInstitute undertake internationally recognized research into heartand lung disease treatment. Approximately two-thirds of patientaccommodation was both over 70 years old and fell below theminimum suitable condition. 2 The basic remedial maintenancerequired to correct unchecked estate degradation had a cost ofalmost £21 million and the estimated cost to update buildings tomodern standards was £294 million.Imperial College of Science, Technology and Medicine has aworld-wide reputation as a centre of excellence for teaching andresearch in science and medicine. The Imperial College Facultyof Medicine is one of the largest and most prestigious centresof biomedical research and teaching in the UK, with over700 faculty members active in research. As a result of theproposed moves of the NHS hospitals from the Royal Bromptonand from the Harefield Campuses, it was necessary also torelocate Imperial College’s closely associated research andteaching facilities, particularly its National Heart and LungInstitute, from these campuses to the proposed PaddingtonHealth Campus.Source: 2004 OBC and National Audit OfficeNoteS1 Partnerships UK became a co-sponsor of the Campus scheme with effect from July 2002 when it agreed a Development Partnership Agreement with thetwo NHS Trusts.2 Condition B as defined in NHS Estate Code: sound, operationally safe and exhibits only minor deterioration.The Paddington Health Campus scheme11

part oneThere were strong clinical driverssupporting the proposed PaddingtonHealth Campus1.2 The clinical case for the Paddington Health Campuswas based on a number of reviews into health provisionand specialised health services in London. In 1997 theTurnberg report set out a number of recommendations,all of which received Government acceptance, to definethe wider London healthcare strategy. The Turnberg reportargued for:nnnnna modernisation of London’s hospitals;integrated working both within the NHS and withother partners;alignment of specialist commissioning with Londonmedical school groupings;Imperial College being responsible for the academicfocus in north west London; anda more rational distribution of specialist services innorth west London.These points were all cited in the 2000 OBC forthe Campus.1.3 Subsequent clinical reviews of specialistservices indicated:nnthe need for a single specialist paediatric centre, toreplace the then current services fragmented overfive sites (the Boyd Report 1998); andthe desirability of concentrating heart services ontwo sites in west London, rather than four as was thecase (the English Report 1998).The original vision of the Campusfully addressed the main objectivesof the Campus partners1.4 In October 2000, following on from a StrategicOutline Case prepared in 1998, the then London RegionalOffice of the NHS, acting under delegated authority fromthe Department of Health, approved an OBC for thePaddington Health Campus drawn up under the auspicesof the West London Partnership Forum. Neither theDepartment nor HM Treasury played any rolein approving this business case. The intention of the2000 OBC was to address the recommendations made inthe Turnberg Report and subsequent specialist reviews andthe condition of the Trusts’ estates. The preferred optionwithin the OBC called for the:nnnrationalisation of specialist services (paediatric andheart and lung) centring on Paddington;redevelopment of St Mary’s Hospital; andinvestment in associated facilities byImperial College.1.5 The 2000 OBC had an estimated gross capitalcost of £300 million 5 and a completion date of 2006. Itinvolved separate hospitals for St Mary’s NHS Trust andRoyal Brompton and Harefield NHS Trust on the proposedhealth campus. A map of the then existing site is at Map Aand a map of the Campus vision is at Map B (see centrepage map section, page 28).5 The figure of £360 million usually associated with the 2000 OBC included capital expenditure on a number of other hospitals and equipment. The figure of£300 million is comparable in scope to the later scheme valuations used in this report.12The Paddington Health Campus scheme

part oneThe report will consider why theCampus scheme collapsed andwas cancelled1.6 In May 2005 the Campus scheme collapsed asthe Royal Brompton and Harefield NHS Trust did notrecommend an Addendum to a revised OBC forapproval by the Strategic Health Authority afterfive years and £14.9 million in direct costs. The StrategicHealth Authority then recommended that the scheme becancelled and in June 2005 the Minister at the Departmentconfirmed that the project could be formally cancelled.The scheme did not proceed as far as the selection of a PFIpartner or exchange of contracts so, given that there wasno deal, it is not possible to comment on the valuefor money of any proposed procurement route.1.7 This examination was prompted in part bycorrespondence from four Members of Parliament in 2005expressing concern at the cancellation of the Campusscheme and what they felt was a lack of clarity onaccountability for the collapse.1.8 The study scope is limited to the immediate andunderlying causes for the collapse of the scheme inMay 2005, rather than the chronological story of how thescheme progressed from Strategic Outline Case in 1998to cancellation in June 2005 (a chronology of events is atAppendix 1). The report considers:nnnthe risks faced by the Campus partners and how theyapproached the task (Part 2);the progress made by the Campus partners inimplementing the 2000 OBC (Part 3);roles and accountability in the scheme (Part 4); andn the way ahead for all parties (Part 5).1.9 The report is based on documentary evidence from,and interviews with, all relevant stakeholders and alsodraws on the findings of a number of external reviewsof the scheme, including the Independent Review Panel’s‘Lessons Learned’ Report commissioned by the North WestLondon Strategic Health Authority in July 2005and published by the Strategic Health Authority inOctober 2005 6 (Appendix 2). The full methodologyis at Appendix 3.6 Final Report to the North West London Strategic Health Authority from the Independent Review Panel: Lessons Learned from the Paddington Health CampusProject http://www.nwlondon.nhs.uk/featuredInformation/download/board18Oct05/PHCLessonsFinal.doc.The Paddington Health Campus scheme13

part twoPart TwoThe way the Campus partners approached the schemeexacerbated the risks14The Paddington Health Campus scheme

part two2.1 This part of the report focuses on the risks faced bythe Campus partners in delivering the scheme outlined inthe 2000 OBC and the way in which the Campus partnersattempted to manage those risks.There were complex intrinsicproject, organisational and policyrisks for the Campus scheme2.2 The Campus scheme, like other major capitalschemes faced multiple layers of risk: intrinsic projectrisk, organisational risk and policy risk. However thescale and complexity of the scheme meant that theserisks were exacerbated by the ways in which the Campuspartners chose to address them. In addition, the schemewas based on the 2000 OBC which the 2004 JointReview (Appendix 2) found was produced at speed andcontained a number of errors and omissions such that itwas not deliverable at the price within the OBC.Intrinsic project risk2.3 These are risks faced by any major capitalinvestment. The only NHS-specific risks relate to theclinical content. All capital investments must managethese risks. Many struggle unsuccessfully to balance time,cost and quality. None will succeed without good risk,project and programme management.2.4 A major project risk affecting affordability is thatof the history of cost escalation for large NHS schemes.All large NHS capital investments (schemes above£75 million) cost significantly more than their initialOBCs. For major schemes either in planning or buildstage, the average cost increase above the original OBCis 117 per cent (Figure 3 overleaf). In the case of theCampus scheme it was late 2002 before the Campuspartners realised, for the first time, that, because of theinadequate 2000 OBC, the likely full costs of deliveringthe scheme had more than doubled to £786 million(excluding optimism bias).2.5 In the case of the Campus scheme, the 2000 OBComitted any material cost relating to how St Mary’shospital would be kept operational while the newhospitals were built on the St Mary’s site – the decantstrategy. The original OBC allowed £1 million for this.The Campus partners’ 2003 estimate was for £80 millionfor what was, by then, a completely different schemebecause the Campus’s space requirements grew duringits development.The Paddington Health Campus scheme15

part two2.6 Securing planning permission is a standard riskthat needs to be managed. The NHS Capital InvestmentManual states that Trusts are expected to obtain outlineplanning permission for the site to be developed priorto advertising the scheme in the Official Journal of theEuropean Union (OJEU). In the case of the Campusscheme the partners did not expect planning permissionto pose a threat to the viability of the scheme. After atendering exercise in 1999, the Kensington, Chelseaand Westminster Health Authority appointed Skidmore,Owings & Merrill (SOM) as consultant architects, at a costof £35,000, to undertake a seven week study to identifya Master Plan and Urban Design Strategy. The work waslater extended to cover an Outline Planning Applicationfor the selected Master Plan.3Increases in estimated capital cost since original OBC for NHS capital schemes over £75 millionCost increase, %200180Increase since OBC stage160140120Average increase, 117%100806040200Paddington Health CampusRoyal Wolverhampton Hospitals NHS TrustPeterborough & Stamford Hospitals NHS Foundation TrustEssex Rivers Healthcare NHS TrustCentral Manchester & Manchester Children's Hospitals NHS TrustMid-Essex Hospital Services NHS TrustNewcastle upon Tyne Hospitals NHS TrustMaidstone & Tunbridge Wells NHS TrustUniversity Hospital Birmingham NHS Foundation TrustBarts & The London NHS TrustWhipps Cross University Hospital NHS TrustUniversity Hospitals of Leicester NHS TrustSalford Royal Hospitals NHS TrustSt Helens & Knowsley Hospitals NHS TrustLeeds Teaching Hospitals NHS TrustUniversity Hospital of North Staffordshire NHS TrustPortsmouth Hospitals NHS TrustMid Yorkshire Hospitals NHS TrustSource: Draft memorandum received from the Department of Health containing replies to a Written Questionnaire from the Health Select Committee, HC 736(iii)1, Session 2005-06, December 2005. Figure for Paddington Health Campus calculated by National Audit Office.16The Paddington Health Campus scheme

