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Department of Health looks to apply private finance 2 to hospitals in procurement

Private finance 2 is set to be implemented in all PFI hospital schemes that are in procurement, including two multi-million schemes just weeks away from preferred bidder announcements, CN has learned.

The change could affect £1.85 billion-worth of hospital projects that are either in procurement or approaching financial close, along with a previously announced PF2 hospital in Birmingham.

Those schemes currently involve 13 major contractors including Bouygues, Carillion, Interserve, Laing O’Rourke and Skanska.

CN understands that the Department of Health is looking to implement “transparency”, one of the central elements of PF2, across all schemes, which is likely to require companies to share financial information about projects with their public sector clients.

Elements of the new private finance model look likely to feature in the £450 million Royal Liverpool Hospital, which is just weeks away from a preferred bidder decision between Carillion and Horizon, a consortium of Interserve, John Laing and FCC.

PF2 elements could also feature on the £150m Papworth Hospital, where Bouygues and Skanska are expecting an “imminent” preferred bidder announcement.

PF2 was unveiled in December after a 12-month PFI call for evidence by the Treasury. Financing experts initially estimated it would take a year or more to filter through to projects.

The move means the health sector could see parts of PF2 in use before the long-awaited £2bn Priority School Building Programme, which has been mooted as the first major PF2 programme in the spring.

The DoH said it is considering PF2 elements for all schemes in procurement, but said any incorporation of these elements “should not hold up the timetables for these schemes”.

PF2 key elements

  • Transparency – the private partner will need to increase the amount of project information made available to taxpayers to give confidence that value for money is being achieved. Includes publishing an annual report where government is a shareholder.
  • 18-month procurement cut off – projects not procured in this window could be axed by the Treasury.
  • Public equity stake – enables gov’t to share in the rewards when an asset is sold, but could make the scheme more expensive. It also means a Treasury seat on the project board.
  • ‘Change in law’ risk – The private sector historically took the risk of government policy affecting an asset but PF2 brings it back to the public sector, reducing the cost of projects.
  • Soft FM dropped – many contracts have already dropped soft FM, criticised for clients paying high prices for basic services.

The transparency element is at the centre of the replacement to PFI and is aimed at increasing the level of project information made available to taxpayers “to give confidence that value for money is being achieved” while giving public procurers more information to manage their contracts effectively.

One source said the open book approach is “definitely coming in” on schemes in procurement, to the extent of an annual report detailing full project and financial information.

Another element understood to be coming in is ‘change in law’ risk being taken back by the public sector.

That risk has historically been taken on by the private sector, leaving them open to any alterations required to an asset when a government introduces a new law, such as ensuring buildings hit green targets or meet new disability laws. The removal of that risk could also make the scheme cheaper for the public sector.

However, there is some concern over the potential introduction of other PF2 elements, including giving the public sector an equity stake at a late stage in procurement, which would enable hospital trusts to share in any profits once the asset is sold, and could also see them represented on the project board by a Treasury official.

It is understood that equity share is being looked at for the £370m Sandwell hospital in Birmingham, which CN revealed in December is looking at PF2 but is yet to reach procurement.

One senior industry source warned against the introduction of equity share for schemes near to close, saying it could “set the process back by months”.

“An equity stake could set the process back by months” - industry source

Other central elements in PF2 include dropping soft FM from the contracts; however, a number of trusts told CN they had already done this.

PFI experts suggested that changing the model mid-procurement could lead to grievances among contractors who may have been eliminated at an earlier stage or had not bid when competing under a different model.

KPMG health director Matthew Custance said any changes to a project at a late stage always caused some uncertainty.

Pinsent Masons projects partner Jon Hart also warned against “trying to retrofit” schemes that were in procurement.

They said the equity stake could have an impact on the initial cost of schemes, while stressing that the public sector should claw that money back through profits off the back of a sale.

One source estimated that an £120m scheme could be looking at an additional cost of up to £1.1m on the front end, though this would be made back later.

A spokesperson for the Royal Liverpool University and Broadgreen Hospital Trust, which had expected to announce a preferred bidder last year, confirmed they have now considered PF2 but could not specify elements.

However, she said soft FM was never part of the scheme and added that PF2 has “not got in the way of the procurement process at all and we don’t expect it will do”.

“[PF2] has not got in the way of the procurement process at all and we don’t expect it will do” - Royal Liverpool

A spokesperson for Papworth Hospital said it had already introduced aspects of what is now included as part of PF2 in its draft contract with its two bidders, before PF2 guidance was issued.

