Official Report (Hansard)

Session: Session currently unavailable

Date: 14 June 2007

NORTHERN IRELAND ASSEMBLY

COMMITTEE FOR
HEALTH, SOCIAL SERVICES
AND PUBLIC SAFETY

Private Finance Initiatives
Public-Private Partnerships

14 June 2007

Reply from the Minister for Health, Social Services and Public Safety to PFI/ PPP issues raised 14 June 07

Members present for all or part of the proceedings:

Mrs Iris Robinson (Chairperson)
Mrs Michelle O’Neill (Deputy Chairperson)
Dr Kieran Deeny
Mr Alex Easton
Mrs Carmel Hanna

Witnesses:

Mr John Cole Chief Executive, Health Estates Agency
Mr Stephen Galway Grade 7, Infrastructure Investment
Dr Jim Livingstone Director of Infrastructure Investment
Ms June Wilkinson Deputy Principal, Infrastructure Investment

The Chairperson (Mrs I Robinson):

Members, I must leave at 4.00 pm. The Committee will not be able to continue after that time, because too many members are absent. We will hear the presentation from the witnesses and if members keep their comments brief, I will try to include as many questions as possible. Any unanswered questions should be put in writing or can be asked at our next meeting.

I welcome Dr Jim Livingstone, the director of infrastructure investment at the Department of Health, Social Services and Public Safety (DHSSPS), and his colleagues Mr Stephen Galway and Ms June Wilkinson. We are short on time today, so if there are any unanswered questions, the Committee will forward them to you for written response.

We have set aside 10 minutes for you to provide a brief outline of your thoughts on private finance initiatives (PFIs) and public-private partnerships (PPPs). After that, members will ask questions. You will be aware that we took evidence from UNISON last week, and I am sure that you will want to address the issues raised during that discussion.

Dr Jim Livingstone (Department of Health, Social Services and Public Safety):

Unfortunately, my colleague Mr John Cole, the chief executive of the Department’s health estates agency, is delayed in Enniskillen, but he may join us in due course.

It is good to be here, and I hope that we can assist the Committee’s deliberations on PFIs and PPPs. We have supplied members with copies of a short briefing paper and are happy to deal with any questions about its contents or, indeed, any other related matters.

With such a range and complexity of procurements, the Department must ensure, above all, that value for money is secured in all health and social care infrastructure investments. One consequence of that imperative is that the Department uses a range of procurement methods to secure value for money for the taxpayer and, most importantly, for patients and clients of the service.

One of the PPP procurement methods used is the PFI model. As with all the procurement methods employed by the Department, that model is used only where, and if, it can deliver best value for money.

The PFI model has been around for about 15 years. It originated in New Zealand before being brought to the UK, and was initially used for large infrastructure projects, typically roads and bridges. Gradually, its use spread across the UK, Ireland, Europe and the rest of the world. It is widely used internationally in many different sectors, with varying degrees of success. For example, it is now generally accepted that undertaking ICT or IT projects through PFI is not a good idea — it does not work well. On the other hand, large accommodation projects, such as those for Government offices, have proved successful and are a fast-growing part of the international market.

The reasons cited for the use of PFIs and PPPs have varied over time and across sectors. In the early years, many people saw the potential balance-sheet treatment of PFI as advantageous to their budgets. In other words, if they were able to get an off-balance-sheet deal with a private sector provider, no public-sector capital investment was needed upfront and therefore no consequential capital charges would be incurred. That is especially useful when Departments are short of capital or revenue.

In other cases, the driving force has been the absence of sufficient project and programme management delivery skills in the public sector. The private sector has those skills in abundance. That was particularly true with large-scale road and bridge projects. In such cases, PPPs can enable the public sector to make use of private-sector skills, but that comes at a price.

Another reason cited for using the model is that a PFI can introduce a dynamic into procurement that better ensures speedy, high-quality delivery of facilities and services because of the incentives generated by the private finance lending institutions themselves. It is the very presence of banks as, in a sense, the third party — there is the public sector, the private operator and the bank — that creates a different incentive for high performance.

The key point is that the usefulness of PFIs and PPPs depends on a range of factors at play in any context in which such procurement happens. It is certainly the case that the PFI model would not be appropriate, let alone useful, in every instance; it is horses for courses.

