Skanska to be paid Lm145.5m for new hospital - 10/11/2004

Skanska are to be paid a total of Lm145.5 million for the building of the Mater Dei Hospital, the incorporation of facilities due to have been completed in 2010 and the installation of medical equipment, Prime Minister Lawrence Gonzi told parliament yesterday.

The hospital's medical equipment, IT systems, logistics and administration expenses of the Foundation for Medical Services could cost an additional Lm30 million to Lm40 million.

Dr Gonzi said in a statement that in terms of the agreement reached last Saturday, the Skanska consortium would be paid Lm139 million for the first phase of the project which involved the building of the hospital, Lm6 million for the accommodation of the second and third phases within the existing building, and Lm500,000 for the installation of medical equipment.

The hospital has to be commissioned on July 1, 2007, failing which Skanska would be liable for penalties of Lm1 million per month up to a maximum of Lm5 million.

Dr Gonzi said the Lm139 million agreed for the first phase of the project was Lm25 million lower than the potential total which the government had faced before intensive talks with Skanska started in the summer.

The second and third phases, which were to have been completed in 2010 would include the Institute of Health Care and the Medical School, the Renal Unit, the Dental Unit, the Oncology Unit and the Dermatology Unit.

Dr Gonzi gave the figures at the end of a 30-minute statement where he gave a detailed overview of the way how the building of the hospital had evolved. He later answered questions which took the rest of the parliamentary sitting.

He said the project's development could be divided into four periods. The first was between 1990-1996 when the project was conceived as a 480-bed hospital which was to complement a modernised St Luke's Hospital. The new hospital, then called San Raffaele, was to have specialised in diabetes, heart and degenerative diseases and chronic diseases, with a strong accent on research. At the time the costs were projected at Lm51 million, including medical equipment. On September 12, 1995 a consortium led by Swedish contractor Skanska was awarded the contract to build the hospital.

The second period, Dr Gonzi said, was between 1996-1998 when the Labour government decided to completely change the concept of the new hospital so that it would become an acute general hospital of between 800-1,000 beds. The implications of these changes, Dr Gonzi said, were enormous.

Malta was to have a 1,000 bed hospital in a space meant for 480 beds. The change also meant a substantial increase in costs for building, medical equipment and other systems. At the time, a direct order was issued for the building of an additional two storeys on the new hospital's footprint.

The third period, Dr Gonzi said, was between 1998-2004.

The Nationalist government had decided that it could not go back to the original San Raffaele Hospital concept. The new hospital, therefore, would be an acute general hospital, but the number of beds was revised downwards as social cases currently accommodated at St Luke's Hospital would be moved to St Vincent de Paul home or elsewhere.

It immediately resulted that the designs adopted by the Labour government meant that a whole block built before 1996 had to be demolished, a change which cost Lm2.5 million. The changes also meant the building of another storey and a new block.

Dr Gonzi said the extent of the changes between the projected San Raffaele hospital and the new acute general hospital were such that instead of 16 operating theatres, there would now be 24; instead of 22 wards, there would be 40; instead of 33 lifts there would be 52 and the car park would grow from 500 slots to 1,600 slots.

In view of problems which often cropped up between the designers (Ortesa and Norman and Dawburn) and Skanska the government in the year 2000 awarded Skanska a design and build contract.

However, before that contract was awarded, Skanska in February 1999 presented a pre-design brief and concept design where it indicated the cost for the construction of the hospital as being Lm93 million including the management and design fees. (excluding medical equipment and IT as well as the second and third phases). The design and build contract with Skanska had saved the government Lm7 million which had been due because of some variations from the plans agreed with Skanska in 1995.

Dr Gonzi said that right from the very beginning of the new contract, the Foundation for Medical Services (FMS) realised that some aspects of the designs submitted by Skanska were not in conformity with the design brief and changes were accordingly requested. FMS itself authorised variations of about Lm5 million after advice by 55 commissioning teams formed of medical specialists who would work in the hospital.

