Case Study: United Kingdom The Private Finance Initiative NHS model 1. PPP Law/Legal Framework/PPP..

Case Study: United Kingdom The Private Finance Initiative NHS model 1. PPP Law/Legal Framework/PPP Policy in Health In November 1992 the then UK Conservative Government announced in its budget statement “ways to increase the scope for private financing of capital projects.” This was the beginning of what was to become known as the Private Finance Initiative (PFI), under which groups of private investors manage the design, build, finance and operation (DBFO) of public infrastructure. PFI was rapidly expanded under the Labour government, which came to power in 1997. The current coalition government, formed in May 2010, has confirmed that it remains committed to the Private Finance Initiative as a way of delivering investment in infrastructure. It is a procurement model that uses private sector capacity and public resources in order to deliver public sector infrastructure and (optional) non clinical services according to an output specification defined by the public sector. A defining characteristic is the use of project finance using private sector debt and equity, underwritten by the public (central government). Its widespread adoption for health sector infrastructure investment in 1997 followed the lead of Australian State Governments’ development of the concept in the early 90’s. From 1998 on it in effect became “the only game in town” (Minister of Health 1998) for financing new health infrastructure investment in the hospital sector. This reflected the limited availability of government capital for hospital renewal at that time – and an ideological belief in public service outsourcing by the then government; PFI in consequence became the only practicable (formal policy) funding framework for large scale capital investment in hospital facilities. In addition to PFI, the Labour government introduced a limited scope full service PPP model for the provision of a specified range of surgical and medical treatment; the so called Independent Sector Treatment Centre Policy. This is described separately. 2. Centralised PPP Unit on health at country level/ Decentralised decision making (devolved/decentralized approach used for management of PPP) Under pre-PFI conditions hospitals negotiated directly with the Ministry of Health for the provision of large scale capital through submission of formal business plans. The process (and content of plans) was heavily standardised and subject to rigorous MoH guidelines. Hospitals were also required to produce evidence of local district health authority and regional board support for the project. This system prevailed for the PFI programme excepting that: ? The Treasury required the Ministry of Health to establish a separate central PFI unit to advise on and approve all PFI proposals. The unit is part of the Procurement, Investment and Commercial Division of the MoH. The Treasury has representation on the PFI unit. Central guidance is extensive and mandatory (a combination of Treasury and MoH provisions) and covers all dimensions of planning, procurement and management of projects. In practice it has proved formulaic in shaping hospital development; ? Treasury approval is also required for PFI sign off. The Treasury maintains overall policy responsibility for PPP, the Department of Health's PFI activities operate with a degree of flexibility but within the overall policy; Health and Economics Analysis for an Evaluation of the Public Private Partnerships in Health Care Delivery across EU 30 ? The government accepts a legal obligation for underwriting all PFI contracts – covering its public sector liabilities – in practice mainly payment of the unitary charge (see later). Following MoH (PFI unit) approval of project proposals the individual Hospital Trust is wholly accountable for the management and operation of the public sector element of the project. This includes ‘front line’ negotiation of the contract with the PFI operator special purpose vehicle (SPV) – and its subsequent operation. Final MoH PFI unit approval is necessary before contracts can be signed by the hospital, as the formal contracting body (acting on behalf of the MoH). 3. In case of the decentralised approach – the role of the central government Not applicable 4. First PPP Contract: The first district general hospital: Cumberland Infirmary, Carslisle, Cumberland. Opened 2000 (£87 million capital cost – 444 acute beds) The first academic teaching hospital: Norfolk and Norwich University Hospital, Norwich, East Anglia, opened in late 2001 (£229 million capital cost – 987 acute beds) 5. Total Number of PPP Contracts See below 6. Model: ? PFI – According to Treasury figures there are 118 PFI projects in the English health sector, the vast majority are fully commissioned. The total capital value of projects is £ millions 11,614.3; ? Infrastructure + Clinical (SPV) Hospital Management – none ; ? Franchise – one, for management services of an NHS hospital (Hinchinbrook) that had failed financially; ? Full service provision – none (see also Independent Treatment Centres). 7. Contract duration Typical contract duration at the beginning of the PFI programme was 25 years. However, as capital costs have risen, in particular for the larger and more complex teaching hospitals, a significant number of projects are tending towards 30 years with a small number extending to 40 year contract periods to ensure that the unitary charge to the hospital remains affordable. The rising cost of borrowing is also a factor in extending the contract period. It is to be noted that some contracts now paradoxically extend beyond the normal lifespan of typical hospital buildings. 8. Payment System PFI is funded through Hospital Trusts making an annual payment, called the unitary charge, which comprises an availability fee (covering the capital and lifecycle costs) and a facilities management fee (covering the costs of services such as cleaning) if these services are incorporated in the project. In calculating the unitary charge the PFI company will include: ? the capital costs of the project; ? the likely financing costs and, hence, debt service responsibilities of the Contractor; ? the operating costs of the project (including sub-contractor costs, administrative costs, employment costs, insurance costs, tax liabilities and


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