PPPs in perspective - High anxiety, by Mark Hellowell

15 Sep 05
Mammoth PFI commitments appear to have had their day in the NHS, now that the government is prizing competition above all else. Smaller, self-financed projects are emerging as the way forward

16 September 2005

Mammoth PFI commitments appear to have had their day in the NHS, now that the government is prizing competition above all else. Smaller, self-financed projects are emerging as the way forward

With 15 new NHS hospitals announced in June last year, the capital value of schemes completed, in negotiation or due to be released to the market topped £16bn.

It seemed at the time that nothing could stop the 'biggest hospital programme in the history of the NHS', as the government never tired of calling it.

The target, flagged up in the NHS Plan, was to deliver 100 major hospitals by 2010. With 78 given the go-ahead since 1997, in theory that leaves 22 outstanding. All of these were set to be delivered under the auspices of the Private Finance Initiative - of the previous 78, just four have been taken forward under conventional procurement.

But there is a concern within the industry that the remaining schemes - and even some of those green-lighted - will never see the light of day. Noises from the top of the health policy tree suggest a major rethink is on the cards.

First, Bob Ricketts, the Department of Health's head of access policy, development and capacity, told a management conference this summer that 'awfully grand' PFI schemes were causing 'real problems' for capacity planning.

Rather than seeking to build 'monuments with long-term leases', Ricketts said that trusts should look to buy cheap facilities that would last around five years.

But monuments with long-term leases are exactly what the PFI is delivering. The latest tranche of 15 projects, worth £4.4bn, includes some mammoth undertakings. A package of building work in Watford and Hatfield will cost £880m, and there is a multi-site scheme in Merseyside that officials believe is worth £1bn.

The average value of these schemes is £293m, and that's before the inevitable cost-hikes. Six of the 15 hospitals have an estimated capital cost of over £300m.

The leases on these schemes are between 30 and 60 years, during which the NHS will pay billions of pounds to the contractors and investors. It is understandable that the PFI industry is puzzled: its confusion is the product of a general discord at the heart of this government's approach to the NHS.

The fact is that the PFI, with its focus on large, rationalised facilities and long-term maintenance contracts, does not flow in the same trajectory as wider NHS reform. The 'new NHS' is all about competition between providers.

Under payment by results, NHS trusts will, like health companies, be paid according to the volume of patients they treat. In an environment where the patient can choose his or her health provider, it follows that a trust's income will be based on its capacity to attract that patient. If patients are increasingly choosing other providers, the cost to the trust of meeting the PFI unitary charge will rise in proportion to its total revenue.

This will put trusts with PFI projects under greater strain than those without, and might prove a competitive disadvantage.

Prospective private sector investors will want to know how the trust proposes to ensure it can pay for the buildings it is being asked to provide. Many trusts will look to smaller-scale investments.

Government reforms assist them in this: as more and more trusts are awarded foundation status, they will find new ways of raising capital.

The experience of Stockport NHS Foundation trust could be a pointer. It has borrowed £25m over 15 years to fund a new cardiology and surgical unit. The hospital had planned a big £250m PFI redevelopment, but ditched this in favour of a number of small, self-financed projects.

A second possibility is that private financing will continue, but in a different form. There is already support in the industry for an approach based on the NHS Local Improvement Finance Trust programme used in primary care.

Lift involves joint ventures between the public and private sectors, allowing a range of projects to be undertaken over time. So it is more flexible and can cope with smaller schemes.

In the short term, the DoH might consider getting bidders for existing schemes as its biggest problem.

There is, accordingly, a need for the department's capacity and choice team and its private finance unit to co-ordinate their policies. As long as the former team castigates massive monuments while the latter pushes ahead with £1bn schemes, confusion will reign.

Mark Hellowell is editor of Public Private Finance