Opinions on the degree of success of the PFI funding model for hospitals and other healthcare facilities have always tended to be pretty polarised — with critics citing increasingly fractious relationships between PFI consortia / projectcos and their NHS counterparts, and difficulties in getting even basic maintenance or repairs undertaken without time-consuming and laborious contract variations. In PFI’s earlier days the funding consortia were also sometimes accused of profiteering. Advocates of PFI argue, however, that without its emergence in 1992 during John Major’s Conservative Government, many badly-needed new NHS hospitals would never have been built. Whatever one’s standpoint, over the next 15-20 years many healthcare PFI contracts (the average term is around 31 years) will end, and the built assets funded built, operated, and maintained via private finance will revert to Trust ownership. Many healthcare PFI contracts — and especially those drawn up in the earlier days — were complex. This necessitated the recruitment of specialist teams, both in-house at NHS Trusts, and at PFI consortia, to ensure an equitable agreement that would be workable over, typically, a 30-year lifetime, and, crucially, ensure that the built assets would be handed back in excellent condition.
Extensive experience in PFI
Ian Daccus, who I recently spoke to by ‘Teams’, has extensive PFI experience — having for instance, being involved in the University Hospitals Birmingham PFI scheme in 2006. With a sizeable tranche of PFI handbacks now looming, I was keen to find out from him what he feels will be the biggest associated challenges, and indeed opportunities, for both NHS Trusts with PFI-funded buildings, and the private sector consortia. How prepared, for example, does he believe Trusts with PFI estate are to address potentially unprecedented issues following handback. What follows is a Q&A-style report on an interesting 45-minute discussion with him.
JB: “Ian, can you firstly tell me a little about your own professional background and experience of PFI?”
ID: “I worked in the NHS for nearly four decades — having started as a trainee with the old regional office at Cumberland House as part of the National Programme for Training, primarily at Selly Oak Hospital, which developed into University Hospital Birmingham. My experience in PFI in particular was on the PFI project there. As part of the multidisciplinary Trust PFI team, I led on the contract schedules relating to all of the services and management of the hospital during its operation — to help the Trust team take the contract to financial close in 2006. The PFI, valued at about £550 m, was one of the last two large schemes in the second round. After that, more of the schemes were valued at under £300 m, and diminishing. So, my experience primarily involved looking at the contracting schedules for Estates & Facilities activity, and all the performance metrics around ongoing contract management.”
JB: “What about your current role?”
ID: “Today I’m the Partnership director for Capita Estates and Facilities, working in the NHS. I’m also Chair for HefmA London and South-East coast.
JB: “How did the PFI model first develop, and how did it evolve for healthcare projects?”
ID: “The Conservative Government, under John Major, introduced it as an initiative at the time to address the poor condition of hospitals, the need for new ones, and the mounting backlog challenge. Tony Blair’s Labour Government then took it forward. In reality, it was led as ‘the only show in town’ that could bring in that level of funding. So, it was launched by the Conservatives, and expanded by Labour.”
JB: “In simple terms, how does the model work?
ID: “There’s a PFI consortium initially brought together — comprising the operating company, which usually includes a series of private sector funders, including a bank, a major developer, and a facilities arm — quite often linked to the developer. In the UHB case it was with Balfour Beatty as the main developer.”
JB: “Was PFI effectively like the NHS taking out a long-term loan?”
ID: “It’s more of a vehicle to allow someone else to fund, build, develop, and operate the facility. PFI was designed to ensure that — in a contractual performance-managed manner — all the criteria and requirements of the NHS hospital were met, with the contract managed in a way that would keep the PFI buildings in good condition and operating optimally throughout the term, and then handed back in ‘as new’ condition.”
JB: “And for their part, NHS Trusts pay a monthly unitary charge to cover the cost of the services; they’re effectively paying back the money?”
ID: “Yes. So instead of government funding the infrastructure works, it’s all funded by the consortium, which receives a monthly unitary charge, agreed at the outset, with various metrics for inflationary increases etc. included. That continues through to the contract’s end — when the facilities are due to be handed back. The volume of these projects coming to an end will significantly increase over the next 10 years.”