The FMS, Dr Gonzi said, had an important role in ensuring that the project followed the established criteria and the projected target value, authorising changes where necessary. The FMS participated in the granting of tenders and could thus compare the contract prices with the projections it had been given.

As time went by substantial variations resulted from the projected cost which Skanska had given. This had happened because the project grew after the tender was awarded, because standards were raised, and also because the designs were not complete or insufficiently detailed.

In May 2001, therefore, FMS appointed Horwarth CLS Ltd to provide cost control services.

The situation grew worse, and on August 8, 2001 the then Prime Minister convened a meeting with the ministers of finance and health, the president and chief executive of FMS, the president of Skanska and a representative of the Maltese partners in the Skanska consortium to discuss concerns over rising costs and the projected opening date. Up to that time Skanska was insisting that costs were under control.

However, with every contract that was signed, FMS continued to realise that the final cost was continuing to rise.

The cost overruns became more clear in September 2002 when the projected cost rose to Lm120.9 million, and on to Lm121.5 million in October. In November of that year Finance Minister John Dalli called a meeting with senior Skanska officials and agreement was reached on the setting up of a joint committee to analyse the cost divergences.

This exercise further revealed how Skanska's original estimates had to be substantially revised upwards. By September 2003 the construction costs were being put at Lm138.8 million but Skanska's sub contractors were making claims for a further Lm22.3 million meaning a potential construction bill of Lm161 million.

The situation was reported to the Cabinet in November 2003 and the FMS subsequently commissioned a report to identify the difference between the target value made by Skanska and the projected final cost. The report was completed in April 2004.

Dr Gonzi said the fourth period consisted of the intensive talks held over the summer this year with Skanska. On June 3 he and Health Minister Louis Deguara had a meeting with senior Skanska officials and negotiating teams were appointed to make a detailed analysis of all claims and cost discrepancies, the aim being to establish a final cost figure and completion date. The government's team was headed by Parliamentary Secretary Tonio Fenech.

At the opening of those talks the government was facing a potential bill of Lm161 million, just for the first phase of the hospital, and there was no guarantee that this would not continue to rise. There was also no realistic date for the opening of the hospital.

The Maltese negotiating team had five targets: changing the contract to a lump sum deal; establishing a final price which would not rise; establishing a definite and realistic opening date; imposition of penalties of up to Lm5 million if the hospital did not open on time; and management by Skanska to ensure that there was full coordination involving the mechanical and electrical services and medical equipment.

The government had aimed for an opening date of May 31, 2007 as long as that was realistic.

Dr Gonzi said that early in the talks, Skanska said that because of the delays in the award of the tender for medical equipment, it was facing claims of Lm23 million from its contractors. It also demanded an additional Lm6 million for management and design because of changes which had been made. In all, the bill was put by Skanska at Lm164 million.

This, Dr Gonzi said, was unacceptable to the government. It recognised there had been justifiable delays owing to the time taken for the adjudication of the medical equipment tender. But this delay had been claimed by the consortium itself as amounting to Lm6.5 million.

At this point, Dr Gonzi said he wanted to express his "profound disgust" at the delays caused because of the controversy over the medical equipment tender. His disgust stemmed mostly from the fact that when he had asked the representatives of the company involved to report their allegations to the police for investigation they refused to do so and it had to be himself, as Prime Minister, to pass on the information he had been given to the police for investigation. The allegations were now before the courts, but the damages caused to the country could not be calculated.

Continuing, Dr Gonzi said that during the talks with Skanska the government recognised that it had, through FMS, authorised changes which amounted to some Lm5 million.

But the government could never accept responsibility for the cost overruns, including the claims by Skanska's contractors, with which the government had no contractual relationship.

The two sides therefore had distant positions but the two positions gradually started getting closer. The government had accepted in principle that in every project there normally was a 20 per cent contingency. The consortium accepted to reduce the claims made by a number of its contractors.

The talks reached a critical stage in September. The government's offer was of Lm135, on condition that Skanska absorbed all the risks until completion of the hospital, which had to be completed by December 2006 for commissioning by May 2007.

