Health and education are the focus of the second in our three-part series on Tony Blair's public spending plans. We examine Labour's £8.5bn schools investment. But of all the government's pledges, its plans to transform the NHS are the most expensive, ambitious and controversial. With PFI and PPP under attack, Building asks where health procurement goes from here
Depending on your point of view, the UK's health service is either terminally ill or on the verge of a remarkable recovery.

On the one hand, an increasingly vocal lobby of anti-PFI campaigners have successfully painted the private sector as a profit-obsessed cancer, eating away at the cherished notion of publicly-funded healthcare. On the other, the government and health service chiefs are unrepentant: private cash and expertise are the best hope of bringing the creaking NHS up to scratch in time for the next election.

Whichever way you look at it, the health service has embarked on the biggest building programme in its history. Last year's NHS Plan set out the government's shopping list: by 2010, England alone will have more than 100 new hospitals, 7000 extra beds in existing hospitals and intermediate care centres, 500 new one-stop primary care centres and more than 3000 modernised GP premises.

The NHS is also committed to clearing a quarter of its £3.1bn maintenance backlog, a legacy of two decades of underinvestment, by 2004. To pay for all this, the NHS budget will grow by about 50% over the next five years.

To cope with the scale of the challenge, the health service – the biggest public sector construction client of them all and the owner of the largest property portfolio in Europe – is embarking on a series of pioneering initiatives aimed at rationalising procurement and increasing private sector involvement through public-private partnerships.

The NHS has long seen itself as one of the most innovative public clients, spearheading PFI, PPP and, through its fledgling Procure 21 initiative, framework agreements. Over the last few years, PFI has steadily grown to become the dominant form of procurement for large hospitals, and now accounts for 90% of all schemes. Of projects currently in the pipeline, 60 are being built with private finance, while just six are publicly funded. By 2010, PFI investment will have totalled £7bn.

Following Labour's landslide election victory in May, prime minister Tony Blair felt he had secured a mandate to push forward with his plans to roll out PPPs across government, with the health service at the forefront of the revolution. Ministers announced they were prepared to see the private sector's role expanded still further, hinting that private consortiums may be asked to go beyond providing "soft" services such as hospital maintenance to include the provision of frontline clinical services – an area traditionally the preserve of the public sector.

Insiders saw this as evidence of the government's exasperation with the entrenched attitudes of the public sector and a discreet vote of confidence in the private sector. But unions, notably Unison and the GMB, were incensed, for ideological reasons as well as more selfish ones: this was a further threat to their hegemony and to their members' terms of employment.

At the same time, a ferocious backlash against PFI was unleashed, as unions, think tanks and newspapers lined up to condemn – often erroneously – the profits private consortiums were set to make, and quality of design and healthcare provision in the first wave of PFI hospitals.

We believe the vast majority of attacks on PPP are politically motivated

Peter Coates, head of private finance, Department of Health

Some in government smelled a union-led conspiracy to see off the encroaching private sector. "We believe the vast majority [of attacks on PFI and PPP] are politically motivated," says Peter Coates, head of private finance at the Department of Health. "The issue is to discredit PFI."

One senior civil servant suggests that the unions were terrified that private sector workers would outperform their public sector colleagues. "People without performance-related pay are very afraid of competition," he says. "They don't want to be compared with the private sector."

But the scale of the backlash has rattled ministers, who have scaled back their rhetoric and effectively frozen the PFI hospital programme, while they try to strike a deal with Unison over the future transfer of staff contracts to the private sector.

This has left the construction industry exasperated, as costly bidding processes are left in limbo. "It's a concern," says John Spanswick, managing director of Bovis Lend Lease Europe. "We've got big investments and so have our rivals. It currently looks like it will delay the programme by six months, but it could get longer."

Spanswick issued a stern warning to the government: "If this issue isn't resolved quickly – in a matter of weeks rather than months – it's likely that none of the new wave of hospitals will be completed before the next election. That would be a big political issue."

Robert Donald, a construction sector analyst at Schroder Salomon Smith Barney, believes the freeze could dent the industry's enthusiasm for PFI. "Procrastination will hurt the industry. The government has got to be careful it doesn't slow down [the roll-out of PFI projects] too much, because the industry might lose confidence and be reluctant to commit resources and take on risk.

"Politically they can't let that happen. Blair has got to either stand up to the unions or meet his public spending aspirations through direct public-sector investment."

In reality, however, the government is unwavering in its belief in the principles of public–private co-operation; its dogged determination to drive through the London Underground PPP in the face of massive opposition is proof of that. And while government is eager to reach a compromise with the unions, it is equally determined to address the private sector's concerns.

PFI is taking too long. We’ve got to find a way to reduce bidding time

Peter Wearmouth, acting chief executive, NHS Estates

For the construction industry, the most pressing concern is the time and cost involved in bidding for PFI hospitals. The tortuous process costs an estimated £2m per hospital and can take up to two years.

"The only thing I'd ask the government to do is make the process more streamlined and shorter," says Bovis Lend Lease's Spanswick. "If you don't win one in three [PFI hospital bids], it's not worth it."

The government appears to be listening and is set to act. The Major Contractors Group has been lobbying hard behind the scenes on this issue, with significant success. "We hear what the MCG says on cost and time," says the DoH's Coates. "We believe the best possible way to reduce the process is to standardise systems as much as possible."

As reported in Building last week, the department is in the process of standardising the PFI so that NHS trusts commissioning hospitals in future will be able to use off-the-shelf documentation. A standard contract is already available; payment mechanisms will follow this month. Consultant Mott MacDonald is drawing up a package of output specifications covering 18 standard criteria, which is expected to be available within six months. By then, Coates believes, up to 80% of all PFI paperwork will be standardised, saving bidders huge amounts of time and legal expense. This initiative will also make it easier for NHS trusts, which are often inexperienced one-off clients, to procure better buildings.

But NHS Estates, the agency responsible for health buildings, is set to go even further to satisfy the industry. It plans to expand Procure 21, its pioneering framework agreement, to cover PFI projects.

"PFI is taking too long," says Peter Wearmouth, NHS Estates' acting chief executive (see below). "We've got to find a way of reducing bidding time. The way to shorten it is to use partnering principles. We're on course to include PFI in our framework agreements." For major contractors, this offers the tantalising prospect of winning a string of PFI hospital deals with a single tender.

At the moment, Procure 21 is only intended to cover PFI projects under £20m, which are too small to tender individually. "If [the Procure 21 pilot scheme] is successful there's no doubt we'll be looking to roll it out on schemes over £20m," says Wearmouth.

Details are sketchy at this stage, but it is likely PFI framework teams would include financiers as well as the usual consultants, contractors, developers and facilities managers. One potential sticking point, says Wearmouth, is to ensure the frameworks do not act as approved lists – virtual monopolies on lucrative contracts for a limited number of giant suppliers. Wearmouth says: "We're working closely with the Major Contractors Group and the Office for Government Commerce to achieve a successful solution."

Health: Key aims

  • 40% of the total NHS estate will be less than 15 years old by 2010, with 100 new hospitals and 500 new primary care centres
  • One quarter of £3.1bn maintenance backlog cleared by 2004, plus 7000 extra beds to be provided in existing hospitals