part two2.7 After spending £1,040,000 in total with SOMon design fees for a planning application prepared inaccordance with an agreed development brief, the schemefailed to secure outline planning permission adequatefor the development. 7 Outline Planning Permissionwas agreed in principle by Westminster City Councilin August 2002, subject to the completion of a legalagreement. In the event the planning permission was notissued as the scheme had moved on.2.8 In the negotiations with the Campus partners on theAugust 2002 scheme, Westminster City Council’s planningdepartment had stressed the maximum bulk and scalethat could be recommended for the site and thereforebelieved the partners to be aware of its planning concernsbefore November 2002. In November 2002 the Council’splanners advised that the scheme, which was by thensignificantly different from the August 2002 scheme, wastoo large for the existing site (by one floor for St Mary’sand two floors for the Royal Brompton and Harefield’sproposed buildings). This required the partners to acquireadditional land to address the building design issues.2.9 Procurement of a major capital investment of thescale of the Campus scheme is a one-off event and fewif any NHS Trusts or Boards have the necessary skills forsuch a scheme. In November 2002, the Campus partnersappointed Partnerships UK (PUK) as a procurementco-sponsor for the scheme (backdated to 1 July 2002).St Mary’s NHS Trust told us that Campus partners assumedthat with the degree of expertise that PUK brought,they had the best available advice on the managementof complex PFI projects in the NHS. This included theprocurement of advisers and property advice.2.10 PUK’s role was to work with the Campus partners toachieve the successful procurement of a contract for thescheme in a timely and efficient manner. PUK also agreedto fund 50 per cent of internal and third party projectdevelopment costs up to a maximum of £6 million andshare any value for money savings from a signed contract.2.11 If the scheme was cancelled by the Campus partnersPUK would recover its direct costs and project funding.Once the scheme was cancelled, when the Royal Bromptonand Harefield NHS Trust did not recommend the May 2005Addendum to the OBC for approval, PUK was thereforeentitled to recover its investment. In October 2005 theTrusts agreed to settle the amount due to PUK whichrepresented £1.1 million in direct costs, £4.8 million forthird party and internal project development costs fundedby PUK and £0.1 million in interest charges for deferredpayment. The NHS Trusts agreed to pay these amounts,in broadly equal proportions in April 2006, because ofcash-flow problems in the NHS in the North West LondonStrategic Health Authority. The Strategic Health Authorityhas agreed to reimburse the two Trusts £1 million eachtowards the settlement of the sums due to PUK.Organisational risk2.12 This refers to the additional risks introduced tothe successful delivery of the project by the Campuspartners themselves. They include project sponsorship;risk management; project management; and clinical andpublic support.Project sponsor2.13 A key risk in this area was the decision of the twoNHS Trusts to enter the Campus scheme as separate, ratherthan merged, organisations. This prevented the schemehaving a single management chain capable of actingquickly and decisively on the areas within its control andassessing risks on a consistent basis. The Royal Bromptonand Harefield NHS Trust Board had formally identified aTrust merger as an unacceptable option and a conditionwhose breach would remove its support for the Campusscheme. The concern was that a corporate merger,undertaken for mainly project reasons, might makethe delivery of the campus easier, but that the resultingmerged hospital would so change the nature of theservices it was able to deliver that a primary purpose ofimproved specialist services would have been jeopardised.The Department believed a merger was desirable but didnot propose one at the start of the scheme as it believedsuch a requirement would stop the scheme.7 Initial payments were made by Kensington, Chelsea and Westminster Health Authority on behalf of the West London Partnership Forum until October 2000,after which St Mary’s NHS Trust hosted payments in accordance with its Standing Financial Instructions. Kensington, Chelsea and Westminster Health Authoritywaived its Standing Financial Instructions to take account of the increased cost as the Paddington Basin Steering Group judged the time required to tender thework would have delayed the planning application unacceptably. The only other material breach of procurement guidelines was the contract with Mike FlaxmanAssociates, let in 2000 on the basis of a cost estimated by the Campus partners at £75,000 for consultancy on NHS financial matters. The work was not tendereduntil 2002 by which time Mike Flaxman Associates had been paid £173,000. In total they were paid £460,000 between March 2000 and June 2005.The Paddington Health Campus scheme17

part twoRisk management2.14 The NHS Capital Investment Manual requires NHSTrusts to assess risk at a level sufficient to assure the Trustthat the preferred option in an OBC is affordable andrepresents the optimum solution. The 2000 OBC did nothave a risk register. In early 2001 the Campus partnerscommissioned a risk assessment from Ernst & Young whichwas delivered in May 2001. It was a static assessmentand was not integrated into the scheme’s ongoingmanagement. While there were plans to update theassessment in 2002, it was not updated until the autumnof 2003. A further update took place in the autumn of2004 and was incorporated into the 2004 OBC.2.15 There were a number of areas specific to the Campusscheme which were not covered in the risk assessments.There was no risk/impact assessment of;nnnnhaving two sponsor NHS Trusts and three SeniorResponsible Officers;commissioners’ reluctance to support the scheme’sdevelopment costs;the absence of strategic support; orthe cost-benefit implications of Imperial College’sresearch to the vision of the Campus.Although the Campus partners recognised the need toaddress the final bullet after the 2003 Gateway review(Appendix 2), they were unable to identify an appropriatemethodology to quantify either risk or benefit inconjunction with Imperial College.2.16 None of the risk assessments were used in astructured way as active risk registers for the ongoingmanagement of the scheme. As the 2005 IndependentReview Panel noted (Appendix 2), in 2003 the schemewas focussed on procurement when in reality it stillneeded to satisfy the pre-conditions of a robust OutlineBusiness Case.2.17 Following the Gateway review in November 2003(Appendix 2), the Campus partners accepted the needto introduce and embed a risk register, assumptionslog and issues log as primary project control tools.However, during the summer and autumn of 2004 theProject Director recognised that the project team didnot have the capacity, or financial resources, to absorbsignificantly different ways of working at the same timeas producing a new OBC. The Project Director decidedto concentrate on the OBC with the firm intention ofintroducing the Gateway recommendations for projectcontrols immediately after submission of the revised OBC.The Campus partners’ December 2004 OBC included arisk management strategy, an updated risk register and thecommitment to an active risk management process.Project management2.18 In October 2000, the Department’s guidance onfunding operational planning for PFI schemes was thatthe then London Regional Office would re-imburse thescheme with 1. 75 per cent of the capital costs to fund thecost of developing the scheme to Full Business Case. Thescheme, with projected capital costs in the 2000 OBC of£360 million was therefore based on a funding ceiling of£6.3 million. The project team understood that this couldnot vary, despite the significant increase in the estimatedcapital cost of the scheme.2.19 The abolition of NHS Regional Offices inMarch 2002 transferred the responsibility for fundingproject costs to the local NHS. The North West LondonStrategic Health Authority provided £2 million for projectcosts in 2002/03 and £1.5 million in 2003/04. Howeverfrom April 2004 the eight main commissioning PrimaryCare Trusts only agreed to cover half the sum sought fromthem. PUK agreed to match this funding.2.20 The Royal Brompton and Harefield NHS Trust hadactivity commissioned by all 303 Primary Care Trusts overthe period the scheme was being developed. Since mostPCTs therefore had little activity carried out by the RoyalBrompton and Harefield NHS Trust, it had correspondinglylittle influence over their commissioning decisions.In addition, approximately 20 per cent of the RoyalBrompton and Harefield NHS Trust’s income came fromspecialist clinical service commissioners and researchand development funding, neither of which consideredthat their resources had been increased to enable themto support project development costs. As noted by theIndependent Review Panel, inadequate and inappropriatefunding handicapped the scheme’s management capabilitythroughout the planning phase.18The Paddington Health Campus scheme

part two2.21 Had the revised OBC been approved in 2004or 2005 for a higher capital value the funds availablewould have increased to approximately £16.6 million.The Department told us it believed the Trusts were in aposition to redirect operational costs to provide funds, ifthey so chose.2.22 The Independent Review Panel concluded thatthere had been a number of significant lapses in basicprogramme management disciplines, only partiallyaccounted for by inadequate resourcing of the scheme.These contributed to the failure of the Campus scheme.They included inadequate management of stakeholders,risks, work briefs and general progress (Appendix 2).When it first became involved, PUK discussed with theCampus partners the need for project resources to beincreased and management processes strengthened.2.23 From approval of the OBC in October 2000, theplanned date of advertising the scheme in the OfficialJournal of the European Union (OJEU) slipped five times,from summer 2001 to July 2003. In the event, no OJEUnotice was ever issued. Such delays would have dentedmarket confidence in the scheme and the project team.2.24 The Project Director’s contract was terminated inOctober 2002, by mutual agreement, reflecting the ProjectBoard’s dissatisfaction with the slow progress in meetingdevelopment planning milestones. An interim ProjectDirector was appointed in October and a permanentreplacement from April 2003.Clinical and public support2.25 Staff and public consultation by St Mary’s NHSTrust showed a high level of support for the vision of thehealth Campus. However, support by both staff and thepublic from the Royal Brompton and Harefield NHS Trust’stwo sites was mixed. Royal Brompton-based staff weregenerally more in favour of the proposal than Harefieldbasedstaff (Figure 4).2.26 In September 2002, a first detailed draft of all theclinical output specifications was produced. This showedthat the planned Campus buildings were insufficient inscale to contain the proposed clinical activity. Althoughthe Clinical Reference Group reviewed and acceptedthe proposed clinical content, Westminster Primary CareTrust noted at the Joint Project Board in April 2003 that, infact, no agreement had been reached on service strategiesand affordability, so the clinical content remainedunconfirmed. However in June 2003 the Strategic HealthAuthority, approved the scheme with the support of thethree main Primary Care Trusts.2.27 Discussions on the clinical configuration of servicescontinued to the end of the scheme and were a particularcause of concern to clinicians at the Royal Brompton andHarefield NHS Trust. In December 2004, in response toconcerns expressed by clinicians, the confidential sessionof the Trust Board considering a new OBC was assuredby the acting Chief Executive that the Campus option, asstated, was not the final product. It was advised that therewould be opportunities to make changes, including tothe functional content of the OBC, between approval ofthe OBC and the production of the full business case. TheBrompton Trust has told us that this assurance was givenon the good faith understanding that a PFI procurementpartner would provide value in the development of outputbased specifications into a building solution better thanthat proposed in the OBC. There was no price identified asthe likely cost of this assurance.4Staff willingness to move from Brompton andHarefield sites to the Paddington Health CampusIntending Not intending Unsureto move to move(Per cent) (Per cent) (Per cent)Brompton staff 24 33 44Harefield staff 8 64 28Overall 19 46 35Source: The Quality of Working Life Survey: Royal Brompton andHarefield NHS Trust, Institute of Employment Studies, 2003The Paddington Health Campus scheme19