JB: “What do you think have been PFI’s key advantages and disadvantages?”
ID: “The model undoubtedly delivered more new hospitals over a particular period than would have been possible through traditional funding mechanisms. Nationally, it brought forward more funding than would have been possible through normal government funding, or Department of Health capital. PFI therefore provided an opportunity that otherwise wouldn’t have existed — so, from that perspective, it brought us multiple new hospitals.”
JB: “What about the drawbacks?”
ID: “The time and complexity to get the schemes to financial close was one; in most cases it took over five years of contract design negotiation and development before construction started at ‘financial close’. Secondly, there are now issues surfacing in quite a few of the PFI-funded and managed hospitals with elements of the construction — especially around some of the investment choices made originally by developers as regards the completeness of the construction of hospitals versus the ongoing costs. Equally, because all the provision and ownership, and the knowledge and expertise, were within the consortia, quite a few PFI sites are now finding that some elements of the hospital — as originally constructed — weren’t to the required design standards. There are excellent examples of PFI hospitals working and being managed well; however, a number are surfacing where there are concerns.
“There have been some early ‘takebacks’ of existing services. Several Trusts have already taken back their cleaning and other soft FM services through in-house bidding via the market-testing mechanism within the contract. There are also several Trusts that Capita, and others, have supported with forensic surveyors coming in to examine what was actually built in the first instance. To date there have been some quite significant shortfalls identified in a number of PFIs, with rectification costs into the hundreds of millions of pounds — for lack of provision to the original design standard or specification.”
JB: “Will the affected Trusts have recourse to the courts to reclaim those monies?”
ID: “The NHS does now have support from the Infrastructure and Projects Authority, within which there is a PFI Centre of Excellence. PFI contracts are a highly specialised area. It’s extremely difficult for individual Trusts, consortia, and construction parties, to fully assess the entirety of the contract; many are thousands of pages. Typically, you have a main contract, and then schedules, each addressing different elements of building performance. They are complex, and need considerable expertise and resource — so it’s helpful to have a centre of excellence to support Trusts. With those major PFI providers — one of which is no longer with us, however, there also has to be a balance with the reality of the challenges for the consortia — who, contrary to some perceptions, often don’t make substantial profit. Annual surplus in one provider I worked with in the past — with more than 10 PFI contracts — was less than £300,000.
JB: “If forensic surveyors used by some Trusts to look into PFI contracts identify major deficiencies, will the Trusts concerned then go to court over the monies they believe are owing?”
ID: “They could, but there are mechanisms within the contract for the parties to come together and work through any non-compliance issues. When they get into a high cost or level of difficulty, however, they could quite easily end up on the way to court, with the issues settled more litigiously — especially where you could be talking reinstatement at £100 m for individual claims.”
JB: “Do you think many of these cases will progress down the legal route?”
ID: “I think it depends on the negotiation and the certainty of the non-compliance. When you have significant construction elements not built to the designed statutory standards, these elements have to be rectified, with all the associated cost. This is all central to why we had the PFI system in the first place — to have the perfect hospitals built, and then handed back in a perfect condition.”
JB: “So, as regards the sort of figures you are referring to, we may be talking about potentially quite significant construction defects and — where forensic teams find significant deficiencies — is the onus on the PFI consortia to rectify those before handback, or could they simply leave it to the NHS Trust to address thereafter?”
ID: “I think this is the crux of what we’re discussing. The pre-handback process really does require the Trust to lift all those lids, and indeed any they may not have thought of — including the construction elements and standards. Quite often, once these PFI hospitals are open, they are such magnificent facilities that some of these elements were never looked at. It was more about getting on and operating them, and making sure that energy use, cleanliness, food standards, and the ongoing services provided by the consortium, are all working well. There were quite a few Trusts in the early years that found that their air-conditioning plant and some of some of their engineering services weren’t fit for purpose, or indeed properly compliant, for example.
