• Home
  • Our Team
  • Useful links
  • Blog
  • Contact
P2G LLP

PFI, the baby, and the bathwater. Why it’s important to take stock of where we are.

10/6/2014

0 Comments

 
Hexham Hospital is about to go through a voluntary termination. Reportedly, this involves Northumbria NHS Trust paying compensation to the private sector Special Purpose Company (SPC) of £114m. As a result, the Trust will regain ownership and management of the facility in all aspects and save £3.5m per year (£67m over the original life of the PFI contract).

What does this mean?

It means that, for this particular deal, the Trust was able to borrow sufficient funds (in this case from the Local Authority). It means that the cost to the Trust in re-procuring the services to run the hospital for the remaining years of the PFI, together with paying off the private sector for their contractual loss of profit, was £67m less than the cost of continuing to pay the PFI unitary charge.

To put all this in context, according to HM Treasury, the capital cost of the hospital was originally £54.1m.

The Trust Chief Executive called the hospital a “fantastic facility” that could never have been built without PFI. Nevertheless, the PFI was not seen as offering value for money in the current climate. Northumbria NHS Trust are to be congratulated for assessing their options and to have negotiated their way into a significant saving. It has taken them two years to do so.

Is this a model that other NHS Trusts and Local Authorities can follow? Unfortunately not all PFI contracts allow for voluntary termination. In addition, the compensation provisions vary, making termination more or less attractive.

And, crucially, not all PFI contracts are a bad deal for the public sector.

It is true that many PFI contracts have proved expensive, particularly the earlier deals. However, over time, the Treasury refined the standard form of PFI contracts. Mistakes were rectified, the imbalance between amount paid and the risks transferred was addressed.

The later PFI deals were a vast improvement on the earlier incarnations. If we look at later deals, in particular those done in Scotland, PFI was cut down to design, build and maintain. The provision of soft services (cleaning, equipment, catering, portering etc.) was generally outside the PFI. In our desire to rectify the wrongs of early deals we should not be blind to the fact that later deals provided a competitive procurement avenue. We should not throw out the baby with the bathwater.

What should a Trust (or Local Authority) do?

An Authority should be aware of the the difference between the costs of the PFI to the contract term, and the costs of running the facility under self-procurement. An Authority should also assess whether the contract can be terminated, and the amount of compensation payable. If the procurement saving is greater than the compensation payable, then the Authority should seriously consider its options.

Importantly, however, PFI contracts contain variation provisions. This means that the Authority has rights to change the contract. In many cases, significant savings can be made in this way. In assessing value for money, therefore, Authorities need to conduct a full review of their PFI contracts.

PFI contracts are complex and, to date, much of the experience and expertise has sat on the other side of the table. It’s different now. We would urge Authorities to seek expert advice and develop a plan for their PFIs. If value is already being achieved, that’s great. If not, then there is work to be done.

0 Comments



Leave a Reply.

    Authors

    The authors have experience of more than 100 PFI projects in multiple sectors.

    Archives

    March 2022
    January 2022
    September 2021
    March 2021
    April 2020
    March 2020
    October 2019
    September 2019
    June 2019
    March 2019
    May 2018
    June 2017
    October 2015
    July 2015
    June 2015
    April 2015
    March 2015
    February 2015
    January 2015
    October 2014
    August 2014
    July 2014
    June 2014
    May 2014
    October 2013
    July 2013
    June 2013
    May 2013

    Categories

    All
    Charitable Donation
    Code Of Conduct
    Contracts
    Covid 19
    Covid-19
    Damage
    Honesty
    Insurance
    Monthly Reports
    News
    PF2
    Pfi
    PFI Handback
    PPM
    Profit
    Public Sector
    Relationships
    Savings
    Secondary Market
    Special Purpose Companies
    Vacancy

    RSS Feed

P2G LLP
A Social Enterprise Partnership
Registered in England & Wales
No. OC375527
​P2G Contract Support LLP
Registered in England & Wales
No. OC419519