part two2.28 Public support for the scheme in the Harefield areawas limited by two factors:nnThe scheme involved the transfer of clinical servicesfrom Harefield hospital to the Paddington Basin siteand the consequent closure of Harefield hospital; andSupporters of Harefield hospital were not happywith the integrity of the consultation process. Thepublic consultation on specialist acute services(including those at Harefield hospital) closed inNovember 2000. But the OBC was developed beforethat date, a planning application for the Campusscheme was submitted in June 2000, a ProjectDirector was advertised for in July 2000 and theOBC approved in October 2000.2.29 Supporters of Harefield hospital created the Heartof Harefield group in July 2000 to take forward theiropposition to the closure of Harefield and, later, theescalating cost of the Campus scheme. The campaign tosave Harefield hospital provided a continual check andchallenge on the viability of the Campus scheme to theBoard of the Royal Brompton and Harefield Hospital NHSTrust and to the scheme.Policy risk2.30 Policy risk is a particular risk for public sectorprojects and relates to changes outside the control ofindividual organisations but which may have a materialimpact on the organisation and investment scheme. Suchrisks are common to all NHS schemes so, while theyshould be recognised as an additional risk, they cannotexplain the failure of the Campus scheme on their own asother hospital building schemes have overcome similarhurdles. Against this it should be recognised that theDepartment is currently reviewing how the commissioningof major capital schemes through PFI can be reconciledwith long-term affordability and policies on choice,Payment by Results and the movement of care away fromacute hospitals to the primary care sector. 82.31 The main relevant NHS policy change affecting thedevelopment of the campus was consumerism whichincreased space in patient areas to improve the dignity andprivacy of patients. This guidance, although not mandatory,had a considerable impact and was a major factor in theincrease in size of the scheme between 2000 and 2003.Further draft guidance on the proportion of single roomsin a hospital was issued for consultation in 2004. Theproject team was assessing the potential impact of this draftguidance on design and space requirements prior to thescheme’s collapse but the May 2005 Addendum did notmeet the standards in the draft guidance.2.32 Three other policy changes affecting the affordabilitycalculations for the scheme were the introduction ofprivate and NHS Treatment Centres, Payment by Resultsand choice at the point of GP referral. These policiesemerged after the scheme started in 1998. TreatmentCentres and choice increase the potential that patients willchoose to attend other hospitals or providers for electivecare. Payment by Results ensures that money followspatients and sets a fixed price for hospital activity. Thereis a potential opportunity as well as a risk for Trusts if theycan attract additional patients and make a financial surplusout of treating them but uncertain income increases therisks for new schemes with higher than average costs.2.33 The underlying risk from choice/Payment by Results isthat it is a new and different funding regime for NHS Trustsand is therefore very difficult to forecast, especially overthe very long time horizons of PFI contracts. Each Trustwill need to make their own assumptions as to how patientchoice and Payment by Results will impact on their futurerevenues but they have no track record on which to basethose assumptions.8 Our health, our care, our say: a new direction for community services, Cm 6737, Department of Health, January 2006.20The Paddington Health Campus scheme

part threePart ThreeThe Campus partners were unable to agreea deliverable scheme22the Paddington Health Campus scheme

part three3.1 The Royal Brompton and Harefield NHS Trust Boarddecided in May 2005 that it could not recommend theAddendum to a new OBC to replace the 2000 OBC unlessand until three concerns were addressed to its satisfaction.The concerns were:nnnthe current absence of certainty about a suitable landdeal and its acceptability;the affordability gap for the Campus and in particularfor St Mary’s NHS Trust under the Payment by Resultsregime, after transitional funding has ceased, withpotentially serious implications for the strategiccoherence and original vision of the Campus; andthe work being undertaken in north west Londontowards improving efficiency of service deliveryraises fundamental issues about the capacity andconfiguration of services in the sector with furtherpotential implications for the Campus asoriginally envisaged.This part of the report considers the build-up ofthese problems.The Campus partners were unable tosecure adequate land for the scheme3.2 The NHS did not own enough land to make theCampus work within Westminster City Council’s planningpolicy. It therefore needed additional land. Much of2003 was spent exploring the possibility of acquiringadditional space beside the Campus site – The Pointbuilding. This was an office building on the other sideof the Paddington Basin from the St Mary’s site. With thestrong encouragement of the Strategic Health Authority,which also took an active role in securing Primary CareTrust agreement to the affordability of this option, theCampus partners prepared a Full Business Case for theprocurement of The Point. This was approved by theStrategic Health Authority on 4th November 2003which then submitted it to the Department for approval(Map C in centre page map section, page 28).3.3 A month earlier, the Chief Secretary to the Treasurywrote to the Department expressing concern about thescheme’s escalating costs and setting out that before hecould consider approving any expenditure on the Pointhe required:nna new OBC for the Campus scheme; andan independent review of the process that led tothat situation.the Paddington Health Campus scheme23

part three3.4 Once the Joint Project Board was orally briefedon the interim findings of the independent review inFebruary 2004, it stopped work on developing the schemeas the review highlighted fundamental weaknesses(Map D in centre page map section, page 28). TheDepartment authorised work on a new OBC, as requestedby the Chief Secretary, in July 2004, following asubmission from the Campus partners in April 2004.3.5 In April 2004, Paddington Development CorporationLimited (PDCL), the developer of the Paddington Basinsite, approached the Campus partners with a proposal thatthe Campus use land to the north of the Paddington Basin(Map E in centre page map section, page 28 ). The Campuspartners immediately referred the offer to the Departmentwho approved testing its feasibility.3.6 In October 2004 Westminster City Council’s Leaderand chair of its planning committee met with the Campuspartners and informed them that the then current proposalwith hospitals on both sides of the Paddington Basincould not be recommended for planning permission. TheCampus partners recognised that this would mean theycould not build the Campus as they did not have sufficientland available to meet the Council’s concerns. Theytherefore decided to exit the scheme, anticipating that itwould take four weeks to make the arrangements beforemaking a public announcement.3.7 Three days after this decision, Westminster CityCouncil re-iterated that it would support use of part ofthe North Westminster Community School site, due tobecome free in 2006, to accommodate all clinical activityat the hospitals on the north of the Basin. The Campuspartners, with Departmental consent, immediatelydecided to explore the Council’s offer. This would havefreed the main St Mary’s site as well as the Brompton andHarefield sites for disposal, more than funding the costs ofacquiring the land on the north of the Basin, albeit with adelay before disposal receipts could be received.3.8 In December 2004 the Campus partners thoughtthey had found a solution which involved the purchase ofland from PDCL and Westminster City Council. Howeverthe Department considered that the proposed land dealwas unacceptable because it meant the land purchasewould appear on its balance sheet, and so would countagainst its annual spending limit for capital projects,which it could not accommodate. The Department alsoconsidered the £62.5 million premium over open marketvalue that would be paid to PDCL excessive, althoughthe District Valuer confirmed that, in his view, the landtransaction represented fair value. The Departmentmade clear in January 2005 that it would reject theDecember 2004 OBC on the above grounds.3.9 The Campus partners therefore decided inJanuary 2005 that, in the light of the Department’sreaction to the 2004 OBC, they had no option butto exit the scheme.3.10 Westminster City Council did not want to see thescheme fail because of a lack of land as, in planningpolicy terms, it had made clear since 1987 that it viewedthe retention and improvement of St Mary’s hospital as astrategic priority for the Council. Therefore, in February2005, with the agreement of the Department, and thesupport of the Campus partners, but without any writtenbrief, the Council commenced negotiations with PDCLon behalf of the Campus partners (Map F in centre pagemap section, page 28). The Campus partners were notpresent at these discussions although the Departmentheld a number of bilateral meetings with the Council overthis period. On this basis the Campus partners decidedto draw up an Addendum to the 2004 OBC. This wouldconcentrate on the financial implications of the potentialnew land deal.3.11 The Department stipulated four conditions for theland deal for the Campus scheme. These were that:nnnnThe agreement on land for the Campus scheme hadto be with Westminster City Council only, not PDCL,as the Department did not believe PDCL shouldreceive anything more than fair open market valuefor their land.PDCL was not to be involved in the disposal ofsurplus sites.No overage was to be paid to parties other thanWestminster City Council.No premium over open market value should be paidby the NHS on land it acquired.24the Paddington Health Campus scheme

