Is this the end of PFI?

Will the Private Finance Initiative still be shaping the NHS landscape after 2010? B&E reports.

THE private-finance initiative (PFI) has come along way since its humble beginnings in 1992.

By shifting the risk to the private sector, the then Conservative government saw PFI as an ideal way to kick-start investment in new hospitals and schools without the taxpayer footing the bill.

However, 16 years on, the government’s enthusiasm for PFI is wavering.

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Changes to the international accounting standards will force it to bring £30bn of PFI liabilities onto the public balance sheet from 2009 to 2010.

FINDING A CURE
Models the government wants to explore further for larger healthcare projects
• Strategic infrastructure partnerships, such as the NHS Lift programme.
• An integrator approach, where the public sector authority procures a
project delivery organisation (the integrator) to manage the project from pre-procurement preparation through to operation.
• Hybrid approaches to address specific requirements, such as Procure 21.
• Joint ventures for specific projects, or for a longer duration.
• An approach where a facility may be built entirely at the private sector’s risk
but with the public sector paying a proportion of the capital at completion to lower the total borrowing cost.
And with major facilities still needed, where does this leave the state of healthcare construction in the UK?

Delivery models
Since 1997 PFI has delivered 70 operational hospital schemes worth £4.5bn.

This month the government announced it will expand the current range of procurement models and looking at new ways to deliver large, complex projects.

The aim is to get all of the benefits of PFI with less of the costs by mixing public and private capital in newer forms of partnerships.

The government wants to explore finance models such as Procure 21, joint ventures and NHS Local Improvement Finance Trusts (LIFT).

But with £23.3bn-worth of PFI projects due to be signed over the next five years, it insists the scheme still has a role to play.

Procure 21 allows NHS Trusts to use a framework of construction companies to deliver acute capital projects across the country.

To date LIFT schemes have been used to develop primary and community care facilities. Under the initiative, a joint venture company is created between the private sector and local primary care trust. Unlike PFI, trusts can sidestep the costly bidding process and use the LIFT company’s designated contractor and its accredited supply chain.

A balanced case
On or off the balance sheet, Ian Wootton, lead healthcare partner at Pricewaterhousecoopers insists PFI has proven its case for the future. “The reality is the PFI process has proven better value for money against traditional public sector procurement,” he says. “And we are still in much need of new hospital investment.”

PFI has come under fire from trade unionists who say it produces poor buildings built for the lowest cost.

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Wootton says most large hospitals procured using traditional methods were late, over budget and didn’t meet the specification. “I think all the complications have been reasonably worked out,” he says. “There is now a lot of experience delivering hospitals under PFI and we should build on that not throw it away.”

The number of large acute facilities required on a city-by-city basis is far less now than it was 10 years ago. However, there are still substantial developments that need to go ahead.

To do this, a number of NHS Trusts are ditching their PFI business cases and looking at other routes.

Foundations for the future
A key driver behind this is the government’s initiative to devolve more power to NHS Trusts by allowing them to apply for Foundation status.

A Foundation Trust can carry over any shortfall on spending each year instead of returning the cash to a central pot. It allows the trust to build up funding in a way that was not previously possible. It also allows the trust to borrow money from the banks to finance capital programmes.

The result is that a number of trusts are now raising the capital to fund new developments.

Taunton and Somerset NHS Foundation Trust is revisiting its plans for a £57m PFIfunded hospital. Trust director of planning and facilities, David Allwright said he assumed PFI would be the only funding route available for the size of the development.

Since submitting its business case, the trust has achieved Foundation status. Allwright says it is now considering delivering the scheme, which now stands at £72m, through traditional procurement or via Procure 21. “It has not been decided yet,” he says. “We are going to reconsider the business case in April that puts forward a proposal for how we can move forward to not use PFI.”

Allwright says the decision to look beyond PFI funding was about the longer-term affordability of the scheme and having the flexibility to deliver it in three stages. “With PFI, it is much harder to phase,” he says. “It’s one big hit. Traditional procurement allows us to deliver the programme in stages.”

He says trusts forced down the PFI route are having to make decisions to accept a 30- year recurrent unitary payment at one particular moment in time regardless of how successful the hospital might be.

