Don’t throw the baby out yet!

If you read many of the headlines around the Private Finance Initiative in the NHS, you might believe that PFI is in its death throes whilst simultaneously leaving a legacy of empty and unsuitable buildings that divert funds away from patient services in locations where they are most needed. The truth is more complex than simple slogans might suggest, says Andrew Lloyd-Kendall

North Bristol NHS Trust has recently advertised for a new 947 bed PFI hospital and nearly 70 major PFI hospitals worth around £5bn are now operational, with over 20 more under construction. And PFI has been one of the UK’s most successful recent exports, with much of Europe and the wider English-speaking world experimenting with forms of PFI. 

It’s helpful to remind ourselves why we needed PFI back in the 1990s. Before PFI, so the story goes, major hospital projects were delivered late and over budget, and phased developments often never got past the first phase. PFI offered transfer of the risk of overruns to the NHS’ private sector partner, as well as bringing a welcome focus on whole life costing and the hardly radical idea that facilities needed to be properly maintained and available for use over their life. And indeed, several reports have reported the success of PFI in achieving this.

Moreover, thanks to its longevity, and the effort the government has put into improving and standardising the PFI product-for example, by ensuring that all recent deals allow for the public sector to take 50% of “refinancing gains”-there is now a mature market of well known and strong companies. Should this ‘bathwater’ of experience and expertise be thrown out or can and should PFI continue to develop to address some of the more valid criticisms levied against it?

Perhaps the most recent relevant criticism of PFI is around its inflexibility and this is the justification most often given by those trusts who have cancelled their major PFI projects. The argument typically has two strands. Firstly, because the trust has to pay a fixed unitary charge to their PFI partner, they need to ensure there is enough activity to cover this under the payment by results system. Secondly, because new technology and new models of care mean that care need no longer always be provided in a hospital setting, there is typically a need to either change the use of the facilities or, worse, no longer a use for them at all. The NHS therefore pays for space it does not need, or has to pay for a so-called “PFI variation” to change its use. Critics have pointed to the time and cost associated with these variations and the National Audit Office is due to report on their value for money next year. Where the space cannot be reused, the argument goes that this prevents the shift of services into the locations, such as community hospitals, where patients can safely and really want to be treated.

There is undoubtedly a strong degree of truth in this inflexibility and “stranded capacity” argument, which seems particularly pertinent to some of the very early NHS PFIs. What many critics fail to look at though is the counterfactual. If the hospital had been procured some other way - be that public capital or indeed direct borrowing - would that solve this problem? 

Again while it’s difficult to give a simple answer, the problem seems to lie more in the planning of the project rather than the procurement and funding route. If at the initial planning stages, it was possible to identify better the future scenarios around technology, workforce, models of care and so on, then it should be possible to design a hospital building that can flex as the scenarios unroll in practice. Where areas are particularly uncertain as to how long they might be needed for, they could be designed to be able to change use or indeed be sold off. Where services might not be needed for several years, a variation might be ‘pre-costed’ and a date agreed to decide whether to take up that option. While PFI as it stands today doesn’t incorporate this ‘real options’ approach to phased developments and asset management, it is surely worth seeing whether it can before dismissing it?

PFI isn’t dead yet, then, though new threats, such as the impending move to international accounting standards and its likely impact on bringing PFI schemes onto the NHS’ balance sheet, will continue to challenge it. Trusts therefore need to undertake more detailed scenario analysis and ‘procurement option appraisal’ when considering how and when to invest in new facilities. PFI is still one alternative, though perhaps not as we have known it.

Andrew Lloyd-Kendall is head of the Future Healthcare Network at the NHS Confederation