Health trusts operating PFI-funded estates are being urged to act ‘before it is too late’ as the controversial contracts near the end of their lifespan

 

NHS organisations operating PFI-funded estates are being urged to act ‘before it is too late’ as the controversial contracts near the end of their lifespan.

The Infrastructure and Projects Authority’s (IPA) 2022 report, Preparing for PFI Contract Expiry, recommended that trusts take the next steps at least seven years prior to contract expiry.

That means hundreds of organisations will need to take action now to prepare for handback and decide how they will fund, operate, and maintain their estate moving forward.

And, as many Private Finance Initiative (PFI) contracts also covered the delivery of hard and soft facilities management (FM) services, there will also need to be discussions on how these will be provided in the future.

Long-term vision

Government figures from 2018 show the value of the initial investments was £12.8bn, but the Department for Health and Social Care will have spent a total of £80.7bn once they are all paid off.

The long-term contracts – which often spanned a period of up to 30 years – were signed between the NHS and a private sector consortium, typically a special-purpose project company, and meant the private sector designed, built, financed, and operated the asset and related services.

Under the contracts, the private party bears the risks associated with construction and maintenance and management responsibility, and remuneration is linked to performance.

There are currently over 120 PFI projects in NHS England, with contracts varying in size, but most including the delivery of hard and soft FM services such as maintenance, portering, cleaning, and catering.

The first deal was signed in July 1997 and successive waves followed until, in October 2018, the Government announced it would no longer support the model.

Plan ahead

But now trusts which have operational PFIs need to begin planning for the future, ensuring their estate is handed over in tip-top condition and either finding the in-house expertise to take over operations, or opting for a new public/private model.

The National Audit Office (NAO) found in its June 2020 report on PFI contract expiry that public sector bodies risk underestimating the time, resources, and complexity involved in managing the end of PFI contracts.

Matthew Vickerstaff, deputy chief executive of the IPA, said: “The expiry phase of PFI contracts, including asset handback and the transition to future services provision, presents additional risks, including potential operational disruption, lack of service continuity, financial loss, and reputational damage.

“The effective management of the expiry process is therefore of particular importance.”

The report adds: “The IPA expects that senior leaders will commence planning for PFI expiry at least seven years prior to the contract end.

“Early, but cost-effective steps will need to be taken to increase awareness and active management of the contract in advance of expiry, understand the assets, systems, and people involved in the exit and transition process, build supportive relationships with other

parties, and obtain information from the PFI project needed to shape and plan the future provision of services.

Managing risk

“Significant risks will need to be managed, diverse expertise and resources will need to be applied, and additional budgets will likely need to be made available.

“What is certain is that the whole expiry process will require more, and different, senior management support than is currently being provided to the PFI project.”

The IPA guidance is supplemented by an expiry toolkit, which provides additional tools and materials to support authorities in managing expiry.

But what is next for these hospitals?

Next steps

Speaking to Healthcare Property, Alison Martin, legal director and PFI specialist in international law firm DAC Beachcroft’s infrastructure and projects team, explained: “For the past 30 years a large number of hospitals have been provided via PFI and from 2030, a lot of those contracts will expire.

“With the IPA guidance recommending planning for expiry seven years out, now is the time for those trusts to start preparing for handback and expiry, and planning what is coming next.

“This will be critical for the NHS in terms of ensuring service continuity and delivery of its healthcare estate.

She added: “It is not yet clear what a successor model for PFI might look like. It could be a centrally driven standardised approach, or trusts may be allowed more flexibility to design their procurements at a local level. It could also look at bringing it back in-house, but this could present potential resourcing issues in terms of capacity and capability.

“In my view, the private sector will continue to play a part in the NHS estate, particularly in the provision of hard and soft FM services – it’s just what model that will look like.

“Certainly value for money will be key and any replacement will have to be more balanced and focused on value rather than pushing the risk to the private sector.”

Know your rights

Key to the handback will be clarity as to the required condition of the buildings and the respective rights and responsibilities of the parties under the PFI contract.

Martin said: “The NHS can’t make strategic plans for taking these buildings back unless it knows what condition they are in, what condition they are meant to be in, and what is coming next.”

But, threatening to hamper this process, are disagreements as to the condition of the assets and the often-frosty relationships that have grown over time between some NHS organisations and their PFI providers.

Martin explains: “A number of public authorities have been accused by the private sector of taking overly-draconian enforcement measures under the PFI contract – often in an attempt to maximise the level of deductions that can be made for poor performance under the payment mechanism.

“In turn, concerns with the private sector approach have been cited.

“Together, these are said to have driven behaviours, antagonised relationships and led to a rise in disputes.

“A priority will be to restore those relationships going into the handback process.”

Pushing ‘reset’

She added: “We have seen a number of NHS PFIs adopt the ‘reset’ approach recommended in the recent White Fraiser Report, with a view to restoring the goodwill between the parties.

“The ‘reset’ approach gives them an opportunity to improve and assure performance of their PFI contract now, rather than waiting until the contract is due to expire.

“It provides for the carrying out of an audit of the PFI contract (by way of surveys), and gives the PFI provider a time-limited period within which to rectify any issues identified without threat of being penalised under the contract for non-compliance.

“Despite its critics, there are some merits to the PFI model, which have helped transform the healthcare estate over the years, albeit not without cost.

“But, ultimately, handback will be used to measure its success and it will take collaboration between the parties to agree on what that ‘success’ looks like.”

Cutting edge

Stan Campbell, partner and health property lead at DAC Beachcroft, concludes: “Some of the PFI hospitals are still very cutting edge, but the perception of the associated cost was a problem – stories of companies charging £40 to change a lightbulb eroded public opinion.

“Many also held the view that PFI effectively privatised part of our beloved NHS.

“Within the private sector, there appears to still be an appetite for investing in the NHS estate and a group of investors who want to do well by ‘doing good’.

“We don’t quite know what the future will hold, but to ensure there is sufficient capital investment in NHS infrastructure, the NHS needs to consider what will replace the PFI model.

“It also needs to start conversations with existing providers now to make sure the estate it gets back is the one it paid for.”