“My understanding is that we are not alone on this,” he says. “A lot of trusts are reviewing their PFI status simply because there is another way of doing it and that is as a Foundation Trust. If you are talking about a £200m-plus scheme, then PFI would probably be the only route through. For smaller schemes like ours the freedom of Foundation status allows us to do that.”

Hillingdon Hospital NHS Trust is also currently considering alternative options to deliver a new £80m hospital. The trust had an outline business case approved for a PFIfunded delivery. A trust spokesman said it is now looking at the possibility of a phased development through traditional procurement.

Treating the old
Peter Woolliscroft, chairman of the Construction Clients’ Group says the people now heading up the trusts are a different breed to what they were 15 to 20 years ago. “The client and the industry has matured significantly over the years and now there is a particularly strong drive for value as oppose to lowest price,” he says.

He says trusts may sharpen their thinking before investing in new infrastructure. “I’ve been recommending to my members that as clients they ought to be thinking long and hard about whether they need something new or not. They should look after what they’ve got a bit better – repairs and maintenance are the Cinderella art.”

Post 2010 landscape
The change in culture has coincided with the emergence of more standardised ways of delivering healthcare facilities, such as the Department of Health’s (DoH) Procure 21 framework.

Each of the 11 framework contractors, which include Laing O’Rourke and Balfour Beatty, are required to form full supply chains featuring architects, engineers and M&E firms to bid for a place on the framework. By using Procure21, NHS Trusts need not go to OJEU tender.

While it has provided a more standardised and open working relationship between contractors and trusts it has come under fire from contractors who have failed to win projects despite paying the annual fee.

Despite this, Procure 21 has been used to deliver £70m building projects, providing firms with repeat work. To date, the programme has more than 360 schemes registered with a combined value of more than £2.5bn.

The new capital regimes enjoyed by trusts is likely to boost the programme even further when trusts look to deliver what would have previously been £50m to £100m PFI-funded deliveries through Procure 21.

Its success has prompted the DoH to replace the current programme when it expires in 2010 with NHS stakeholders saying that a replacement is still needed.

Woolliscroft was head of construction for the DoH when it developed the Procure 21 programme. He says it has provided standardisation amongst hospitals that doesn’t exist under PFI-funded arrangements.

“Under PFI there is no incentive to benchmark between providers and solutions,” he says. “If you’ve got a contract to build a hospital in Durham and a different contract to build one down in Essex there is no natural collaboration between standards and utilisation of material purchasers, unless the same contractor is used.”

Long-term partnering is flourishing under Procure 21. HBG, for example, has shook hands on 15 separate projects with Sheffield Teaching Hospitals NHS Foundation Trust.

“When I was heading up Procure 21, I would be getting phone calls on a consistent basis from chief executives of NHS Trusts who would far rather go down the Procure 21 route than the PFI route,” says Woolliscroft. “In some cases it was because Procure 21 was quicker and trusts had more hands-on control. They were also negotiating in a real sense with a contractor about what they were getting.”

Woolliscroft says he is keen to see more work on the big PFI schemes to nurse some of the smaller investment programmes. “If you look at any one of the schemes two things hold them up,” he says. “The first is the financial argument, and the second is the legal argument. If the government is to make anything out of PFI it’s got to put in some standard forms of arrangements: standard legal practices and standard specification.

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Woolliscroft says that contractors can waste up to 5% of the capital value of a scheme through the pre-contract phases when delivering through PFI. “That is a big chunk of money on a £600m scheme that has to go in as an overhead. If we had an option of putting some form of standardisation into the precontract phase a lot of that would be taken out,” he says.

As with any capital project delivery, trusts must obtain value for money. For the major infrastructure projects, PFI will still be the only game in town, but by 2010 most trusts will have achieved Foundation status.

The longer-term affordability of owning a hospital from day one, as opposed to entering a 30-year recurrent unitary payment regardless of the hospital’s success, will be an attractive and realistic option for trusts delivering medium-size projects.

The government’s drive to address investment in community-based healthcare will also see the number of PFI schemes dry up.

The onus will be on the smaller investment models to update the NHS estate. With long-term collaboration and repeat work at the core of such models, it might provide the perfect platform to transfer their success into the large healthcare facilities of the future.

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