part three3.12 The PDCL negotiator made it clear that he wouldnot recommend any proposal to his shareholdersunless it had been agreed by the Department first andrepresented at least as good value to PDCL as theproposed December 2004 deal. This made the approvalof the Addendum to the OBC difficult: there could be noAddendum without a land deal and no land deal withoutsupport for the Addendum. This conundrum would laterprove to be insurmountable.3.13 On 2 March 2005, PDCL formally renouncedany further involvement with the Campus partners asit believed the Department did not support the schemeand that the scheme would therefore ultimately fail.PDCL publicly announced it had appointed architects todevelop the site. This is not to say nothing was going on.With the support of the Principals’ Group and the JointProject Board, the Campus partners’ property negotiator– an independent property consultant – continued to haveexploratory discussions with Westminster City Counciland the principal PDCL negotiator on what sort of dealmight be available (Figure 5).3.14 Both the Campus partners’ property negotiator andPDCL’s negotiator were effectively operating informallyin exploring with each other the shape and nature ofa successful land deal. The Campus partners’ propertynegotiator was authorised to deal with Westminster CityCouncil, but had no brief to discuss with PDCL, and thePDCL negotiator was not, at this time, operating on behalfof PDCL, so did not speak for PDCL. All parties have toldus that this did not amount to negotiation. The Departmentwas kept aware of developments by the Council and theCampus partners, even though at this time the Departmentwas no longer invited to the Principals’ Group.3.15 In the proposed May 2005 land transaction PDCLwould be involved in the disposal of surplus sites andwould receive overage at a lower level than in theDecember 2004 deal. In addition PDCL would be paid£19 million for the work required to secure planningpermission for the surplus sites plus indemnity for abortivecosts it would incur in seeking planning consents todevelop its site before the Campus partners would agreethe land deal.5Relationships between parties on the proposed land deal, March – May 2005St Mary’sNHS TrustRoyal Bromptonand HarefieldNHS TrustImperialCollege LondonPDCLJoint ProjectBoardPrincipals’GroupPDCL leadnegotiatorDepartment ofHealthCampuspropertynegotiatorWestminsterCity CouncilInformation exchangeExporatory discussionsSource: National Audit Officethe Paddington Health Campus scheme25

part three3.16 The May 2005 Addendum to the OBC waspredicated upon the NHS Trusts accepting contractualobligations if the Department approved the OBC. Becauseof the complex relationships described in paragraphs3.13 and 3.14 above, the Royal Brompton and HarefieldNHS Trust was not confident that PDCL was seriousabout selling the land to Westminster City Council orthat a genuine proposal existed which had the supportof PDCL, Westminster City Council and, particularly, theDepartment. It was concerned that the Department wouldnot support the proposed land deal as the conditionsset out in paragraph 3.11 above had not been satisfied,although the Department had explained that its conditionswere not immutable.3.17 In May 2005 Westminster City Council wrote to theDepartment to set outnnnhow it saw the current position on the proposedland transaction;that it required commercial close on the option tobuy the North Westminster Community School siteby September 2005; andthat it sought a decision from the Department onwhether it found Westminster’s proposals acceptableby the end of June 2005.3.18 In its letter, Westminster City Council stated thatit believed:“this overall proposal is fair to both parties and providesan appropriate and justifiable framework for agreementbetween the public sector partners and a privatedeveloper. The most recent offer represents the mostfavourable basis on which we believe PDCL’s participationcan be secured. It is either this deal or no deal.”3.19 St Mary’s NHS Trust has told us that it was the contentsof this letter that formed the basis of its Board’s support forthe Addendum to the OBC. Conversely, the Royal Bromptonand Harefield NHS Trust noted from the same letter that thePDCL Board was “unenthusiastic” and that past experiencesuggested further discussions between the Trusts and PDCL“may be pointless”. Coupled with PDCL’s public withdrawalfrom involvement with the scheme (paragraph 3.13 above),the Royal Brompton and Harefield NHS Trust was left inthe position of lacking confidence about the certainty of asuitable land deal and its acceptability.3.20 Unlike the Board of St Mary’s NHS Trust, the RoyalBrompton and Harefield NHS Trust Board at this stagedeclined the offer of another presentation on the proposedland deal from the Campus partners’ land negotiator.It believed it had a full understanding of the land dealthrough previous discussions and presentations. On25 May 2005 its Board declined to support the proposedAddendum, in part because of the above concerns.The Campus partners, and others,differed over whether the schemewas affordable3.21 In October 2000, when approving the OBC, theLondon Regional Office expressed concerns aboutthe affordability of the scheme at an estimated capitalconstruction cost of £300 million. By October 2002, theCampus partners considered that projected costs hadincreased by an estimated 10 per cent over the OBC. Thisincrease breached the tolerance level at which the NHSCapital Investment Manual required formal reappraisalof the OBC, although no reappraisal was carried out. Infact, independent costings estimated the capital cost to be£786 million (December 2002, excluding optimism bias).This implied an annual scheme payment of approximately£80 million, some £53 million over the resources availablefrom Primary Care Trusts to pay for the Campus scheme.3.22 The Department did not believe that theDecember 2004 scheme was affordable but, becausefinal figures depended on the rejected land deal, did notcomplete its analysis. It continued throughout the periodJanuary to May 2005 to stress that it was concerned thescheme was at the margin of affordability.3.23 The Department told the Campus partners to assessaffordability on the basis of traditional NHS financingarrangements and to address affordability under Paymentby Results as a sensitivity factor. Under the existingfunding regime, the Campus partners believed that theycould afford the May 2005 scheme with an expectedsurplus of £0.75 million. However, under Payment byResults, which is being introduced by stages until 2008,the forecast steady state position was for an overall deficitof £2.8 million, including the cost of the land deal andassociated rental of accommodation. This compriseda Royal Brompton and Harefield NHS Trust surplus of£15.4 million and a deficit of £18.2 million for St Mary’sNHS Trust. St Mary’s NHS Trust was confident that therequired savings were easily achievable in the timescalesinvolved (over 10 years).26the Paddington Health Campus scheme

part three3.24 All Campus partners recognised that in May 2005the steady-state scheme was not affordable under whatwould be the future funding arrangements without savingsat St Mary’s NHS Trust. In addition, the supporting landdeal was not affordable from local NHS resources withoutbridging finance from the Department to cover the periodbetween the partners acquiring additional land for thenew Campus and when they would be able to dispose ofthe existing Brompton and St Mary’s sites. Such fundingwas not available from the Department to support theDecember 2004 land deal but was available from the NHSBank for the land deal in the May 2005 Addendum. TheDepartment was not confident that the Campus partnerscould deliver the scheme against the background ofpunitive penalty clauses for delay.3.25 In parallel with developing an acceptable land dealthe Campus partners checked the value for money of theirscheme with similar schemes. They drew up confidentialcomparisons on capital construction cost per bed and costper square metre (Figures 6 and 7 on page 30). We haveadded a column to that analysis to show the impact ofincluding optimism bias.3.26 While the Campus scheme reported a high costper bed, the Campus partners believed that this wasbecause of the specialist nature of the care providedwhich had a relatively high proportion of tertiary andintensive care beds. The Department told us that itregarded the cost per square metre as a better guide tothe affordability of schemes. On this measure the Campuswas in the middle of the core comparator group of tertiarycentres in constrained urban environments, although itsestimated capital cost of £777 million excluded a further£117 million for optimism bias which the scheme wasrequired to include when calculating its affordabilityposition. Some of the optimism bias costs wouldeventually have contributed to increases in cost persquare metre and cost per bed prior to financial close.Capacity planning in 2005 indicatedthat the local NHS in north westLondon needed to reduce capacityby 500 to 600 beds3.27 When the scheme was first conceived, theNational Beds Inquiry 9 had identified the need for morebeds in the NHS. The 2000 OBC accepted this startingpoint and planned for 1,000 beds. By November 2002this had risen, on the basis of detailed modelling, to1,200. By October 2003 this had fallen to 1,088 and inthe final scheme (May 2005) had been reduced, on thebasis of planning and collaboration between the Campuspartners and Primary Care Trusts, to 835 NHS beds and88 private beds.3.28 By late 2004 the Strategic Health Authority andthe Department were concerned about having toomany hospital beds in north west London. The NHSwas developing PFI schemes at Hillingdon NHS Trust(£271 million, 500 beds) and North West LondonHospitals NHS Trust (£305 million, 600 beds) in additionto that proposed for Paddington. The Department toldthe Strategic Health Authority that this was a matter thatneeded a plan, but not a resolution, for the OBC tobe approved.3.29 In December 2004 the Strategic Health Authorityhad estimated that there were 300-400 surplus beds in thesector, although in poor accommodation, and in Januaryit calculated that St Mary’s alone, if in-patient stays werereduced to national averages, could release 110 beds.St Mary’s was using different planning assumptions tothose used by the Strategic Health Authority, but intendedthat the planning assumptions used by both would bereconciled and agreed once the OBC had been approved.After an exercise in February-March 2005, the StrategicHealth Authority concluded that there was a need toreduce hospital capacity in north west London by500-600 beds – the equivalent of a medium sized hospital.9 Shaping the Future NHS: Long Term Planning for Hospitals and Related Services, Department of Health, February 2000.the Paddington Health Campus scheme27

part threeThe Changing proposals for Paddington HealthCampus Schemes - Maps C-FMaps C-F overleafthe Paddington Health Campus scheme29