Several sources told CN that Aldey Hey is considering PF2 elements, but a spokesperson for the trust said that was not the case.

A spokesmperson for the £84m Royal National Orthopaedic Hospital in Stanmore said there “are some elements of PF2 that we are exploring with the trusts’ bidders, but they are not raising any concerns”, while there are no plans for an equity stake and soft FM is already excluded.

A DoH spokesperson said that for PFI schemes already in procurement, it is considering what PF2 elements “can usefully be adopted at this stage”, confirming that the incorporation of PF2 elements should not affect project timetables.

Trusts’ reactions

  • Royal Liverpool University and Broadgreen Hospital Trust confirmed they have considered PF2 elements, but insisted this has “not got in the way of procurement”. CN understands PF2 was being added in terms of transparency and change in law. The trust said soft FM was never part of the scheme. The spokesperson said they are waiting to hear back from the DoH and Treasury on their business case, with an announcement “weeks away”, having also considered pension funds and public sector capital.
  • Alder Hey Children’s NHS Foundation Trust: Sources said PF2 was being examined in terms of transparency and change in law. But the trust insisted that PF2 guidance will “not have an impact”. Alder Hey has never included soft FM.
  • Royal National Orthopaedic Hospital NHS Trust in Stanmore said there are “some elements of PF2 that we are exploring with the trusts’ bidders, but they are not raising any concerns”. A spokesperson said there are no plans for an equity stake and that soft FM is already excluded.
  • Papworth NHS Hospital Foundation Trust said there had been “no detailed discussions” with the DoH over PF2. But a spokesperson said the trust had introduced aspects of what is now included as part of PF2 in its draft contract with its two bidders, before PF2 guidance was issued.
  • North Tees and Hartlepool NHS Foundation Trust’s lead director for its new hospital programme Kevin Oxley said they are “still pursuing a pension funded solution without an equity injection, while evaluating the new PF2 process recently announced”. He said further detailed guidance is needed on PF2 before a full consideration can be done.  


Hospital schemes

£425m Royal Liverpool Hospital
Royal Liverpool University and Broadgreen Hospital Trust.

Carillion is up against Horizon, which includes Interserve, John Laing and Spanish contractor FCC.
Preferred bidder will be announced once the DoH and Treasury have signed off the business case.
DoH told CN that decision is ‘weeks away’.
CN also understand that PF2 elements are being looked at for the Royal Liverpool.

£237m Alder Hey Children’s Hospital, Liverpool.
Alder Hey Children’s NHS Foundation Trust
The Acorn consortium Laing O’Rourke, John Laing and Interserve is preferred bidder.
A complex funding mechanism includes pension fund money from M&G and the Pru. Financial close is expected in 1 March.
Sources suggests PF2 elements such as transparency and change in law will feature, but the trusts says otherwise.

£150m Papworth Hospital, Cambridge
Papworth Hospital NHS Foundation Trust

Skanska is up against the Bouygues consortium of Bouygus Construction and Ecovert FM Ltd.
A preferred bidder is expected in spring 2013 and has been described as ‘imminent’.
The trust is hoping to raise between 40 and 45 per cent of the capital cost through low interest loans from the foundation trust bank.

£84m Royal National Orthopaedic Hospital, Stanmore
Royal National Orthopaedic Hospital Trust

Balfour Beatty is up against Bouygues, with a preferred bidder announcement expected in June.
The trust confirmed to CN that the scheme “is moving forward in a manner complementary to the recent Treasury announcement of PF2”.

£285m Broadmoor Hospital
West London Mental Health Trust
Five firms are in the race, including Balfour Beatty, Willmott Dixon, Kier, Skanska and Vinci for the £150m construction contract.
The full business case is with the DoH.
A shortlist is expected around March with construction to start in December.

£300m Teesside Hospital
University Hospital of Hartlepool and the University Hospital of North Tees
North Tees and Hartlepool NHS Foundation Trust
Laing O’Rourke, Brookfield Multiplex and Iridium Concesiones de Infraestructuras are competing.
They are in a three-month series of meetings and to go into the design aspects of the hospital in more detail.
The trust had chosen a ‘pension fund’ route, but now says it is “evaluating PF2”.

Est £370m Midland Metropolitan Hospital in Smethwick
Sandwell and West Birmingham Hospitals NHS Trust
Revealed by CN as one of the first potential PF2 schemes in December.
Trusts said this week it continues to refresh its plans as part of a 6-month review launched in December.
Contractor procurement will form part of this.

Readers' comments (1)

  • An interesting article here from CN should see some outcomes on this once the schemes above have been announced. PF2 seams to be gaining momentum

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