“Capita’s experience is not only that in some cases those more apparent elements weren’t installed in accord with the design criteria, but equally that the fundamental construction elements weren’t provided to those standards, and possibly were never looked at in sufficient detail. Trusts need to get onto the front foot sufficiently early ahead of the handback, to identify any concerns in the original design and construction, reviewing their lifecycle cost replacement plans, and that sort of thing, and starting the process early.”
JB: “I’m presuming that with HTMs in place for many years, healthcare PFI contracts include stipulations that the building(s) covered must be maintained in accordance with the guidance?”
ID: “Yes, they all have the requirement to be maintained to those standards — although some include specific derogations where there may have been some funding or other requirements of a shared nature, to allow them to partially comply. Generally speaking, though, they have to comply with all relevant standards for construction, and statutes, HTMs, and HBNs, as they were at the time constructed, and, in some cases, also for future updates unless derogated.”
JB: “Given that a number of the earlier contracts will soon come to an end, do you think Trusts have been able to adequately resource their in-house handback teams?”
ID: “It’s definitely a challenge — as indeed it was at the outset — for the teams developing the contracts that led the PFI to financial close or contract signing to secure that skillset. The teams that have then operated and managed the PFI hospitals through the intervening period have varied by Trust, as have their approaches. We are now gearing up to a similar process where that extra input is needed again, as it was at commencement — and on a scale. With that workload the expertise needs to be sourced again. Some of this will be in the same way that teams of different professional specialisms were brought together to help with the contracts at the start of the PFI. This is also where the Infrastructure and Projects Authority comes in — as a helpful support to everybody.”
JB: “Do you think many NHS Trusts with PFI handbacks looming have brought in external consultants?”
ID: “I think — depending on their circumstances — yes, because there’s a whole range of expertise required, including legal support. Most PFI Trusts formed an extensive project team. There could have been 20 or 30 dedicated people dealing with the clinical planning design, capital and construction, and negotiation with all the different parties, while the consortia would have also developed their own team.
“A real level of specialism was developed in the run-up to the PFI facilities being constructed, and then, in many Trusts, large parts of the team that had helped get the contracts to financial close moved on. These teams were partly disbanded once the hospitals opened. The remaining team then helps manage the PFI partner, while the PFI partner built, and then operates, the hospital. That’s a scenario that works well for the operational period, and these Trusts now need to gear up ready for handback to ensure, as best they can, that the hospital comes back in accordance with the contract — as that is what the NHS has paid for over the years.”
JB: “Do you think many Trusts have the in-house expertise to be able to pull together a team, or will many of them need to recruit to do it?”
ID: “It’ll be a combination, and there will always be a need for extra resources. It wouldn’t be sensible to resource for the work that is required for a handback during what’s been optimistically an amicable relationship through the operating period.”
JB: “I believe the National Audit Office at one stage suggested the public sector ‘doesn’t take a strategic or consistent approach to managing PFI contracts as they end, and consequently risks failing to secure value for money during the expiry negotiations with the private sector’. Is that a fair point?”
ID: “I think you could take two or three different views. The NAO’s criticism could be fair for some of the PFIs, but given the size and complexity of the risks the developers have taken, and I think there’ll probably be significant evidence to show that that this is not necessarily the case on the provider side. Where the IPA’s Centre of Excellence can help is in finding the right balance in the handback process to ensure that the value for money is maintained, and that the NHS gets the return on its investment over the years. However, simultaneously, it must do it in a way that allows that to happen in an effective way, if there are issues. If significant design and construction issues are discovered from detailed surveys, the liability sits with the PFI consortia. With the size of those potential issues, it’s best to start addressing them at least 6-7 years before the end of the PFI, to allow time to negotiate. The earlier, the better. Time can help resolve the challenge in a more effective way. The opportunity for rectification is essential. That opportunity is increased with time.”
JB: “I believe that in 2020 the NAO said that around 55% of all public sector authorities had ‘insufficient knowledge about the condition of their assets, which risks them being returned in worse quality than they expected’. Do you think there’s an issue with some of the larger (healthcare) estates where the data they have on assets held, and their condition, is not very good?”