part threeThe changing proposals for the Paddington Health Campus schemeMap A: Existing site layoutMap B: Proposed site layout – June 2000Key:Existing Imperial College buildingsProposed Imperial College buildingsExisting St Mary’s NHS Trust buildingsProposed St Mary’s NHS Trust buildingsSource: Adapted from graphics produced by Studio4 Design & Architecture28the Paddington Health Campus scheme

part threeMap C: Proposed site layout – May 2003Map E: Proposed site layout – July 2004Map D: Proposed site layout – February 2004Map F: Proposed site layout – February 2005Proposed Royal Brompton & Harefield NHS Trust buildingsProposed shared non-clinical services buildings for St Mary’s and Royal Brompton & Harefield NHS TrustsProposed buildings to be occupied by both St Mary’s and Royal Brompton & Harefield NHS TrustsSurplus site released for commercial - residential developmentThe Paddington Health Campus scheme

part three6A comparison of capital construction cost per bed for major hospital buildsCost per bed, £000/bed1,2001,000800CampusschemefiguresIncludingoptimismbias6004002000Paddington HealthCampusTrust A Trust B Trust C Trust DSource: April 2005 Campus documentation and National Audit Office addition of optimism biasNOTEThe four comparators are major urban teaching hospital schemes on constrained sites.7A comparison of capital construction cost per square metre for major hospital buildsCost per square metre, £/sq m6,0005,0004,000IncludingoptimismbiasCampusschemefigures3,0002,0001,0000Trust B Trust D Trust A Paddington HealthCampusTrust CSource: April 2005 Campus documentation and National Audit Office addition of optimism biasNOTEThe four comparators are major urban teaching hospital schemes on constrained sites.30the Paddington Health Campus scheme

part fourPart fourThere was a lack of clarity inkey accountabilities and roles32the Paddington Health Campus scheme

part fourAccountability for the schemewas uncertainThe Accountable Officer4.1 The Chief Executive of an NHS Trust sponsoring ascheme is the Accountable Officer for all capital schemes(Figure 8 overleaf). However in the case of the Campuspartners there was no clarity over whether there was, orshould have been, a single Accountable Officer.4.2 The Chief Executive of St Mary’s NHS Trustbelieved in late 2003 that, ultimately, he was thesingle Accountable Officer for the scheme, given thatall expenditure was initially made through his Trust’saccounts and then recharged to other Campus partnerson an agreed basis. Imperial College never accepted thattheir Rector was an Accountable Officer for this scheme,nor even that he was appropriately a Senior ResponsibleOwner for what was an NHS-led and driven scheme.The Chief Executive of the NHS confirmed in writingto the Campus partners in February 2004 that the ChiefExecutives of St Mary’s NHS Trust and the Royal Bromptonand Harefield NHS Trust and the Rector of ImperialCollege were equally accountable for determiningthe appropriateness of any expenditure by their ownorganisations on the Campus scheme.4.3 The Chief Executive of St Mary’s has subsequentlycome to learn that in April 2004 his external auditors hadstated that, since there was more than one participatingorganisation in the scheme it was not, by definition,possible for there to be one Accountable Officer for thescheme. The Department told us that it considered this tobe simply a governance issue of how the Campus partnerssatisfied themselves as to the propriety of expenditurecharged to their organisations, rather than an AccountableOfficer issue.The Strategic Health Authority4.4 In the first year following its establishment(2002-03), the North West London Strategic HealthAuthority kept a distance from the scheme, although it hada Non-Executive Director on the Joint Project Board. Italso set deadlines for the scheme, highlighted the interestsof Primary Care Trusts with those of the Campus partnersand gave strong direction as to how the scheme shouldproceed. It did not have any influence over ImperialCollege. In the latter stages of the scheme, the role of theStrategic Health Authority blurred into that of a projectpartner, whose principal distinct role was to act as aconduit between the scheme and the Department.From September 2004 the Chair or Chief Executive of theStrategic Health Authority chaired the Principals’ Group.the Paddington Health Campus scheme33

part four8Generic organisational responsibilities for Outline Business CasesOrganisation/PostHM TreasuryDepartment of HealthResponsibility in construction of Outline Business CasesNone normally, but in the case of the Campus scheme, after October 2003, the Treasury was responsiblefor granting or withholding approval of a new OBC.Private Finance Unit responsible for giving advice and support to the NHS;In the case of the Campus scheme, after October 2003 the Department was responsible for granting orwithholding approval of a new OBC.Trust BoardTrust Chief ExecutiveProject BoardStrategic Health AuthorityThe Trust board is responsible for effective oversight of the project, holding the Project Board and the TrustChief Executive to account.The project owner and accountable officer for the transaction is the NHS Trust Chief Executive. The ChiefExecutive has ultimate responsibility for delivering the scheme, and as such owns the deal. S/he is anaccountable officer (through the NHS Chief Executive to Parliament) and is therefore responsible forensuring value for money and appropriate use of public funds.This should be constituted as a committee to enable it to act directly on behalf of the NHS Trust and tobe accountable to the NHS Trust board. Should be given clear terms of reference and stated areas ofdelegated discretion from the NHS Trust board.The Strategic Health Authority is responsible for the performance management of the NHS in its area.Specifically, it will:n be involved in the preparation of OBC;n participate in the Project Board; andn formally approve the OBC before submission to the Department of HealthPrimary Care TrustsResponsible for commissioning care from NHS Trusts. For capital schemes they:n are involved in the preparation of OBC;n participate in the Project Board; andn formally endorse the OBC.Source: Department of Health Capital Investment Manual and National Audit OfficeThe Department of Health4.5 This was not a local scheme for the local NHS, giventhe nature and scale of the Campus scheme. It had explicitnational dimensions in the integration with ImperialCollege’s research work and the national services providedby both NHS Trusts. However Departmental policy underShifting the Balance of Power within the NHS 10 wasthat all funds would be allocated to local NHS budgetsso the solution to any funding issue was also local. TheDepartment had no formal position on whether or notthe Campus should be built. It explained to us that theinitial 2000 scheme was approved by the local NHS andthat the Department had no role in this. Both NHS Trusts,Partnerships UK and Westminster City Council all told usthat they had been uncertain whether the Department didin fact want the Campus scheme to go ahead.4.6 The Department provided advice for the schemethrough its Private Finance Unit and guidance through itsCapital Investment Manual. Under the system of delegatedauthority by which the Department allows a degree ofautonomy to the local NHS, it did not see its role as policingschemes’ compliance with the Manual because local NHSorganisations developed plans for capital investment.4.7 Once the scheme involved complex land transactions(from April 2004 onwards) the Group Delivery Director atthe Department became much more closely involved.He had at least 24 meetings with Campus partners andrelated third parties between April 2004 and the collapseof the scheme in May 2005. No substantive steps weretaken by the Campus partners during this period without hisconsent although it is equally true that the Department didnot sponsor or request any scheme initiatives.10 Shifting the Balance of Power within the NHS, Department of Health, 2001.34the Paddington Health Campus scheme

part four4.8 Some of the advice and guidelines provided by theDepartment to the Campus partners were ephemeral. It saida scheme with a capital to revenue ratio of over 1:1 waslikely to be unaffordable (the Campus was 1.8 :1) but lateragreed that this was not the case. It also expressed concernsover capacity in north west London but later said thisproblem could be managed after the OBC was submitted, aslong as the Strategic Health Authority planned to address it.This created uncertainty on the part of the Campus partners.The 2002 NHS reorganisationdisrupted the scheme4.9 Following the restructuring of NHS commissioningbodies from April 2002, the local Primary Care Trustsbecame responsible for commissioning services fromhospitals and consequently determining the levelsof funding available. It was not until approximatelyMay 2003 – over one year after their creation – thatPrimary Care Trusts began to assert limits to their approvalof the Campus scheme.4.10 Continuity of personnel was one mitigating factorduring the period of organisational change and beyond.A number of key personnel maintained continuity for thescheme, even while in different organisations (Figure 9).4.11 In March 2005 a new Chief Executive of the RoyalBrompton and Harefield NHS Trust took up post. He hadno previous involvement with the Campus scheme or theNHS in England. With his fresh perspective on the schemehe was concerned at the Department’s absence fromdiscussions with the Campus partners and the way in whichthe proposed land deal was negotiated without the RoyalBrompton and Harefield NHS Trust being a participantin those negotiations. He was instrumental in the Boarddeclining to support the Addendum to the 2004 OBC.9Continuity of NHS personnel involved in the scheme and their differing roles over the span of the schemeIndividualJohn BaconOriginal involvement with the schemeDirector of Finance and Performance, LondonRegional Office of the NHS (1995–2000)Approved the 2000 OBCLater involvementDirector of Delivery, Department of Health,(2000–2006) responsible for guidance on capitalinvestment for Campus schemeDr Gareth GoodierChief Executive, Royal Brompton and HarefieldNHS Trust (April 2003–August 2004)Senior Responsible owner for the Royal Bromptonand Harefield NHS Trust element of the schemewhich was already underway when he took up postChief Executive, North West London Strategic HealthAuthority (September 2004 onwards)Member of Joint Project Board and Principals’ GroupBaroness HanhamChairman of St Mary’s NHS Trust(2000 onwards)Chaired Trust Board which approved the2000 OBCOversaw St Mary’s involvement with theCampus schemeMember of Joint Project Board and Principals’ GroupJulian NettelChief Executive of St Mary’s NHS Trust(1999 onwards)Member of West London Partnership Forum thatdeveloped the Campus as preferred option in the2000 OBCSenior Responsible owner for the St Mary’s element ofthe scheme as Chief Executive of that TrustMember of Joint Project Board and Principals’ GroupLord NewtonChair of West London Partnership Forum(1999–2001)Brokered a way forward for specialist services inwest London through the Campus schemeChair of Royal Brompton and Harefield NHS Trust(2001 onwards)Member of Joint Project Board and Principals’ Groupthe Paddington Health Campus scheme35

