PPP IN THE UK HEALTH SECTOR. Section Head, Capital Investment Branch, Department of Health, UK Government. Susan Peak

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1 PPP IN THE UK HEALTH SECTOR Susan Peak Section Head, Capital Investment Branch, Department of Health, UK Government December 2007

2 Areas covered in presentation: Context the use of PFI (Private Finance Initiative) in the NHS Key lessons from UK health sector PFI Health Case Study key issues in procurement Issues after contract signature PFI in other areas UK social services; LIFT

3 Context the UK NHS NHS stands for National Health Service and provides health services to all citizens in the United Kingdom (England, Wales, Scotland and Northern Ireland) NHS is state-funded, and provides essential health services (emergency and elective) to all those who need it, free at the point of use Some charges are made, for example for prescriptions Hospitals receive funds through payments for every procedure they carry out; and the money moves with the patient Infrastructure developments, for example new hospitals, can be paid for via public capital, or through private finance. Hospitals pay the private sector charge, funded through their allocations

4 Context Use of PFI in UK Health Sector UK Government Target 100 new hospitals by PFI schemes in health (value GBP14.6 billion) 68 already built and admitting patients (GBP 4.2 billion) 27 currently under construction (GBP 6.1 billion) 25 in the pipeline (including pre-procurement) (GBP 4.3 billion) First contract was signed in July 1997 so UK has 10 years experience of PFI

5 Use of PFI in UK Health Sector Why PFI? Need for investment in hospital buildings Not enough public money (capital) available Transfer of risk to private sector (to reduce problems experienced with public money procurements) Legal framework: European Union procurement directives (now Competitive Dialogue)

6 Main features of PFI (1) Private sector responsible for: Design of hospital Building the hospital o On time o On budget o To the right specification Repair and maintenance (30 years) (sometimes) soft services cleaning, catering Obtaining the money! Borrowing (90%) Shareholders (10%)

7 Main features of PFI (2) Public sector responsible for: Clinical services Payment! o Payments are fixed o Inflation increases o Only pay if hospital is available to be used o Underwriting of payments?

8 PFI compared with public capital: public capital cost profile: Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Cost

9 PFI compared with public capital: private sector cost profile Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Cost

10 Key lessons from use of PFI (1) No payment until construction is finished [private sector manage budget and time issues] If parts of hospital cannot be used, no payment If service quality poor payment deductions [potentially to zero] If costs increase, no increase in payments: the amount due is fixed, increasing only with reference to inflation Use of standardised contract documents: main Project Agreement, schedules (including Payment Mechanism): everyone knows what is expected

11 Key lessons from use of PFI (2) Costs of bidding can be high Slow to sign contracts Inflexible? difficult to make changes to contracts Does not encourage partnership, either before or after contract signature PFI projects are resource-intensive and require top-quality project management vital to have good organisation in place Not considered suitable for some project types, eg, small, or Information Technology

12 Case study Tees, Esk and Wear Valley NHS Trust Hospital in North-East of England providing mental health, learning disability and substance misuse services Undertaking 75 million capital cost PFI project to rebuild its hospital Private Sector partner is John Laing, experienced in UK NHS PFI schemes Hospital has annual turnover of 203 million (06-07) Unitary charge will be no more than 7.54 million Partner will also provide: Helpdesk; Utilities management, Estates Maintenance, Ground and Gardens care, Window Cleaning, Car Park and Security Management, and Restaurant and Hospitality Service

13 Case study Tees, Esk and Wear Valley NHS Trust Procurement process: Advisers appointed during 2005 Outline planning permission granted July 2005 OJEU issued September 2005 Pre-Qualification of Bidders Dec 2005 Invitation to Negotiate issued December 2005 Bids evaluated May-Sept 2006 Preferred bidder appointed 30 th May 2007 Funding Competition held Contract signature planned 4 th or 5 th December 2007

