Private schooling

Roger Tanner suggests that the private sector needs to change its approach to PFI if it is to realise its full potential for improving efficiency and delivering change in the NHS, in the context of the recent White Paper.

The introduction of PFI into the NHS was generally greeted with enthusiasm by the private sector who saw it as heralding an end to what they perceived as rationing of capital funding by regional offices and the NHS Executive. Since the formation of trusts in the early 1990s, many private sector companies had experience of spending time and money on developing schemes with NHS trusts only to be told: "We want to go ahead with this scheme but we simply can't get the capital - the regional capital programme is already over committed". Hence the private sector believed that NHS trusts were queuing up to start capital schemes and all that was needed was to make the capital available and schemes would go ahead. This naivety was compounded by the fact that at this time the Capital Investment Manual was relatively new and the private sector were not familiar with its rigorous business case approach to capital investment decisions. Enthusiasm soon turned to frustration as private sector companies became involved in the timely and costly process of producing business cases that in the end often failed to demonstrate both value for money and significant transfer of risk.

The realisation that PFI proposals which simply replaced public sector capital funding with private sector funding could never demonstrate value for money eventually forced consortia to adopt the design, build, operate and finance (DBFO) approach promoted by the NHS Executive in its guidance HSG(95)15. Unfortunately, the most active response to the private finance initiative had at this time come from building contractors who were generally poorly equipped to respond to the "operate" element of this approach. They responded by trying to recruit facilities management partners for the consortia but this proved to be difficult as in practice very few FM companies had comprehensive experience of operating facilities in the NHS. This lack of experience of operating NHS facilities remains the obvious weak link in many of the current PFI schemes - a weakness that will not manifest itself for a number of years yet.

The failure of many of the early PFI schemes to demonstrate value for money was also the result of contractors believing that this could be achieved by reducing initial capital costs. This was a continuation of their past approach to winning tenders in the NHS rather than the expected life-cycle costing approach being sought through the PFI procurement route. Anyone who has analysed the relative importance of the capital and revenue elements of lifecycle costs will know that revenue is the dominant variable. Despite this, consortia bids often provided large amounts of detail on capital costs but little on revenue and therefore failed to demonstrate that they had taken lifecycle costing seriously. This was not surprising given that over the previous 40 years the NHS itself had procured its capital programme on a "lowest capital cost" approach and had little experience of lifecycle costing. In addition, producing accurate lifecycle costs for both the PFI proposal and the public sector comparator proved to be difficult as very little information exists on the real cost of operating and maintaining the NHS estate.

The statistics that do exist from central returns and benchmarking clubs show that huge variability exists in operational estate management and maintenance expenditure across trusts. Existing budgets for estate and facilities management often have more to do with historical happenstance than an accurate reflection of need to maintain buildings and engineering systems in a satisfactory condition. Hence an NHS backlog maintenance expenditure requirement in excess of L2bn.

Not surprisingly, the comparison between PFI bids, based on full lifecycle costs, and existing budgets often showed private sector costs to be high. Consortia soon became aware of this and frequently complained that it was not fair to compare their proposals with the existing costs of running services as they had priced for maintaining the estate properly - something that the NHS had not done. This may have been a valid point but its acceptance then created another problem - affordability. If PFI schemes are genuinely providing a level of service that exceeds current levels then it obvious that they are likely to be more expensive than existing budgets.

Whilst it is easy to ensure that the comparison is fair by adjusting the public sector comparator to take account of proper lifecycle maintenance, it doesn't solve the problem of the NHS being able to afford the increased costs. Consortia have genuinely sought to produce revenue cost savings but this has largely been limited to the estate management and facilities management budgets and these are often relatively small and may already be perilously low.

The problem of affordability led to much lobbying of Ministers and eventually some "pump priming" help for the early PFI schemes. However, this is not a long term solution to the problem of affordability.

The long term success of PFI is much more likely to be dependant upon the private sector being able to develop genuinely innovative schemes that produce revenue savings through new ways of working, investment in technology and improved performance. Such schemes will inherently provide value for money as well as being affordable. However, it is likely that this will require the private sector to take a much more holistic approach to developing schemes. Such an approach will inevitably impact on the whole way in which services, including clinical, are provided and will not be based on simply reducing the cost of estates and facilities management services.

Whilst the private sector may not be allowed to provide clinical and some other services, it must aim to reduce costs and improve performance in these areas through the impact of the facilities and services which it can provide. Such an approach will require consortia to have access to a much broader range of expertise than the current "builder/facilities manager" team that has been so evident to date.

Consortia teams that include clinical, nursing, healthcare planning, management and technology expertise would enable them to work with NHS teams as professionally equal partners able to challenge existing practice and performance across the whole range of services. It would enable them to be much more pro-active in seeking out the kind of efficiency gains and improvements in performance and quality that are necessary to justify major capital investment in the NHS.

As part of adopting a more holistic approach to developing innovative schemes, consortia will have to take a much longer term view of investment in technology. There is a huge opportunity for the NHS to benefit from both new and existing technology, and this is not limited to information technology, although opportunities abound in that area. Investment in new building materials, engineering plant and systems for new facilities as well as the existing estate could bring enormous benefits for the NHS as well as creating a massive business opportunity for the private sector. Low energy lighting, combined heat and power plant, high efficiency condensing boilers and alternative energy technologies are examples of such areas of investment. So too are low maintenance building finishes that can both reduce maintenance cost as well as improve the quality of the environment.

In the past, particularly over the last decade, the NHS has had a very short-term view of such investment and anything with a payback period of more than a two or three years would not get implemented. This, coupled with constraints on available capital and in many cases a "head in the sand" rejection of new technology, led to serious under investment in the estate and missed opportunities to improve performance. PFI is an opportunity to put this right.

The private sector must however be proactive in seeking out these opportunities, rigorously evaluating the financial and non-financial benefits of the technology, and must be prepared to guarantee performance and savings. Structured in the right way such investment would not only pay for itself through savings but could in many cases be "cash releasing" for NHS trusts. Surely, such an approach would be irresistible to the NHS?

There is much in the Government's White Paper The New NHS - Modern, Dependable to encourage the private sector to adopt such an approach. One of the six key principles that underlie the changes proposed by the Governments is stated as "to drive efficiency through a rigorous approach to performance". Similarly, the Government is committed to exploiting new technology for the benefit of patients.

Hence, future PFI schemes will be expected to deliver efficiency, performance and quality improvements across the full spectrum of NHS activity. The private sector will only deliver what the `New NHS' wants if it can itself provide a new approach to investing in modern healthcare facilities.

Roger Tanner is managing director of Stratagem Consultants. He was formerly head of the consultancy arm of NHS Estates.

Copyright Wilmington Publishing Ltd. Aug 1998
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