part fivePart fiveThe way ahead is challenging for all parties36the Paddington Health Campus scheme

part five5.1 Both NHS Trusts continue to need substantialinvestment to redevelop or refurbish their hospital estatesto make them fit for purpose. The 2004 OBC quantifiedthe combined cost of bringing both the St Mary’s andRoyal Brompton Hospitals’ estates to modern standardsat £759 million. Both Trusts are working on reviseddevelopment plans which take account of the demandand capacity work the Strategic Health Authority hasconducted during the latter half of 2005. At this pointin time the exact nature of future capital developmentrequirements for both Trusts has yet to be established.5.2 The cost of construction in the public sector hasincreased at above the cost of inflation while the schemewas in development. This means that it will be some37 per cent more expensive to build replacement facilitiesnow than it would have been in 2000, before allowing forgeneral inflation. A worked example of the impact of delayis at Appendix 4. Such a delay does not represent cashspent or wasted on this scheme and nor is it an argumentfor simply building schemes more quickly, irrespectiveof the business case for investment. It demonstrates thatredevelopment now will be markedly more expensivethan in 2000.5.3 The North West London Strategic Health Authorityin July 2005 announced that it would carry out a sectorstrategy review to determine its capacity and servicerequirement and investment priorities. It is unlikely thatall three hospitals – St Mary’s, the Brompton and Harefield– can be rebuilt or refurbished as required in the light ofavailable capital resources.5.4 In September 2005 the Department issued newguidance on the business case approval process for majorcapital schemes. The principal changes were thatnnthe Department would no longer approve StrategicOutline Cases. These would now only requireStrategic Health Authority approval; andOBCs for schemes with a capital cost of £75 millionor more will require Departmental approval beforea scheme can advertise in OJEU. This would followStrategic Health Authority approval of the OBC.5.5 The changes reflected a re-prioritization ofDepartmental resources away from reviewing StrategicOutline Cases as experience had shown they werevery difficult to assess conclusively. The intention of thepre‐OJEU review is that it ensures Departmental resourcesare focused on more fully developed cases to check thatcapacity and service assumptions fit with national policies,affordability assumptions are robust, the scheme representsgood value for money and the scheme is ready for OJEU.5.6 The Department, in the context of the Our health,our care, our say 11 White Paper on health and socialcare services in the community, is reconsidering thecurrent capital investment programme. It expects toreduce the scale of the programme from £12 billion to£7-9 billion after a reappraisal of the affordability of theprogramme and individual schemes within it in early2006. It will also, as part of this exercise write to StrategicHealth Authorities with practical guidance on applyingthe experience of previous procurements, both in the NHSand in wider government.5.7 Since the end of the scheme, Imperial College hasadvanced plans to refurbish the National Heart and LungInstitute building on the Royal Brompton Hospital Campus.This current modernisation is expected to be completed byearly 2008 at a cost of around £10 million.11 Our health, our care, our say: a new direction for community services, Cm 6737, Department of Health, January 2006.the Paddington Health Campus scheme37

glossaryglossaryAddendumAffordabilityBusiness CaseCampus PartnersCapital Investment ManualClinical Reference GroupCommissionersEnabling and decantingFull Business CaseGateway ReportIndependent Review Panel 2005Joint Project Board (JPB)Joint Reviewthe May 2005 update to the December 2004 OBC.the capacity of an organisation to afford the health campus. It is usuallyexpressed as the maximum price that the organisation could pay.a document that supports a proposal for capital investment. It mustconvincingly demonstrate that a project is economically sound, financiallyviable and will be well managed.St Mary’s NHS Trust, the Royal Brompton and Harefield NHS Trust andImperial College of Science, Technology and Medicine and, from 1 July 2002,Partnerships UK.provides detailed guidance to the NHS for each stage of a capital schemeincluding practical guidance on the technical considerations of the full capitalappraisal process and a framework for establishing management arrangementsto enable benefits to be identified, evaluated and realised.responsible for developing clinical models based on affordable models of carefor the Campus.NHS organisations, usually Primary Care Trusts, which receive direct fundingfrom the Department of Health to purchase healthcare for patients. May alsoinclude national commissioners of specialist services.works that would facilitate the move of the three hospitals to the campus andallow St Mary’s hospital to remain operational during building works.the third phase (following the Strategic Outline Case and Outline Business Case)of the business case, which assesses and plans the preferred option in detail.a review by the Office of Government Commerce to establish a scheme’s fitnessto proceed in the procurement cycle.commissioned by the North West London Strategic Health Authority to producea report on the ‘Lessons Learned from the Paddington Health Campus Project’(published 10 October 2005).established in May 2002 to oversee the Paddington Health Campus scheme.The Board was co-chaired on a rotating basis by Non-Executive Directors ofSt Mary’s and the Royal Brompton and Harefield NHS Trusts.collaboration between the Department of Health, HM Treasury and the NationalAudit Office in 2004 to consider why the scheme’s estimated capital costs hadrisen so much since the 2000 OBC and how this situation had come about.38the Paddington Health Campus scheme

glossaryLondon Regional OfficeMemorandum of UnderstandingMIPSNational Heart and Lung InstituteNHS TrustNorth West London StrategicHealth AuthorityOff balance sheetOfficial Journal of the EuropeanUnion (OJEU)On balance sheetOptimism biasOutline Business Case (OBC)Outline Planning PermissionOveragePaddington BasinPaddington Basin Project BoardPaddington DevelopmentCorporation Limited (PDCL)responsible for overseeing London’s health services, covering a population of7 million and overseeing 16 Health Authorities (as at 1999). Abolished in 2002.a document which set out the agreement that had been reached between theCampus Partners in relation to how the procurement of the Paddington HealthCampus was to be governed.Median Index of Public Sector construction costs.a division of Imperial College, Faculty of Medicine. The Institute is based at theRoyal Brompton and Harefield Hospitals.a providing body for health care, created under 1990 legislation in a move todistinguish between the providing function and the commissioning function(undertaken by Health Authorities).from April 2002, one of England’s 28 Strategic Health Authorities, responsiblefor the performance management of St Mary’s NHS Trust and the RoyalBrompton and Harefield NHS Trust.a form of borrowing in which the obligation is not recorded on the borrower’sfinancial statements and does not attract capital charges.the journal through which a PFI scheme must tender for contractors.Formerly ‘Official Journal of the European Communities’ (OJEC).a form of borrowing in which the obligation is recorded on the borrower’sfinancial statements and does attract capital charges.an explicit adjustment, based on data from previous projects, to redress thetendency to be overly optimistic when assessing the cost, work duration andbenefits of projects.the second phase (following Strategic Outline) of the business case cycle,which identifies the preferred option.establishes the principle of development. The details of the development maybe reserved and will require a further planning application.a clawback mechanism to allow the seller of land to receive a definedproportion of sales proceeds if that land is re-sold by the initial purchaser.the offshoot of the Grand Union Canal, which lies to the north of the currentSt Mary's Hospital.oversaw the development of the Campus scheme on behalf of the West LondonPartnership Forum until it was disbanded during the April 2002 reorganisationof the NHS.owners of land adjacent to the St Mary’s hospital site north of thePaddington Basin.the Paddington Health Campus scheme 39

glossaryPaddington Health CampusPatient choice (at the pointof referral)Payment by Results (PbR)Principals’ GroupProject Executive GroupPrivate Finance Initiative (PFI)Public Sector Comparator (PSC)RiskRisk assessmentRisk registerStrategic Outline CaseTurnberg Report 1998West London Partnership ForumWestminster City Council (WCC)the project by which the Campus Partners sought to build a health complex onthe Paddington Basin site.the policy, effective from January 2006, whereby patients are able to choose aconvenient place, date and time for their initial hospital appointment from atleast four providers.the NHS financial framework for rewarding activity in hospitals witha tariff-based payment.established in August 2004 to enable the Campus partners to negotiate effectivelyin a time-critical manner with Paddington Development Corporation Limited.established in March 2004 to take day-to-day decisions relating to the schemein conjunction with the Project Director. Reported to the Joint Project Board.a policy introduced by the Government in 1992 to harness private sectormanagement and expertise in the delivery of public services, while reducingthe impact of public borrowing.a method used to calculate the “in-house” cost of delivering a project, whichhelps determine whether the Private Finance Initiative route is a viablealternative and demonstrates good value for money.the probability of an event occurring, coupled with the anticipated impact onindividuals and/or organisations.the process that helps organisations understand the range of risks they face– both internally and externally, the level of ability to control these risks, theirlikelihood of recurrence and their potential impacts. It involves a mixture ofquantifying risks and using judgement, assessing and balancing of risks andtheir benefit and weighing them, for example, against cost.a database where results of all an organisation’s risk assessments are recorded.the first phase (preceding Outline Business and Full Business) of the businesscase cycle, which makes the case for change.a review of London’s healthcare provision, chaired by Sir Leslie Turnberg,which set the context for the wider London healthcare strategy.formed in March 1999 to unite the local healthcare organisations in westLondon (now north west London) and Imperial College to take forward therecommendations of the Turnberg Report 1998. Dissolved in March 2002.local authority, which owned the North Westminster Community School Siteand was the provider of planning permission for the Campus scheme.40the Paddington Health Campus scheme