ID: “I think that — superficially — most of the data will be sound — with all the performance metrics provided for reports, joint audits, and inspections. Many of these are presented covering all the operating standards under PFI Schedules; thus standards for hard and soft FM services such as cleaning, portering, catering, security, and helpdesk provision, energy, and other elements, will have been provided for. By nature, these are things managed through the monthly, quarterly, and annual contract mechanisms of joint performance management, alongside the energy performance and the hard FM / maintenance performance. Those include issues that need rectifying, and come with response times. The condition of items and their lifecycle replacement are also worked on, because these factors present themselves via the nature of the parties working together managing a PFI hospital. So, if the flooring needs replacing every 10 years, it’s evident if it’s been replaced on that programme, and if not, there are agreements for adjustments to the lifecycle cost replacement.
“What’s less evident is whether the structure of the floor, internal roof void elements, fire compartments, and so on, were built to the required standard in the first place, and whether some of the more in-depth engineering services have been provided compliantly. That’s where you need to come in and actively take a look. If this hasn’t happened already, it needs to start. Lift those lids, and lift them early, is my advice.”
JB: “So you’d agree with another NAO conclusion — that the information on assets will be in a variety of forms, particularly given that when PFI first emerged, the digital world — as we know it — didn’t exist. There’ll thus be quite a lot of hardcopy documents, as well as digital data. So, presumably the earlier Trusts teams are gathering such information, the better?”
ID: “I would be less worried about the quality of the information, nor that a lot of it is being relied upon to be provided by the consortia. That’s their role, and the contract again deals with exit mechanisms for providing that information in the right format. The significant issue is the amount and the complexity of the information, and a Trust being able to assess and assure itself that what is being provided is correct. The contract is designed within the PFI schedules for all of that responsibility to sit with the consortia, with an accompanying audit and management approach from the Trust side, and pre-agreed forums and governance, and reporting and contract regimes set in. For the handback process, someone needs to take the lid off and have that deeper look, with that specialist knowledge.”
JB: “Do you think there’s a risk that the amount of work involved in some handbacks will stretch already pressured hospital team resources to the limit? Could this impact service delivery, or do you think that as long as they plan well ahead, Trusts will manage it?”
ID: “Again, we return to the expertise from specialists supporting Trusts, and the significant benefit of the IPA’s PFI Centre of Excellence — as a support. The Centre has suites of documents to guide Trusts through that process. They’ve got detailed guides, information, and questionnaires. I think it’s now recognised that the pre-handback processes need to be undertaken robustly, making good use of that support for local teams. The centre’s raison d’être is those concerns from the National Audit Office that many people that have been involved in PFIs were aware of — and it’s starting to help Trusts address them.
“It’s not, however, viable realistically for every Trust to have an expert team of sufficient size, and with the specialist skillset required, for that specific period to deal with the handback of their hospital. The next big question, however, is: ‘How does the NHS and the Trust / hospital manage and operate its facility once it’s handed back?’ That really is one of the bigger issues that also needs focusing on in terms of central support for their effective management, and especially the adequacy of ongoing funding. How do we ensure that the hospitals ‘handed back’ continue to be maintained in the right condition for the next 30 or 40 years, and don’t start deteriorating and joining the existing backlog maintenance debacle we’ve had for the last 30 or so? That’s the other challenge right around the corner. We can see it ahead on the road already.”
JB: “The NAO has recognised that — as it puts it — ‘transitioning service delivery and staff from a private operator to the public sector requires careful planning to avoid service disruption’. Do you think this will be a big challenge?”
ID: “It’s a challenge the NHS is very experienced in — having seen the compulsory competitive tendering introduced in the early 1990s, followed by market testing and various different ways of ensuring best value in terms of outsourcing and then insourcing. We’ve also had shared services — so we’ve extensive experience in the NHS of the transferring out and transferring back in staff and major contracts. I would therefore suggest we do have that level of embedded experience. In addition, while we have the challenge of this, the benefit of the TUPE transfer of all the staff currently in the consortium helps retain the corporate memory and resource. Those individuals that are 50% or more dedicated to their role should be coming with the PFI handback.
