The Private Finance Initiative: A Review of the Funding and Management of Three Projects in the Health Sector

Today, John Dowdall CB, the Comptroller and Auditor General for Northern Ireland, published a report into the funding and management of three Private Finance Initiative(1) (PFI) projects in the Health Sector. His report into the:

• Provision of car parking at the Royal Hospitals;
• Contract Energy Services at Holywell Hospital; and
• Renal Services at Antrim Area Hospital

recognizes that these were three very early PFI projects which did not have the benefit of the extensive guidance developed since then. This together with the lack of experience, precedents and role models, increased the risks for departments, particularly in achieving value for money. These were small projects in PFI terms with capital values of £2.0m, £0.2m and £2.7m respectively and therefore fall well below HM Treasury’s recently proposed minimum threshold of £20m. They were, nevertheless, undertaken in accordance with prevailing policy and guidance.

On the individual projects, today’s report to Parliament records that:

The Royal Hospitals’ Car Park was opened in June 1997 and provides for 2,100 spaces. However, due to unforeseen reviews of health provision, which arose after the contract was signed, demand for spaces has increased beyond original projections. As a result, parking demand outstrips current provision and the Royal Hospitals is in the process of considering options for providing additional car parking spaces (Paragraphs 1.2 to 1.5).

Under the terms of the contract, signed in October 1996, the service provider agreed to pay £25,000 a year for use of Trust and QUB land plus, after 4 years, a further £15,000 in every year in which its revenue exceeded forecast; it was envisaged that profits would increase by 37 per cent a year (Paragraphs 3.12 to 3.16).

The report records that trading results for the first year were severely affected by a staff dispute which centred round proposed car park charges. However, since it ended, the service provider’s performance has far exceeded expectations with average year-on-year increase in pre-tax profits (after interest) of close to 200 per cent. Profits in 2002 were £574,210, £321,172, above original forecast. Of this, the Royal Hospitals and QUB can expect a £15,000 share which represents 4.7 per cent of the surplus in 2002 (Paragraphs 4.9 and 4.10).

The staff dispute was resolved when the Trust agreed to contribute towards parking costs. The cost of these contributions to visitor and staff car parking from June 1998 through to March 2003 was over £2.2m. The Royal Hospitals is currently reviewing its annual contribution as part of its strategic redevelopment of the Hospital site (Paragraphs 4.1 to 4.5).

Holywell Hospital Antrim: Provision of Contract Energy Services

In August 1993, an internal management review noted that Holywell Hospital was served by three oil fired boilers which had been installed in 1958 with a working life expectancy of 25 years. The boilers provided domestic hot water and heating for some 90 per cent of the extensive Holywell site and steam to a laundry, a dry cleaning facility and kitchens (Paragraph 1.1).

To address its energy problems, Homefirst sought a PFI-based contract energy management solution. The option chosen involved initial expenditure of £68,000 by Homefirst to keep the existing boilers in service with replacement and refurbishment of the distribution system over a 5 to 10 year period as and when required (Paragraphs 2.1 to 2.5).

The report indicates that Homefirst has developed and maintained an excellent relationship with its PFI partner. During the six years that the arrangement has been operating, Homefirst has been well served and has considerable confidence in the ability of the company to provide an energy management system to meet its needs. Through the contract Homefirst has secured more life from its boilers than expected and postponed capital expenditure on three boilers to a point when only two are now needed. As a result, it estimates savings over the ten-year contract period to be £430,000, comprising £196,000 capital and £24,000 a year in revenue costs (Paragraph 3.13).

However, the report records that there is no way of knowing if the deal signed by Homefirst was the optimum one. Even when assessed against more traditional procurement guidelines, there were weaknesses in the way the process was managed. The small number of bids received did not provide enough competition to stimulate an optimum outcome and the public sector comparator could have been prepared on a more robust basis. As such, the Audit Office considers that there is no reliable evidence to demonstrate that savings have been made by comparison with public sector ownership or that the contract has provided maximum value for money. Ultimately, however, assessing value for money in a PFI project is feasible only several years down the line (Paragraph 3.14).

Provision of Renal Services at Antrim Area Hospital

In 1994-95, a review of the provision of renal dialysis services in Northern Ireland concluded that development of future dialysis provision should be focused in Belfast City, Tyrone County and Antrim Area Hospitals. Following a review of options, United Hospitals decided that the Private Finance Initiative could deliver a value for money project at an estimated capital value, including the dialysis machines, of £2.2m (Paragraphs 1.3 and 2.1 to 2.3).

This project, which provides for up to 20 dialysis stations, was subsequently identified by the Department of Health and Social Services and Public Safety as a project which could be used as an exemplar of best practice within the wider public sector. Based on discussions and interviews with key staff and a limited review of files, NIAO found that, in the greater part, best practice was adopted and applied (Paragraph 1.1).

NIAO noted that the project objectives were clear, focusing on what United Hospitals wanted having regard to what the private sector could supply. It also found that an outline business case showed that a PFI approach could deliver value for money. In line with best practice, the report also found that a suitably qualified and experienced Project Board had oversight of the project, including proper advertising of the project and establishment of a clear timetable for its delivery (Paragraphs 2.1 to 2.12).

However, the Audit Office report records that to date no project evaluation has been carried out. As a result the Trust has not yet ascertained whether or not the expected benefits promised by the project have been realised and whether or not there have been any problems or issues with the standard of service delivery achieved by the contractor (Paragraph 4.3).

While these projects were undertaken in line with prevailing policy, the NIAO report highlights a number of best practice points which have implications for future PFI projects (Paragraph 7). These include:

• the need for project objectives to be clear, focusing on what procuring bodies want having regard to what the private sector can supply;
• the need to establish the right project team with the right skills at the right time, and proportionate to the size and complexity of the project:
• ensuring that competition is central to the procurement process through the creation of a good tender list of firms invited to bid;
• the appropriate use of informed judgments, including the use and interpretation of public sector comparators or "should cost" models, in deciding on the value for money of PFI deals;
• establishing and applying robust monitoring arrangements to ensure contract compliance;
• carrying out ongoing evaluations of projects to confirm that expected benefits continue to be delivered; and
• ensuring that contracts include provisions which allow procuring organisations to share in excess or windfall profits.

Notes for editors

1. Since its launch in November 1992, the Private Finance Initiative (PFI) has become one of the main methods by which the public sector procures services from the private sector. Its underlying objective is to use the best of both public and private sector skills to improve public services. In particular, this means the use by the public sector of capital assets provided, owned and managed by the private sector.
2. PFI policy in Northern Ireland is set out in the "Policy Framework for Public Private Partnerships in Northern Ireland", published by the Office of the First and Deputy First Minister in February 2003.