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Public Private Partnerships in the National Health Service: Private Finance Initiative

  • Last modified date:
    8 February 2007

An overview of Public Private Partnerships in the National Health Service

This Document

1. This overview of Public Private Partnerships in the National Health Service:
The Private Finance Initiative is in two parts:

  • part one explains the nature, purpose and structure of the guidance;
  • part two summarises the operation of the Private Finance Initiative (PFI) in the NHS.

Part One
The guidance - Public Private Partnerships in the National Health Service:
The Private Finance Initiative (PFI in the NHS)

2. The guidance (referred to from now on as PFI in the NHS) provides practical advice for NHS bodies involved in, or contemplating, PFI schemes. It is for NHS Trusts, commissioning Health Authorities (HAs) and Primary Care Groups (PCGs).

3. PFI in the NHS is based on best practice and the experience of the first wave schemes. It has been developed in keeping with the White Paper The New NHS: Modern, Dependable. It highlights the main issues and procedures in PFI procurement, and indicates what is required at various points in the process.

4. The guidance applies to both small and large schemes involving the provision
of facilities and services.

5. To ease the procurement process, the NHS Executive has produced a standard form contract, with which this guidance is consistent. Nonetheless, NHS bodies and private sector parties should seek their own legal advice before and during any PFI procurement. All efforts have been made to ensure the accuracy of this guidance, but it is not to be taken as a definitive statement of the law. Even if this guidance is followed, there is no guarantee that this will lead to Full Business Case approval by the NHS Executive. No liability for loss arising from following this guidance will be accepted.

Structure of PFI in the NHS guidance
6. Figure 1 shows the guidance structure. Further sections may be added to the PFI in the NHS series later.

Figure 1: Structure of PFI in the NHS guidance

Section 1: The Selection and Preparation of SchemesSection 2: The PFI Procurement Process
Introduction
Overview of the pre-procurement process
The Strategic Outline Case
The Capital Prioritisation Advisory Group
The Outline Business Case
Affordability and value for money
Roles and responsibilities of the public sector team
Skills, training, and where to turn for help
The selection and management of advisers
Developing the scope of the project
Planning permission
Openness and public involvement
Fair treatment of staff
Milestones
Introduction
An overview of the PFI procurement process
Advertising the project
Prequalification
The Invitation To Negotiate
Evaluation and selection
The Full Business Case
Finalising the deal
Section 3: Technical IssuesSection 4: Commercial Issues
Introduction
Risk analysis
The Public Sector Comparator
The accounting treatment of schemes
Payment mechanisms
Indexation
Benchmarking/market testing of services
Land and buildings in PFI schemes
IT and equipment in schemes
Methods of financing PFI schemes
Financial models of schemes
Design quality
Establishment orders
Introduction
The project agreement
Key commercial terms

7. Since best practice will continue to evolve this guidance will be updated in the light of experience, or if new models of public private partnership develop.

PFI in the NHS and other NHS guidance
8. This guidance supersedes the Private Finance Guide published within the Capital Investment Manual (CIM) framework in 1994, and HSG(95)15 (Private Finance and Capital Investment Projects) issued in March 1995. HSG(95)48 (Information Management and Technology Procurement and Private Finance) remains current.

9. The principles set out in Commercial Issues are reflected in the standard form contract which must be used for major PFI schemes and which is available from the NHS Executive Private Finance Unit. A version of the standard contract for smaller
schemes will be provided in due course.

Other non-NHS guidance
10. As well as guidance from the NHS Executive, there is a growing body of guidance, advice and case studies available on PFI across all sectors. The Treasury Taskforce are compiling a library of documentation which may be accessed by contacting Olga Morris, Private Finance Policy Team, Treasury Taskforce, on 0171 270 5447. Treasury guidance is cross-referenced in PFI in the NHS, and a full bibliography is at Appendix 1 of this Overview.(Download the PDF file to view Appendix 1)

11. After examining several PFI schemes, the National Audit Office (NAO) have now produced a report on their general approach to the audit of PFI deals (Examining the value for money of deals under the Private Finance Initiative, July 1999). The report is intended not only for auditors of PFI schemes but for all those in both the public and the private sector who are involved in taking forward a PFI scheme.

Further advice
12. As well as using the guidance, it will often be helpful to talk to others who are tackling similar projects. The NHS Executive facilitates networking for NHS Trusts working on major PFI schemes, and assists any NHS body with practical questions about PFI. For specific queries about PFI procurements, NHS bodies should in the first instance contact their Regional Office. The current list of contacts is at Appendix 2. The changes to the boundaries of NHS Executive Regional Offices came into effect fully from 1 April 1999; a map showing the new Regional Office names and boundaries is at Appendix 3.