Dr Gonzi said that since both sides could not agree, on September 30 he suspended the talks. Later that day he received a fresh offer from Skanska, which was close to what the government wanted, but still unacceptable.

A meeting with the most senior Skanska officials was held on October 25 and although progress was made, agreement remained elusive. Nonetheless a new possibility emerged and both sides decided to explore it. At that meeting, the government had insisted that the final cost should not exceed Lm139 million with completion by May 31, 2007.

Skanska's claim was of Lm143 million and it was refusing the imposition of penalties in case there were delays.

Dr Gonzi said that before last Saturday's final meeting the two sides explored the possibility of merging the three phases of the project into one. The first phase was the building and commissioning of the hospital, the second was the building of a new block for the Medical School and the Institute of Health Care as well as rehabilitation services and the renal unit. This phase, costing Lm10 million, had been projected for 2010. The third phase had included the transfer of the blood bank (which would now not take place following advice that the blood bank should not be within the hospital), the transfer of acute psychiatry facilities, dentistry, oncology and dermatology and a staff leisure centre. This was also originally pencilled for 2010. These works had not been included in the original scope of works and the cost estimates made by Skanska.

The two sides, after an intensive exercise, agreed that better use of the existing building could be made to incorporate those two phases without the need for a new block.

The two sides therefore agreed last Saturday that the contract would be changed to one for a lump sum. The final amount payable to Skanska for the first phase of the project (the construction, electrical and mechanical services) would be Lm139 million, which was Lm25 million lower than the potential sum at the beginning of the talks. The hospital would be opened on July 1, 2007. There would be penalties of Lm1 million per month (calculated for every day) up to a maximum of Lm5 million if the target date was exceeded.

Skanska also agreed to assume responsibility for the management of the installation of the medical equipment for an additional Lm500,000. It would also carry out the necessary works, for an additional Lm6 million, so that the existing building could by July 1, 2007 also accommodate the facilities of the second and third phases (excluding the blood bank, rehabilitation and acute psychiatry).

This meant that apart from the savings on the new building, these services would come on line at the new hospital on July 1, 2007, Dr Gonzi said. It also meant that St Luke's and Boffa Hospitals would immediately become totally vacant and available for development which could be used to finance the building of Mater Dei Hospital.

In his statement Dr Gonzi also referred to the controversy that cropped up over the composition of the Maltese negotiating team right at the time when the talks were in a delicate stage, saying the issue was deplorable. Politicians had to be sensitive over who was appointed to perform government functions, he said, but the reputation of seriousness and honesty of the people concerned should not be tarnished.

He said that architect Paul Camilleri, who had been a member of FMS since October 2000 and was its vice president since May 2003, was a respected architect and knew the whole history of the project. One would have been stupid, therefore, to exclude him from the negotiating team where he could contradict claims by the other party.

The same applied for the choice of lawyer Richard Camilleri, who also enjoyed respect for his competence. He had also been involved in the legal team at the time of the Labour government. The appointment of a lawyer who was not the lawyer of FMS was based on the fact that the government wanted to radically change the contract to one for a lump sum with a definite completion date. Dr Gonzi said he had also wanted a second opinion on the rights and obligations of the two parties in the context of the existing contract. He had to be certain of the alternatives the government had, including the possibility of taking legal action against Skanska. This was no reflection on the legal counsel of the FMS.

He said the bills received so far for the services by the experts were: Dr Richard Camilleri, Lm2,950; Ms Jackie Camilleri, Lm1,060, Michel Ganado, Lm3,380, Paul Camilleri, Lm3,450 and John Barr Stg22,716.

Concluding, Dr Gonzi said he wanted to sound a word of caution. While the agreement with Skanska was an important step forward, the hospital would become a reality once agreement was reached on new work practices for the staff who worked there, once there was successful coordination in the installation of the IT system, agreement was reached on catering services and the migration plan was carried out in an orderly manner. Much, therefore, remained to be done and all should remain focused and determined. But he was convinced that Mater Dei Hospital would be a hospital which the Maltese deserved.

Members from both sides of the House then asked a series of questions, starting with Opposition leader Alfred Sant.