appendix oneAppendix oneChronology of the Paddington Health Campus scheme1998FebruaryThe Turnberg Report, which reviewed the widerLondon healthcare strategy, is published.SeptemberStrategic Outline Case drawn up by West LondonPartnership Forum and submitted to Department of Health.2000AprilWest London Partnership Forum creates PaddingtonBasin Project Board to develop OBC.JuneWest London Partnership Forum submits planningapplication for proposed Paddington Health Campusscheme to Westminster City Council.JulyKensington and Chelsea Health Authority launchconsultation on specialist services in west London.OctoberLondon Regional Office of NHS approved OutlineBusiness Case (estimated gross capital construction cost£300m), with caveats.NovemberConsultation on specialist services closed, one month afterthe approval of the Outline Business Case.First permanent project director for the scheme appointed.2001January/FebruaryObjections to the Paddington Health Campus schemeraised by three Community Health Councils and schemereferred to the Secretary of State for Health.MayRisk register drawn up by Ernst & Young.OctoberSecretary of State confirmed approval for PaddingtonHealth Campus scheme.2002MarchKensington, Chelsea and Westminster Health Authority,London Regional Office and West London PartnershipForum wound up under NHS reforms, to be replacedby North West London Strategic Health Authority andPrimary Care Trusts.MayJoint Project Board (JPB) established to replace ProjectBoard of former West London Partnership Forum tooversee Paddington Health Campus scheme.SeptemberFirst draft of clinical output specifications produced.Planned Campus of insufficient scale to accommodateproposed clinical activity.North West London Strategic Health Authority wrote toCampus partners stating that it should be ready for OJEUadvertising by 31 March 2003 and that there could be nofurther slippage.OctoberJoint Project Board considered 10 per cent increase incosts of Outline Business Case.The Project Director’s contract was terminated by mutualagreement. An interim Project Director was appointedimmediatly and a permanent replacement from April 2003.NovemberWestminster City Council planners advised that theCampus proposal exceeded the planning approval.Partnerships UK appointed as co-sponsor for procurementexpertise (with effect from 1 July 2002).DecemberCost estimate from Davis Langdon and Everest put capitalconstruction cost for scheme at £786 million.the Paddington Health Campus scheme 41

appendix one2003FebruaryWestminster City Council planning department requestthat the Campus partners withdraw their planningapplication for further consideration.MarchThe Campus partners identified the availability ofThe Point building as essential for the enabling anddecanting of the scheme.AprilCost estimate from Davis Langdon and Everest putcapital construction cost for scheme at £792 million.Affordability Gap £53 million.Westminster Primary Care Trust noted that no agreementhad been reached on service strategies so the clinicalcontent of the scheme remained unconfirmedMayNew scheme configuration means that new ImperialCollege building is no longer separate from hospitalbuildings so the College’s building was now within thescope of the proposed PFI scheme.JuneScheme was approved by the Strategic Health Authority,with Primary Care Trust support.AugustOBC for Enabling Case for the Paddington HealthCampus (procurement of the Point building on a longlease) was finalised.OctoberChief Secretary to Treasury requested new OBC andreview of scheme management before Enabling Casecould be considered.Risk register updated by Davis Langdon and Everest2003 (continued)NovemberFull Business Case for enabling works was approved byNorth West London Strategic Health Authority.Gateway review of Campus scheme.The Chief Executive of St Mary’s NHS Trust wrote tothe Chief Executive of the NHS regarding who was theAccountable Officer for the scheme.DecemberJoint Department of Health/HM Treasury/National AuditOffice Review Steering Group commenced review.2004FebruaryInterim findings of Joint Review reported orally to Campuspartners. Work on OBC immediately stopped, pendingdecision on whether to proceed with project.AprilCampus partners agree new affordability andspace constraints with commissioners, subjectto 24 assumptions.PDCL approached Campus partners identifying land onnorth of the Paddington Basin that scheme could use formore straightforward build. Campus partners receivedDepartmental consent to explore this opportunity.JuneJoint Project Board noted the advantages of usingnorth site and subsequently prepared the 2004 OutlineBusiness Case.42the Paddington Health Campus scheme

appendix one2004 (continued)JulyChief Secretary to Treasury approved one final attempt tomake the project work, on condition that rigorous actionwas taken to address all of the problems identified bythe Joint Review. Preparation of new OBC authorisedby Department of Health.SeptemberJoint Review report published.Strategic Health Authority installed as chair of thePrincipals’ Group.OctoberWestminster City Council planning committee notifiedCampus it would not approve Campus using both sidesof the Paddington Basin.Campus Principals’ Group decided to exit the scheme,implementing a four-week timetable before a publicannouncement of the decision.Westminster City Council offered the Campus partnerspart of its school site, which along with existing PDCLland, would allow the partners to build both hospitals onnorth side of the Basin.DecemberRevised Outline Business Case was approved by theCampus partners and submitted to the Department by theStrategic Health Authority with caveats requiring fundingsupport for land deal.Affordability gap under Payment by Results of£9.8 million. Surplus of £4.4 million under existingfunding regime.2005JanuaryCampus partners prepared to cancel scheme inface of objections from Department of Health.Department of Health no longer invited toPrincipals’ Group.FebruaryOffer by Westminster City Council, to use the schoolsite and procure land for the Campus from PDCL, wasaccepted as basis for Addendum to OBC.MarchPDCL terminated the Collaboration Agreement betweenthe Campus partners and PDCL on 2 March 2005 becausePDCL did not believe it was commercially sustainable.MayJoint Project Board approved submission of Addendum toOBC to NHS Trust Boards and Imperial College’s Council,subject to conditions yet to be agreed.Surplus of £0.75 million under existing funding regime.Affordability deficit under Payment by Resultsof £2.8 million.Royal Brompton and Harefield NHS Trust Board did notrecommend Addendum to OBC.JuneStrategic Health Authority recommended cancellation ofthe scheme, withdrawal of the OBC and establishment ofan independent review.Scheme formally cancelled by Minister.the Paddington Health Campus scheme 43

appendix twoAppendix twoExternal reviews of the Campus schemeThe London Regional Office ofthe NHS highlighted a number ofconcerns in late 20001 The London Regional Office of the NHS formallyapproved the OBC in October 2000, subject to theoutcome of the public consultation on the future ofspecialist services in west London. The Regional Officehighlighted its concerns about the:nnnncompleteness of the strategy to operate clinicalservices while building new hospitals on the samesite (“decant strategy”);identification and responsibility for management ofproject risks;treatment of the Queen Elizabeth the Queen Motherbuilding; andaffordability of the scheme.2 The summary of other concerns included afurther 17 issues, such as the need to emphasise theproposed increase in nursing staff, and the need fora full risk assessment and a strategy for achievingplanning permission.3 There was no requirement from the Regional Officefor the above issues to be addressed in a reworked OBC.Rather, the Regional Office split the issues into twocategories: those which had to be addressed in the nearfuture prior to placing the OJEU advert for procurement(anticipated for Summer 2001) and those that would beresolved within the Full Business Case when that wasprepared. There is no record of any review by the RegionalOffice of how the Campus partners were addressing theissues when the OJEU tendering was delayed.The 2003 Gateway Report gave theCampus scheme a ‘Red’ rating4 The Campus scheme was the subject of anOffice of Government Commerce Gateway Review inNovember 2003. The purposes of the review were toconfirm the project’s readiness to move to procurement ona robust, affordable and achievable basis.5 The Gateway Review gave the Campus schemeproject a ‘Red’ rating, which is given to projects orprogrammes that should take remedial actionimmediately in order to achieve success. The Reviewmade 14 recommendations that needed to be addressedwithout delay and noted that the project was beingdriven towards failure by a combination of programmemanagement failures, inadequate resources and skills andthe absence of support from the Strategic Health Authority,Department and Treasury.6 The Independent Review Panel (2005) noted fromthe project’s own documentation, drawn up almost a yearafter the Gateway Review, that:nnn‘Five [of the Gateway Review] recommendationswere not addressed in a timely fashion (e.g. the newgovernance arrangements based around the ProjectExecutive Group and affordability of the scheme).Twelve recommendations did not achieve the rightoutcomes (e.g. those relating to Mission Criticalprogramme treatment, Programme Managementdisciplines, project team resourcing with right skillsand top-level Government support for realisingland requirements).Eleven recommendations were not completed(e.g. adding practical construction and PFI expertiseto the pool of Non-executive Director experience,Technical Director, Heavy-weight Project Manager,Change Control procedures, formal AssumptionsControl, Ground Surveys).’ 1212 Independent Review Panel Report (2005), paragraph 1.23.44the Paddington Health Campus scheme

