Health minister denies claims that process places onerous demands on firms and explains new guidelines.
Health minister John Denham has rejected industry accusations that the government is not committed to the private finance initiative and is placing unreasonable demands on contractors.

In a series of detailed answers to questions put by Building, the health minister, who is responsible for the PFI, also explains the thinking behind new contract guidelines.

Denham also discloses that the government is considering an alternative to the "two to the wire" format he had been planning to introduce to maintain a competitive edge between firms.

Building: Why are the guidelines for the second-wave PFI hospital projects being changed to transfer more risk to the private sector?

Denham: The guidelines for second-wave and subsequent hospital projects are not being changed specifically to transfer more risk to the private sector.

The aim of the PFI is, and always has been, to allocate risk to those best able to manage it. Any changes we are making for second-wave projects are changes designed to allocate risk to those best able or best placed to manage it at the least cost.

In any event, we cannot expect the rules of the PFI to be stationary. As the market for the PFI matures the private sector is becoming used to taking on risks that it was reluctant to accept in the beginning as its experience of managing them grows.

This process is evolutionary and will continue as deals change and various forms and types of public-private partnerships evolve over time.

Neither the industry nor we can expect the market position to stay still as improvements, from both sides, are constantly being developed.

Building: What can you do to ensure that transferring more risk to the private sector does not increase the cost of their bids so much as to make projects unaffordable for your department?

Denham: The PFI is not about transferring risk for the sake of it. It is allocating risk to those best able to manage the consequences of that risk crystallising. In pulling together our second-wave terms and conditions, we have liaised closely with the Treasury taskforce and taken advice from it as to what risks can be absorbed by the private sector and financed.

Our view is that the risk matrix proposed for the second-wave hospital PFI projects is one that is demanding but which can be achieved while retaining value for money.

It is our duty to the taxpayer to ensure that we secure best value for money by pushing the market in the areas it is able to respond.

Building: The flow of large projects on to the market is currently very slow – what can be done to improve this?

Denham: The NHS building programme announced in June 1997 is the largest ever undertaken in the history of the NHS.

We have announced more than £2bn worth of major investment in the NHS. While some of the deals have not come to the market as quickly as we would have hoped, the flow of large and medium-sized deals is continuing.

Dudley and West Middlesex have shortlisted their preferred bidders, while Fair Mile, near Reading, will soon be in a position to announce its long list of bidders. There have been problems in agreeing the right clinical set-ups at Manchester, Newcastle, Coventry and the Royals [Royal London Hospital in Whitechapel] in London, but these are being resolved rapidly. For example, I am confident that the Newcastle scheme will be issuing a notice in the European Union's Official Journal in the near future.

This is, however, also a matter of process. To simplify the way the NHS tackles all of its public-private partnership projects, we are about to issue detailed guidance that will enable trusts to bring their projects to the market much more speedily.

Hand in hand with this guidance, we have prepared a standard form of contract for use in all PFI schemes. This, again, will reduce the time it takes for schemes to reach the market and, more importantly, reduce considerably transaction costs. We will also look to produce a cut-down version of the standard form to allow smaller schemes to come to the market more quickly and cheaply. The government will continue to fulfil its commitment to investing in a new, modern dependable NHS, but we cannot keep building the largest building programme ever. Inevitably, there will be a gradual settling down in the number of schemes out with the market.

There may be other ways of securing value for money and a fixed price without moving to best and final offers

John Denham

Building: What chance is there of reimbursement of bid costs for consortia taken almost to the close of the bidding process under the new system but not then selected?

Denham: I fully appreciate that the costs of taking a major PFI development to financial close can be substantial.

The current proposals, under which the two final bidders will be asked to submit best and final offers, is there for good reason.

Our experience on the first-wave schemes has been that if the preferred bidder is selected early in the process and competition is not run on in towards financial close, it is much more difficult to secure value for money in the transactions and for that to be demonstrated in a transparent way.

It is equally hard to secure a fixed price and thus cut short the lengthy negotiation period.

The guidance, therefore, has been written to try to ensure the taxpayer can see it is receiving best value and the NHS trust gets a fixed price and is not being held over a barrel by the bidder once competition falls away.

However, there may well be other ways of securing value for money and a fixed price without moving to a best-and-final-offer stage.

I have set up a working group of officials from the NHS Executive's Private Finance Unit and the industry to determine what quality and quantity of information would be required to be made available by both sides in order to allow the preferred bidder to be selected on the basis of a fixed price at the shortlist-of-three stage, rather than working on to a best and final offer.

Such a change will require both sides to commit additional resources at this earlier stage, but it is a change I am perfectly happy to consider, providing it secures the right outcome for the department and industry.

These changes will not be introduced overnight, but I see no reason why we could not allow some form of early trial procurement to establish if such a system can produce the result both sides want.

Building: How can you be sure that PFI hospitals deliver better value for money and services than traditional procurement methods?

Denham: We are very confident that PFI-procured hospitals will give a better product for the NHS. The PFI delivers hospitals on time and to cost.

This did not happen previously. Building work at both Dartford & Gravesham and Carlisle is ahead of programme and both hospitals may well be operational before their target dates.

Construction work on the Norfolk & Norwich site is already three weeks ahead of schedule and work at South Buckinghamshire is also progressing well. Contrast this with the National Audit Office report on Guy's Phase III, which noted that the initial estimate of £35.5m rose to an outturn of £151.8m, with a delay of more than three years in completing the project.

The contracts have also been carefully negotiated to ensure that the hospitals are maintained to the highest standards throughout their life. The unfortunate history of the NHS has been to build assets from public funds and then not pay enough attention to ensuring they are maintained properly.

This has been down to a variety of reasons, but what we have now is a contractual obligation to deliver the kind of service the modern NHS needs, well into the next millennium.

Building: How strong is Labour's long-term commitment to the private finance initiative?

Denham: Commitments cannot come any stronger than delivering 12 major new hospitals since May 1997 and the delivery of the 13th, at Bishop Auckland, in the past week.