Gov jitters over big PFI

The healthcare market is in a state of severe flux. Large PFI projects have been stopped in their tracks, most notably the £1.15bn Barts and Royal London project. It is costing the taxpayer a reported £600,000 per day as construction teams stand idle while Secretary of State for Health, Patricia Hewitt tries to convince the Treasury that the project is financially viable.

Meanwhile, the future of big PFI projects looked even more uncertain as Hewitt signaled a shift away from large district general hospitals and towards more care in the community in her healthcare white paper delivered at the end of January. She said 5% of the hospital budget ought to be re-directed toward local community hospitals and the new concept of ‘polyclinics'. Five percent may not seem like much, but it could amount to as much as £2.5bn over 10 years, as 50 new community hospital projects get commissioned.

The news of these small schemes came as something of a surprise to contractors interested in the market, and a potentially welcome one to those frozen out of the main healthcare clubs: mega PFI, Procure21 and LIFT. There is more good news for these players; smaller PFI deals, batched together and with less early risk, are coming to fruition.

However, the picture is muddied further by the fact that despite record funding of £76.4bn this year, the NHS is facing a cash crisis. Nearly a quarter of NHS Trusts failed to balance their books last year and the NHS's deficit is reported to be between £250m and £620m. Patricia Hewitt is threatening to parachute in special administrative hit squads to the worst performing trusts.

Anti-PFI commentators blame this financial crisis at least in part on the high rent-back burden PFI places on trusts. Writing in The Guardian, Professor Allyson Pollock, head of the Centre for International Health Policy at the University of Edinburgh, says that at the Queen Elizabeth hospital trust in Greenwich £9m of its £19m deficit is down to PFI charges.

Those who are pro-PFI deny this, pointing to the time and price predictability PFI has ushered in, a fact established by the government's own National Audit Office. PFI proponents also argue that the high rent-back costs merely reflect the whole-life cycle of a hospital, which were previously invisible to the taxpayer.

But the political pressure against large PFI schemes is nothing if not sustained.

A new funding mechanism, called "payment by results", where government pays hospitals according to how many patients they treat, provides more grist to the anti-PFI mill. It could affect PFI because if a trust commits to a massive private deal, and then loses ‘business' as patients exercise their choice to go elsewhere, the drop in volume of treatment will mean it will struggle to pay the private consortium its rent.

Encouraging developments

However, the sector is not without its encouraging developments. There are signs that smaller PFI schemes are coming on board, emboldened by the Department of Health's new ‘small is beautiful' sensitivities, and equipped with the lessons of 10 years of pain in the PFI bidding process. One of the first examples is the Leicestershire NHS PFI Batch, a project involving the construction of two community hospitals, the total package worth around £66m, in co-operation with the Melton, Rutland, and Harborough Primary Care Trust, and the Hinckley and Bosworth PCT.

This is only the third batched PFI scheme in the UK, and the first involving community hospitals.

5% of the hospital budget ought to be re-directed toward local community hospitals

Patricia Hewitt, secretary of state for health

There is a bit of a buzz surrounding it because it contains procurement innovations designed to speed up the award process and reduce bidding costs normally associated with PFI.

Batching was originally intended to bring more suppliers into a rapidly depopulating marketplace, and it appears to be working. One contractor who attended the Leicestershire batch open day last month said firms who have been strangers to the healthcare market recently had turned up in force.

Less risky

The big difference in the Leicestershire batch is that bidders do not have to produce detailed designs as part of their bids. This is a major reason why bidding for PFI jobs is so risky. Usually the client states its target ‘outputs', or what the facility is meant to do, and the bidding consortia hire architects and designers to work up concepts that they think will deliver those outputs.

With the Leicestershire batch that burden was taken away. The trust developed its own design for the lead scheme (one of the two hospitals). This is called the public sector comparator (PSC). It also hired cost consultants to work up a schedule of unit rates attached to that design, covering construction, facilities management and risk. The trust made this schedule available to the bidders, but left the cost values blank for the bidders to fill in. This means the competition is based to a large extent on cost competitiveness, but not entirely.

Rob Croot, PFI Batch Procurement Director for the trust, said bidders would be asked to show their ability to innovate, the effectiveness of their construction method and how they would handle the mechanical and electrical components.

Furthermore in the Leicestershire batch the trust is laying on the table roughly how much it can afford for the two hospitals. Usually in PFI that figure is kept closer to the client's chest, which adds more time as the parties negotiate to arrive at a mutually acceptable figure.

"That aggravation is taken out of the process," Croot said. "I'm convinced this is an innovative and sensible way to take forward community hospital facilities." He believes the period from Invitation to Negotiate (ITN) and selection will be 10 months. Pre-qualification questionnaires are due back on 10 March.

So as the larger players wait anxiously for some indication as to what the future holds for their large PFI hospital projects (for which they have likely already spent millions bidding), the shift in healthcare vision may spell good news for a sizeable group of smaller suppliers keen to get in on the action.