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England, UK

 

 

The Private Finance Initiative, English NHS

 

  • The private Finance Initiative is essentially a public private partnership between the Government and the private sector whereby the Government (NHS) specifies what outputs it requires from new hospital buildings and the private sector provides finances and owns, designs and constructs, and leases the building back to the NHS for its service delivery. The NHS does not contract out any of its clinical services to the private operator of the building
  • The NHS pays an accommodation charge for use of the building within a contract agreement, usually 25 years. The private sector owner of the building is wholly responsible for maintaining the building (to an agreed standard) throughout its lifespan
  • A key principle is risk transfer. The private sector owner carries the full risk of cost overrun for the project, time overrun and any unforeseen maintenance costs.
  • Evidence tends to show that better risk management by the private sector has led to buildings being delivered on time and within cost
  • This system has been used to fund most new hospital developments during the past decade; almost 100 will have been completed or in final stages of development by 2010. The PFI process also enabled the government to keep the debt incurred off balance sheet (subsequent interpretation and changes in legislation has now removed this benefit)
  • The separation of ownership between the building (private sector) and clinical and care services (the NHS) is in direct contrast with Rhoen Klinikum. There is good evidence to suggest that this separation mitigates against the buildings being designed effectively around work processes. Furthermore there is little evidence that buildings are designed with future adaptability and sustainability in mind; this may be due in large part to an emphasis during tendering processes on cost saving

 

Strengths

 

  • Off balance sheet management of debt allowed the NHS to accelerate its investment in new hospitals
  • Risk transfer to the private sector has resulted in buildings delivered on time and on cost
  • The lifespan costs of building are fully accounted for as part of the risk transfer principle

 

Weakness

 

  • High transaction costs for managing the procurement process and negotiating the contract framework
  • Lengthy overall procurement processes that largely cancel out the gains from shorter construction times
  • Buildings lacking desirable investment in adaptability and flexibility
  • Poor correlation between work processes and design

 

Sructural Fund relevance – low

 

  • The credit crisis has destabilised PFI as a financing process, most governments using this system are phasing it out, with the exception of Australia
  • The separation of building and service ownership creates more problems than it solves
  • It is likely new forms of PFI will evolve that overcome many of the currently perceived problems

 

Download the detailed description of the case study from here.

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