14 Case study Tees, Esk and Wear Valley NHS Trust Key issues in what is regarded as a successful procurement: Clear understanding of scope of project Strong and well-resourced project team Advisers appointed early Good competition amongst experienced bidders Funding competition held after appointment of preferred bidder Main approval decision made when preferred bidder appointed

15 Case study Tees, Esk and Wear Valley NHS Trust organisational issues Trusts themselves are legal entities and may enter into contracts but they have to seek approvals Approval limits are based on the capital value of a scheme not the annual charge Trust s governing board can approve spending up to a certain limit (usually less than 10m capital value) Trusts are organised within Strategic Health Authorities 10 in England. These oversee health services and strategy in their areas SHAs approve capital schemes over 10m and up to 25m

16 Case study Tees, Esk and Wear Valley NHS Trust organisational issues Central Department of Health approves schemes that are over 25m sets health policies for England and Wales And schemes that are over 100m must be approved by Government Ministers and by HM Treasury this also sets UK-wide procurement policy SHA provides health service strategic and managerial support to Trust and continuous liaison DH provides advice from early on in a project. DH has a Capital Investment unit staffed by civil servants who manage approval process; and a Private Finance Unit staffed by consultants who provide high-level commercial and financial advice Trust must also have its own advisors

17 Case study Tees, Esk and Wear Valley NHS Trust key organisational challenges Ensuring good coordination amongst the various approving bodies. (Note: this scheme did not have to be approved by HM Treasury.) Taking on new policies smoothly Tees was asked to accept main approval at preferred bidder stage and to run a funding competition not in original procurement plans Dealing with any conflicts that arose over legal positions

18 Issues after contract signature Dealing with issues during construction Changing specifications Managing the payment mechanism Maintaining the project team

19 PFI in UK Social Services (1) PFI also used to deliver social services to adults and older people Services include homes for disabled adults, day and residential care for older people PFI in social services follows same principles as in Health, i.e., Design, Build, Finance and Operate These schemes are smaller in scale: largest scheme less than 50 million while largest Health PFI scheme is just under 1 billion Central funding support also provided not available in NHS

20 PFI in UK Social Services (2) Issues also very similar: Need for strong and well resourced project team Managing procurement process so as to ensure good competition (and therefore good bids) Procurements can take a long time But risk transfer does happen and does work

21 NHS LIFT Local Improvement Finance Trust Primary healthcare premises o Doctors surgeries o Other local health facilities Joint venture between public and private sector

22 NHS LIFT(2) Launched in areas have a LIFT scheme covers 50% of UK population Current value over GBP4 billion 48 have signed contracts 147 buildings open + 63 in construction

23 NHS LIFT(3) why LIFT? Need for healthcare investment in urban areas regeneration More local doctors needed in inner cities Partnership joint public and private sector investment

24 LIFT legal structure: LIFTCo Joint venture 60% held by private sector investors 20% local health organisations 20% Partnerships for Health

25 LIFT main features Contract for years: LIFTco and Local Health organisation (Primary Care Trust) LIFTco builds new healthcare premises Then leases them to PCT used by doctors LIFTco maintains and repairs the premises Rent paid by PCT is fixed, but annual inflation increases Rent is not guaranteed directly by UK Government Exclusive right for LIFTco to carry out all future developments in the area

26 LIFT similarities to PFI No payments until the new buildings are ready Construction risk is with LIFTco Risk of cost increases is with LIFTco No payments if premises not available for use Payment deductions for poor service

27 LIFT key lessons Much quicker to sign contracts and costs of bidding are lower Encourages a partnership approach Not suitable for complex hospital developments Exclusive deal may weaken competition Building costs sometimes higher

28 Conclusion PPP can deliver good public services, with genuine transfer of risk But is resource-intensive, both in the organisations procuring and centrally Requires very clear focus And high quality project management And good bidders: this takes time to develop

29 Useful links UK Department of Health PFI page: cprivatepartnership/privatefinanceinitiative/index.htm Her Majesty s Treasury (HM Treasury) report on PFI that sets policy for UK Government: HM Treasury PFI page: /ppp_index.cfm