Government reaches commercial settlement with nRAH operator and subcontractor over Labor's long-running disputes
Wednesday, 21 August 2019
The State Government has reached an in-principle commercial settlement with the operators of the new Royal Adelaide Hospital, finalising a litany of long-running historical disputes – including duress alarm system and building faults - inherited from the former Labor government and which have plagued the hospital since well before it officially opened in September 2017.
Treasurer Rob Lucas said the Government had inherited a “diabolical financial and legal mess at the nRAH from the former Labor government which we’ve had to spend an inordinate amount of time and money to resolve’’.
“This has been an absolute lawyers’ picnic costing all parties tens of millions of dollars,’’ said Mr Lucas.
“The State’s legal fees alone total more than $18 million over more than 3 years.”
Mr Lucas said the new Government has worked cooperatively to protect taxpayers’ interests by seeking a commercial settlement with nRAH operator Celsus and Celsus’ subcontractor Spotless (Downer EDI Limited) since the election in relation to the ongoing legacy disputes, which also covered patient minding, Orderly services, the cleaning regime and Chilled Condenser Water System Works among other issues.
The former Labor government had been fully aware of the operational and technical faults in the $2.4 billion hospital well before commercial acceptance in June 2017, but “unbelievably pushed ahead anyway so they could cut a ribbon before the election”.
Technical completion was granted in March 2017, two months before Commercial Acceptance, which triggered the start of $1 million-a-day payments for the initial years of a 29-year contract.
The nRAH eventually opened three months later on September 5 – 17 months behind schedule and more than $600 million over budget.
“The list of problems were as long as my arm,’’ said Treasurer Lucas.
Problems with the duress alarm system prevented the Government from being able to open beds designated for the Psychiatric Intensive Care Unit and required the use of additional security guards and monitoring which has been costly. It also required the State to keep open Psychiatric Intensive Care beds at Glenside.
Upon coming to government in March 2018, the range of ongoing and unresolved legal issues between the State and Celsus included:
- disputes about defects and the application of abatements for Orderly service failures;
- defect notices issued, and disputed, in relation to the duress system.
- issues concerning the Chilled Condenser Water System Works which forced the shutdown of the hospital’s air-conditioning system, putting critical services - including surgeries - at risk.
- issues with the Facilities Management (FM) contract, including patient room cleaning regimen. Spotless had already foreshadowed its potential claims for additional payment for delivery of the FM services, but no formal notices had been issued.
- a vast array of outstanding issues from Commercial Acceptance of the building, which comprised unfinished items that were required for completion of the hospital but were identified as being “appropriate to be deferred” by Labor at the time of Commercial Acceptance.
Under the in-principle commercial settlement – independently facilitated by Hon John Sulan QC - the parties have reached agreement on all issues, including Celsus committing to design and construct two new cooling towers as well as completing a range of works to rectify the duress alarm system.
Celsus will also complete implementation of actions under a “Cure Plan” to the State which addresses the rectification of a number of outstanding items including issues dating back to Commercial Acceptance.
The agreement also includes a resetting of the hospital’s operating model which will better utilise the hospital’s capacity, leading to better patient outcomes and ensuring a sustainable commercial arrangement going forward.
The agreement also involves a release in favour of the State of all existing legal claims between the parties other than the long-standing Builder’s Claim Arbitration against the State.
This agreement involves a complex series of payments between the parties including some which will extend until 2033.
Treasury’s summary of the NPV cost of this commercial settlement to the State is about $16 million.
Prior to the settlement, Treasury advised that average annual payments to Celsus over the forward estimates had reduced to between $285 million and $310 million per year.
The terms of this commercial settlement were supported as being in the best interests of the State by Treasury, SA Health, the Crown Solicitor and private legal advisors Lipman Karas.
The Government also obtained independent advice on the commercial settlement from Hon John Sulan QC (Mediator), Mr Steve Ludlam (technical advisor to the Mediator) and Mr Robert Rust who was the State’s appointed commercial advisor.
All three advisors also supported the commercial settlement.
“The Government is pleased to have finally reached a commercial settlement with both parties to ensure the nRAH can successfully deliver world-class healthcare to the people of South Australia,’’ said Mr Lucas.
Minister for Health and Wellbeing Stephen Wade said this settlement was a key milestone of the organisational and financial turnaround at the Royal Adelaide Hospital.
“This in-principle agreement allows our hard-working staff to focus on providing the very best health care for South Australians and builds on the momentum of change occurring in our central hospitals,” Minister Wade said.
The settlement is planned to be completed in September (effective from July 1, 2019) subject to final financier approvals being obtained by Celsus.