“As there’s a significant HR TUPE transfer, and a substantial contracting and asset transfer element to the handback of a PFI — which in some Trusts, could be heading towards 1000 staff — everybody really needs to start thinking about those plans a number of years before the PFI closes.”
JB: “Do you think the handback situation presents a good opportunity to assess and upgrade assets to meet current building regulations and sustainability guidance etc?”
ID: “The PFI should be operating to, and the facility should be built to, the required standards, so ideally there shouldn’t be a need for much improvement work. What the handback may afford is an opportunity for a more cost-effective way to make some alterations that perhaps weren’t affordable with the PFI in a consortium arrangement. So, I think that will be another advantage in the future; once the assets have come back into the Trust ownership the cost of alterations may be more affordable. The price the Trust pays for that, however, is its ability to then manage and maintain the building(s)at the required standard, and keep it that way. That’s partly why it’s so expensive to operate PFIs now — because the Unitary Payment also includes keeping it at that standard.”
JB: “The National Audit Office has talked about ‘opportunities for collaboration between the public and private sectors to develop innovative handback solutions and service delivery models’. Do you think that there’s evidence of that?”
ID: Absolutely. Several Trusts have now taken back their in-house services, while some are looking at taking them back, and outsourcing them. I think that’s one area where numerous combinations will come to the fore and work quite well. I believe the Trusts are quite capable; the Estates and Facilities community has developed a whole range of excellent solutions using outsourced and ‘insourced’ services, as well as partnerships — with numerous frameworks now available, and in regular use. The expertise on the NHS side is excellent. It’s the capacity that’s the challenge.”
JB: “The NAO has said it ‘recognises the need for early and open engagement and communication and collaboration with all stakeholders — public sector, private sector consultants, surveyors, etc, in fostering transparency, building trust, and facilitating early identification and resolution of potential issues’. Has there been a good deal of positive engagement and openness between the various parties in some of the PFI contracts?”
ID: “As far as I’m aware there’s been excellent communication on all PFIs through their joint performance management; where the level of ‘issues’ gets a little bit challenging and litigious is the concern. With the Trusts that our Capita forensic teams have worked with, that has been part of the process to survey to, with a view to assessing whether there are any issues, and having that open book / open door approach. Unfortunately, they’ve found repeatedly that there are problems that weren’t previously known, and needed to be resolved.”
JB: “How receptive are PFI consortia to forensic surveyors coming in? Presumably if the Trust wants them to do it, then they have to be open to it?”
ID: “There are mechanisms within the contract to allow Trusts to conduct surveys with external parties to ascertain building conditions etc. Generally, where the subject has been broached, it’s been allowed, and understandably there have been concerns. It’s fair to say that our Capita forensic team will only work for the NHS client side. If there are concerns on the consortia side that these surveys could identify problems, then that level of survey and inspection might not be welcomed. However, then you would ask yourself: ‘Why would that be the case?'”
JB: “PFI, as a funding model, has clearly had its pros and cons, but do you think there will be a successor emerging any time soon? Do you think there’ll be another model like it in the near future?”
ID: “I think it’s the financial conditions that make it a challenge; not the market — which I think would welcome a new version in terms of construction. While the New Hospital Programme is most welcome, it’s not going to provide new hospitals fast enough or in the right volume for the needs of the hospital replacement programme. We do need a future alternative. I think the challenge will be the financial accounting treatment, and in particular, the capital limits and allowances for these sorts of costs. Having these within NHS Trusts’ annual accounts does set a challenge and limits for them to be managed effectively.
“I’d suggest the solution is to develop a countrywide full hospital lifetime replacement programme. It wouldn’t be that difficult to develop a 40-year programme of replacement, and to start to work on that alongside backlog and other investment plans. We need that alongside regional, into borough-based plans. ICBs arguably shouldn’t manage a national NHP programme; this is where regional teams could innovate and resource up and help deliver. To deliver that we need a structural reform of NHS estate management and major capital. This could be best delivered with a move somewhere back towards regional teams delivering major projects across larger areas, well-resourced and co-ordinated for a longer time period than is integral to ICBs and Trusts.”