appendix two7 It was the view of the Independent Review Panelthat failing to address adequately the concerns of theGateway Review in a timely manner had a substantiveimpact on the scheme.The 2004 Joint Review promptedthe production of a smaller, moreaffordable OBC8 The escalation of projected costs since OBCapproval, from £360 million to over £800 million by2003, led to an expression of concern from the Treasury.A Member of Parliament also requested an investigationfrom the National Audit Office. This led to the creationof a Steering Group. The Group, which consisted ofrepresentatives from the Department of Health, Treasuryand the National Audit Office, was tasked with:nnreviewing the change in the scheme’s costs sinceOBC approval; andreviewing the process which led to this situation.9 The Group’s findings, published in September 2004,highlighted concerns in two main areas: project governanceand management and affordability. It concluded that unlessthe identified weaknesses were addressed, it was unlikelythat the required investment in the NHS in west Londonwould achieve its objectives. The review recommended:abcdThe Strategic Health Authority should lead a processidentifying options for investment in the NHS inwest London for heart and lung, paediatrics, tertiaryservices and St Mary’s infrastructure;Primary Care Trusts should lead the development ofappropriate models of care;Responsibilities for projects should be clearly set outand there should be a single client who takes fullresponsibility for the cost and funding implicationsof design changes;Recent Gateway recommendations for the PaddingtonHealth Campus should be implemented for themanagement of any new investment scheme andappropriate project resources should be provided forany project team by Primary Care Trusts in line withnational guidance and the revised scale of investment.The 2005 Independent Review Panelidentified ‘lessons learnt’ from thecollapsed Campus scheme10 Following the decision in May 2005 not to proceedwith the Paddington Health Campus, the North WestLondon Strategic Health Authority commissioned anIndependent Review of the scheme. The aim of the reviewwas to identify the ‘lessons learnt’, which could improve thequality of future similar PFI projects throughout the NHS.11 The Panel concluded, in September 2005, that thescheme was unable to simultaneously and adequatelyfulfil all the basic parameters for success – specifiedclinical activity, land procurement commitments or spacewith Outline Planning Resolution (or later a Masterplan)and robust income streams. The review also noted thatthe project was allowed to continue for as long as it diddue to the absence of reliable processes responsiblefor sponsoring, managing and delivering the projectthroughout the management chain.12 The Independent Review Panel also made43 recommendations, covering:abcdefgGovernment and Department of Health leadershipand policy;Department of Health’s supporting frameworkand tools;Area-based capacity and performance management;Sponsorship of programmes;Programme governance and delivery;Management of land and planning dependencies; andContext for re-use of Paddington HealthCampus assets.the Paddington Health Campus scheme 45

appendix threeAppendix threeMethodology1 The fieldwork for this examination focussed on the project documentationfor the Campus scheme, held at St Mary’s NHS Trust. This comprised minutesof all main committees from 2000 onwards and correspondence with theDepartment of Health, including presentations to the senior responsible officialat the Department.2 We had full access to the external reviews that were carried out on theproject, as listed in Appendix 2.3 We spoke to the following organisations or individuals, to whom we aregrateful for their time and co-operation:nnnnnDepartment of HealthEric SorensenHeart of HarefieldIan Robertson, property adviser to the Campus partnersImperial College of Science, Technology and Medicinen Nigel Vince, Chair of the Independent Review Panel, 2005nnnnnnNorth West London Strategic Health AuthorityPaddington Development Corporation Limited (PDCL)Partnerships UKRoyal Brompton and Harefield NHS TrustSt Mary’s NHS TrustWestminster City Council46the Paddington Health Campus scheme

appendix fourAppendix fourThe opportunity cost of delay in taking forward theCampus scheme1 The opportunity cost of the failed project is likelyto be greater than the simple £14.9 million direct costof the project itself. Delay is expensive when buildingcost inflation is running ahead of general inflation inthe economy. While it is difficult to be precise about thecosts of delay on a scheme which was never static, forillustration, had the project eventually gone ahead inMay 2005, in substantially the same form it had reached byOctober 2003, then that 17 month delay would have addedapproximately £103 million to the cost of construction(construction tender prices exceeding general inflation bysome 13 per cent during the period) (Figure 12). The costof borrowing has the capacity to offset the impact of capitalcost increases, if rates fall, or indeed add to the cost, ifrates rise, although the degree of offset /cost would not beknown until financial close.2 This amount is illustrative and is not a cash cost, as theeventual project configuration by May 2005 differed fromthat in October 2003, partly to accommodate affordabilityconcerns. However, it does demonstrate quite clearly howquickly costs would have risen in this case, at that time. Thisunderlines the importance of factoring likely cost increasesinto decisions on whether to proceed with a project whenthere have been material changes to the key factors thatdetermined its original viability.12Construction Costs Inflation between October 2003 and May 2005Cost, £ millions1000950MIPS900850RPI800750Oct2003Nov2003Dec2003Jan2004Feb2004Mar2004Apr2004May2004Jun2004Jul2004Source: Office of National Statistics, Paddington Health Campus documentationAug2004Sep2004Oct2004Nov2004Dec2004Jan2005Feb2005Mar2005Apr2005May2005NOTERPI is the all-items Retail Price Index and MIPS is the Median Index of Public Sector Building Tender Prices published by NHS Estates based on informationcompiled by the Department of Trade and Industry.the Paddington Health Campus scheme 47

appendix fiveAppendix fiveRelevant recommendations from previous Committee ofPublic Accounts’ reportsDepartment of Health: The Chelsea andWestminster Hospital 131 In July 1988, the North West Thames Regional Health Authority submitteda proposal to the Department for a 665-bed hospital at a cost of £136 million.The Regional Health Authority aimed to have the hospital open to patientsby September 1992. By the end of 1992, the total estimated cost had slippedto £236 million and the expected opening time had been pushed back toMarch 1993. The Committee of Public Accounts’ report included thefollowing recommendations:iiixixviWe are concerned that the health authority assumed that planningagreement would be forthcoming and were therefore unprepared for thedifficulty and consequent delay that actually occurred at a cost of some£16 million.We expect the NHS in future to take a more cautious approach onprojects which rely on the property market to fund developments.We also expect to see a full sensitivity analysis on all major capitalprojects to establish the impact of any problem in financing the projects.We wish to emphasise some themes which emerge from our examinationof this project which would be relevant to any major construction projectfinanced from public funds. They are:abethe agreement of the planning authority must be clearly establishedin a formal way before significant expenditure is incurred fordetailed design and development work;the project should be considered in the broadest geographicaland organisational context and not limited to narrow local factors,however attractive the proposals may be to local interests;there should be a full sensitivity analysis to establish the impact ofany problems in financing the project.13 Committee of Public Accounts (1993) The Chelsea and Westminster Hospital, Twenty-Sixth Report 1992-93 (London: HMSO).48the Paddington Health Campus scheme

appendix fiveDepartment of Health: Cost over‐runs,funding problems and delays on Guy’s HospitalPhase III development 142 The Treasury approved in principle the development of Guy’s HospitalPhase III in December 1986 at a cost of £35.5 million and with a plannedcompletion date of December 1993. The development was finally finished inApril 1997 after the cost had increased to £151.8 million. The Committee ofPublic Accounts report included the following recommendations:On the control of project costs and deliveryiiiiiiviThe Guy’s Hospital Phase III project cost £115 million more than theoriginal estimate of £35.5 million and was delivered over three yearslate. It is a disgrace that the original estimate was so inadequate, and wasapproved by both the Department of Health and the Treasury quickly,even though both had strong reservations about it;The unrealistic initial cost estimates may have enabled Guy’s to secure aplace in the queue for scarce NHS capital investment at the expense ofother schemes. We expect the NHS Executive to ensure that priorities forcapital allocation are based on realistic cost estimates;A key factor in the cost overruns and delays was that during the courseof the project there were four changes of client body with overallresponsibility, six different project sponsors, and five changes inproject manager. While we recognise that the NHS was undergoingconsiderable change during this period, the failure to ensure consistentproject oversight and management was indefensible. We note the NHSExecutive’s assurance that they are now seized of the importance of thesponsorship role and the need to ensure continuity of personnel, andindeed had intervened in recent cases to keep project sponsors in post;Accountability for such projects has been sharpened since 1994, with theissue of the Capital Investment Manual, and the designation of trust chiefexecutives as accountable officers with a direct line of accountabilityto the NHS Chief Executive. However, we are disturbed that no oneassociated with this major failure of cost control and project managementhas been identified or disciplined;14 Committee of Public Accounts (1999) Department of Health: Cost Over-runs, Funding Problems and Delays on Guy’s Hospital Phase III Development,Twenty-eighth Report 1998-99 (London: HMSO).the Paddington Health Campus scheme 49

appendix fiveOn the funding problemsviiviiiIn addition to failing to control the costs of the project, and delivery ontime, those responsible for Guy’s Phase III also proceeded at variousstages without full funding for the project. This was reckless. The netoutcome was that the public sector contribution rose from £19.5 millionto £117.9 million including a £25.3 million funding gap; a total costincrease to the taxpayer of £98.4 million. While it is not possible to linkthis extra cost to specific delays to other patient services and projectselsewhere, it is clear that there must have been a considerable adverseimpact in other parts of the country. The NHS Executive put the impact offinancing the funding gap as equivalent to each NHS trust receiving a oneoff reduction of about £58,000, or a large capital project being delayedby one year;We look to the NHS Executive to ensure that future projects should not beallowed to proceed without an agreed funding strategy, without sensitivityanalyses that address the risks involved, and without rigorous re-appraisaland confirmation at every stage that sufficient funding is available;On improvements to the planning and delivery of NHS capital projectsixWe note the Executive’s assurance that improvements in projectmanagement and accountability since 1994, and the introduction ofPrivate Finance arrangements, will limit the risk of problems in thefuture to major construction contracts in the NHS. We look to theNHS Executive to ensure that this guidance is followed by NHS trusts.And we will be interested to hear about their experience withPFI in due course.50the Paddington Health Campus scheme