13. A glossary of terms used is at Appendix 4.

Further information
The New NHS: Modern, Dependable, CM3852, The Stationery Office, 1998
Examining the value for money of deals under the Private Finance Initiative. The Stationery Office, 1999

Part Two

The Private Finance Initiative in the NHS
14. PFI is one model of Public Private Partnerships in the NHS; other forms may develop over time. PFI is a key policy for improving the quality and cost-effectiveness of public services. It enlists the skills and expertise of the private sector in providing public services and facilities. It is not simply about the financing of capital investments, but about exploiting the full range of private sector management, commercial and creative skills.

PFI schemes
15. PFI schemes involve creating partnerships between the public and private sectors. In the health sector, the NHS will continue to be responsible for providing high quality clinical care to patients. But, where capital investment is required, there will increasingly be a role for a private sector partner in the provision of facilities. PFI is about building long term and mutually beneficial partnerships between public and private sector partners.

16. Major PFI schemes are typically DBFO (design, build, finance and operate). This means that the private sector partner is responsible for:

  • designing the facilities (based on the requirements specified by the NHS);
  • building the facilities (to time and at a fixed cost);
  • financing the capital cost (with the return to be recovered through continuing to make the facilities available and meeting the NHS's requirements);
  • operating the facilities (providing facilities management and other support services).

Risks in each of these areas will be assumed by the PFI partner, if best placed to bear them, in such a way that overall the risks associated with procuring new assets and services for the NHS will be reduced. Moreover, because the PFI partner's capital is at risk, they will have strong incentives to continue to perform well throughout the life of the contract.

17. NHS Trusts will continue to be the employer of clinical staff. PFI in health is about ensuring that the facilities in which they work are as modern, efficient and cost effective as possible by placing responsibility for their provision to specialist managers who are expert at providing them. The NHS can then concentrate upon the provision of health care.

18. The essence of PFI is that the NHS defines its needs in terms of 'outputs', ie the nature and level of the service required, and invites private sector bidders to present their solutions to meet these service needs. This allows the private sector to make the fullest possible use of its experience and skills in order to bring innovative solutions to the needs of the health service.

19. Typically, for a large scheme, the private sector partner will be a consortium whose members may include a construction company and a facilities management provider, amongst others. The private sector partner obtains finance for the project, constructs the hospital, and provides services to the NHS Trust as specified in the contract agreed between the NHS Trust and the private partner. The terms of the contract set out the range of services to be provided and the performance standards required of the consortium. No payments are made by the NHS until services are provided to the agreed standard. Thereafter, the standard must be maintained to ensure full payment.

20. Figure 2 illustrates the contractual relationship between an NHS Trust, consortium and financiers for a typical large PFI scheme which is bank financed. (Download the pdf file to view Figure2)

Fundamental requirements for a PFI scheme
21. Any PFI scheme must demonstrate value for money (VFM) for expenditure by the public sector. This can be achieved if the private sector assumes risks which would otherwise have been borne by the public sector where they are more cost effectively managed by the private sector, and by efficiency savings.

22. Best VFM is the optimum combination of whole life costs and benefits. There are three separate VFM decisions to be taken:

  • whether to proceed with the project at all;
  • whether to proceed using PFI;
  • which private sector partner to select.

PFI Procurements in the NHS
23. PFI is governed by the same principles and procedures that have been established to ensure that all investment in the NHS is soundly based. The NHS capital procurement process set out in the Capital Investment Manual (CIM) comprises four stages:

  • Stage 1: establish the strategic context and make the case for change. In future, the Health Improvement Programme will be the means by which the need for change is identified;
  • Stage 2: identify the preferred option and prepare an Outline Business Case;
  • Stage 3: assess and plan the preferred option in detail, and prepare a Full Business Case;
  • Stage 4: manage the project through implementation and evaluation to ensure that the outputs are delivered.

24. The NHS PFI process reflects these four stages. In order to ensure that the number of major schemes (with a capital value over £25m) progressing through the system is realistic, and thereby to increase their chances of success, proposals for major schemes are prioritised nationally on the basis of health service need. Only prioritised schemes may proceed to procurement.

25. The NHS PFI process is as follows:

  • establish the strategic context, assess the options and, for major schemes, make the case for change in a Strategic Outline Case and get approval;
  • identify and develop a preferred option through an investment appraisal, make the case in an Outline Business Case, and get approval;
  • prepare for procurement by turning the approved option into a detailed specification of outputs, outcomes and desired allocation of risks;
  • advertise the project in the Official Journal of the European Communities (OJEC), identify potential providers and the best privately financed solution;
  • select a preferred bidder with whom negotiations can be completed, involving stakeholders (eg staff and trade unions) in the assessment of proposals;
  • complete the definitive investment appraisal and Full Business Case to obtain approval;
  • finalise, award and implement the contract; and
  • evaluate and monitor the project.

26. The phases of the NHS PFI process are illustrated in Figure 3, alongside the procurement process set out in HM Treasury's Step by Step Guide to the Procurement Process. The formal procurement process from advertising in OJEC to financial close is shown in Figure 4.

Further information
Capital Investment Manual, NHS Executive, 1994 [under revision]

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