Dr Sant asked about the responsibilities of the various ministries, the Office of the Prime Minister and the FMS with regard to the new hospital over the years.

He also asked how Health Minister Louis Deguara had said in 2000 that the project would cost Lm83 million, when it was known that it would cost more. How had Finance Minister Dalli said in November 2000 the hospital would open in 2003?

Why had Dr Deguara in 2003 said work was going as planned and the hospital's first phase would open in 2005? Was this an attempt by the government to mislead?

How was the government now saying the hospital would cost Lm139 million when the government's financial reports showed Lm108.5m had already been spent, with another Lm45 million projected for this year?

How much would the medical equipment cost?

Dr Sant said that although he was not questioning the professional competence of Dr Richard Camilleri and architect Paul Camilleri, did the Prime Minister not feel he was violating basic ethics when he appointed them, his cousins, for such roles. Even local council rules did not allow such conflicts. And, surely, Paul Camilleri should not have been paid to negotiate a mess which he, along with the FMS, were tasked to prevent?

What would happen if the hospital was not completed by the target date?

Dr Sant also observed that the government in its convergence plan to the EU had said the outlay on the hospital would be completed by 2006. Now the project would be completed in 2007. How would this affect the deficit and the debt?

Other questions were put by Labour MPs Charles Mangion, Michael Farrugia, Leo Brincat, Joe Brincat, and Nationalist MPs Mario Galea, Jason Azzopardi, Joseph Cassar, Jeffrey Pullicino Orlando, Robert Arrigo, David Agius, John Dalli and Franco Galea.

Replying, Dr Gonzi and Health Minister Louis Deguara said 25 per cent of the medical equipment would be received this year and 75 per cent next year. Some of the equipment would initially be used in St Luke's Hospital. The cost of the medical equipment, IT systems, logistics and administration expenses of the Foundation for Medical Services could reach an additional Lm30 million to Lm40 million.

Dr Gonzi said the hospital project was a national one, conceived by the Office of the Prime Minister and budgeted and costed by the Finance Ministry. Eventually, following the 1998 election, the Health Ministry became strongly involved in the consultations taking place, in the setting up of the commissioning teams, and in the preparation of the medical brief.

The FMS was responsible for the development of the project. It was involved in the issuing of tenders and could stop particular tenders from being accepted, while keeping the government informed of the difficulties and problems being met.

Referring to the discrepancies in the target costs and the projected opening date, Dr Gonzi said it was true that values were changed but as he had explained developments had also taken place.

Referring to the issue over the number of doors, Dr Gonzi said that in its original design Skanska had planned 450 fire resistant doors, each of which was to cost Lm250. But for the standards the government was insisting upon to be met, it was necessary to have 900 fire resistant doors. Skanska should have calculated these in its original costings.

Skanska had been paid Lm1.9 million for it designs which took one year and two months to complete. This was why Skanska was being held responsible, and its responsibility cost millions.

Replying to a question of how Dr Deguara once said the hospital would cost Lm200 million, Dr Gonzi said that included the medical and all the other equipment as well.

Referring to the total of Lm151 million mentioned by Dr Sant as resulting from the government's financial reports, Dr Gonzi said that too included items which were not in the construction phase. Nor did it include Lm15 million spent before Skanska was first engaged in 1995.

Dr Gonzi welcomed the fact that Dr Sant had now recognised the professional competence of Richard and Paul Camilleri, and said they were on the negotiating team on the basis of that competence.

Should the project not be completed on time, Skanska would face penalties of Lm1 million a month and could be taken to court.

Asked by Dr Sant whether he would publish the agreement signed with Skanska, Dr Gonzi said he would have no difficulty as long as it did not contain confidential information. He would not help anyone take any advantage of the situation.

Replying to questions about the blood bank, Dr Deguara said the government wanted to avoid the unnecessary transport of blood so the hospital was to have a unit for blood storage.

On the migration of services from St Luke's Dr Deguara said that the hospital would not open with a big bang in July 2007, but different sections would be opened as they were completed.

The existing migration plan would be updated, but not drastically changed.

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