20 October 2006
As the NHS's financial crisis continues, the Private Finance Initiative has come in for its share of the blame. But this is wrong, argue Phil Lobb and Tom Startup. In fact, with a more flexible approach, the PFI can even help trusts get back into the black
Last week's NHS health check-up results made gloomy reading. The Healthcare Commission found more than a third of trusts were weak in their use of resources, and this in a year when deficits have continued to worsen. According to the King's Fund, the proportion of bodies in deficit rose from 28% in 2004/05 to 31% in 2005/06.
At the same time, the government is pressing on with the use of the Private Finance Initiative in the health sector. According to figures from the Treasury, 19 PFI deals worth around £800m reached financial close in 2005, and more than £2bn worth are in the pipeline.
Some commentators have claimed that the PFI is contributing to these financial deficits. For instance, Amicus, Unison and the British Medical Association have pointed to the example of Queen Elizabeth Hospital in Greenwich, which has a deficit of £19.7m despite being more efficient than the average trust. Its annual payment under the PFI is around £15m. For some, this suggests that the PFI is an unnecessary financial burden on trusts. However, the government claims there is no connection between the deficits and the PFI scheme.
So what is the truth and what does this mean for the future of the PFI? Overall, the evidence does not support the view that the use of the PFI is a significant cause of the financial deficits. Bringing together data from the National Audit Office and the Treasury, our analysis suggests that, if anything, trusts with a PFI commitment are less likely to be in deficit than others. While 26% of NHS hospital trusts were in deficit in 2004/05, the figure for trusts with a PFI scheme was slightly lower, at 24%. These figures exclude foundation trusts, which are subject to a different financial regime and have no statutory obligation to break even.
In fact, independent analysis from the King's Fund suggests a number of causes of the current deficits. These include national policies such as the Agenda for Change pay restructuring, the new General Medical Services contract, the pressure of national targets, dependence of trusts on primary care trusts, and weaknesses in financial management. The latter was also highlighted in the Healthcare Commission's health check.
But this is not the whole story. There are reasons why some people see the PFI as part of the problem. On the plus side, the initiative has many merits as a procurement route, including the ability to spread costs over the lifetime of the asset, an increased likelihood of projects being delivered on time and to budget, improved value for money, and strong performance incentives at the operational stage.
However, compared with conventional procurement, trusts with PFI contracts have relatively less freedom to reduce maintenance spending, defer future projects or close facilities once the contract is signed. (From another perspective, these features could be seen as beneficial – if they prevent insufficient maintenance or the under-utilisation of assets.) Of course, whatever procurement route is used, if a hospital fails to match local medical needs, then difficult decisions will have to be made.
Fortunately, there are a number of ways in which trusts can continue to enjoy the advantages of the PFI while increasing their capacity to respond to difficult financial circumstances. Greater flexibility could be introduced in the specification, contracting and choice of procurement model. For operational PFI schemes, refinancing, variations and termination are all options that could be considered.
In general, trusts could approach their developments more incrementally, avoiding making large commitments that could later prove unsuited to the clinical demands or financial environment. At the specification stage, trusts could be more stringent in building in alternative uses for facilities in the event of future changes in demand. This could involve, for instance, designing an administrative facility that could be leased or sold as office space if required. There could also be a case for excluding services such as soft facilities management and managed equipment services from the contract. This would help keep flexibility over service provision. Another option would be to have part of the building shelled (built, but not kitted out) to be completed as the need arises.
At the contract stage, trusts could introduce greater scope for variations in the services and pass more demand risk to the contractor. For instance, a PFI contract could include provisions to close facilities if the trust required. This would imply a greater cost in the annual charge, but could prove cheaper in the long term if the caution proves to be justified.
However, ultimately, if trusts are to develop their sites more cautiously and incrementally, then a different procurement model might be required. Fortunately, new models are emerging that can enable the use of PFI but on this more flexible, incremental basis.
One approach that we have developed in the schools and defence sector that could be explored in health is the Integrator model. This involves a private sector partner — the 'Integrator' — being given responsibility for bringing forward projects as and when required. The Integrator is rewarded according to overall project outcomes, with penalties for lateness, cost overruns and so on, and therefore takes on significant project risk. It then undertakes to arrange the delivery of the infrastructure, using conventional procurement or PFI, as required.
This model typically requires just a single European Union procurement and would allow trusts the ability to commission projects on an ad hoc basis. It could therefore provide greater flexibility at lower overall procurement costs than a conventional PFI approach.
For trusts that already have PFI schemes, there are other ways of reducing expenditure or increasing control over the financial commitments. Refinancing is one option, either as a means of releasing cash savings or of reducing annual payments. While refinancing is typically initiated by the contractor, in some cases the trust stands to gain as much as 50% of the realised savings.
In other cases, extending the term of the borrowing can cut the annual payments, making them more manageable. Trusts can also use a variation in the contract to reduce obligations on the contractors or the extent of services. Finally, there is the option of contract termination. While this should never be done lightly, in extreme circumstances, when the arrangements no longer match the trust's needs, it might be the right option.
The PFI is not responsible for the financial deficits of trusts, but for some trusts it can seem part of the problem. Changing the approach to the initiative can mean that it becomes part of the solution instead.
Phil Lobb and Tom Startup are respectively partner for health public-private partnerships and head of public sector research at Deloitte. Public Finance will be holding a round table debate on health finance and reform in association with Deloitte on October 25
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