PFIs and PPPs are not free capital investments, nor, for that matter, are they conventionally funded investments. Payments would be made to the PFI operator, typically over 25 or 30 years. The situation is often portrayed as getting a building with finance — a bit like a mortgage — although, technically, that is not a correct definition. What is often not well understood is that conventional capital investment also generates annual revenue costs over the life of a project. For example, with the advent of resource accounting in Government, a publicly funded £100 million building will typically mean that the procuring authority will incur capital charges of £3·5 million every year for the life of that project, a depreciation charge of £2 million annually and maintenance costs of, perhaps, £2 million a year. Therefore in a conventional project there would be a £7 million-a-year hit on the revenue budget for that capital investment. In other words, every capital investment, regardless of how it is procured, puts added pressure on revenue budgets.

In closing, there has been a dramatic increase in recent years in capital expenditure levels in health and social care services from £65 million in 2002-03 to more than £207 million last year, and £619 million during the current three-year CSR period — the first three years of the investment strategy for Northern Ireland. This is extremely welcome after many years of underinvestment, but it is only the beginning of the strategy to reform and modernise the infrastructure or our services as quickly as we can for the benefit of the people of Northern Ireland. The Department is not wedded to any one method of procurement, but it is determined to deliver the investment effectively and in a value-for-money manner.

I am happy to answer any questions that members may have.

The Chairperson:

I shall not comment at this stage.

Dr Deeny:

Next week, I will have been a qualified doctor for 27 years. I have worked in the Health Service for all of that time. I have studied the PFI concept, and I am completely against it.

During the week, one of my colleagues, a retired ear, nose and throat consultant, listened to a programme on Radio 4 that provided evidence from across the water. I did not hear the broadcast, however, last week, I produced what I had learned about the programme to the Committee, which was that private individuals and concerns are fleecing the NHS. Three hospitals, in Bradford, Torbay and Barnstable, have refused PFIs. There are major problems in Coventry, where a hospital has lost 60 beds, two theatres and 250 jobs.

That is the result of the inevitable deficiencies of the model — money is recouped through job cuts. The British Medical Association and the Royal College of Surgeons are against PFIs, and London hospitals are paying £10 million to get out of PFI contracts. It is certainly not the way forward for Northern Ireland. The Minister of Finance and Personnel needs to be aware of the bigger picture. If, in 10 years’ time, 30 PFI projects are being paid back, that will bankrupt Northern Ireland. As an experienced GP, I have no doubt that patients and healthcare will suffer.

I will not discuss the figures today. However, in the west, there are two major financial projects, which are probably the biggest that the Health Minister will have to deal with. Is it justified to let PFI projects go ahead in the west when, appallingly, elected representatives have been refused equality impact assessments (EQIAs) and have not been shown the business plans? The previous and current trusts have consistently refused to show them to UNISON and to the community’s elected representatives.

Although the Committee does not know how much the projects will cost or what the results of the EQIAs are, the Assembly is being expected to provide upfront funding of £400 million. I have been told that PFIs are not the same as mortgages; they are worse. People who have mortgages can paint their houses or make improvements if they so wish. With PFI contracts, a Department is totally dependent on the private sector.

Last week, it alarmed me to hear that part of the deal for the project in the west — the area where I am proud to live and work as a GP, and which depends on its hospitals to provide healthcare and jobs — is that 25% of jobs must be cut in both hospitals. Is that true?

Can the Department justify those projects going ahead in the west when the Committee has not seen the outline business cases and EQIAs have been refused continually?

The Chairperson:

Thank you for that short question, Dr Deeny. I would not like to hear the long one. [Laughter.]

Dr Livingstone:

In response to Dr Deeny’s second question, I can state categorically that it is not part of the Western Health and Social Care Trust’s plan to cut 25% of jobs in both hospitals. In August 2006, figures were shared with UNISON, which, on early analysis, demonstrated that facilities management staff were expected to be part of its public-sector model. That trust must rationalise three hospitals — the Erne Hospital, the Tyrone County Hospital, and the Tyrone and Fermanagh Hospital — into two. At that stage, the trust anticipated that a reduction of certain facilities management staff would bring about an efficiency gain of up to 20% during the five years leading to the creation of the two new hospitals. However, during the past six months that analysis has been revised. The trust is now considering a reduction of 39 posts and resultant efficiency gains as a consequence of the reduction from three hospitals to two.

There will be no 25% cut. However, it is natural for the trust to consider that if it were to create two new hospitals out of what was once three in a publicly-funded exercise, it should rationalise, create a new structure, and establish a new service-delivery model in order to achieve efficiency gains. That must be the self-evident result of any rationalisation process. Therefore, despite what some have claimed, I can categorically say that there will not be a 25% cut in jobs across the two hospitals.

An EQIA has been completed for the project, and the trust has also carried out further equality impact screening on the service delivery model — which had not been constructed when the original EQIA was completed. Now that that screening has been completed, the proposed action is to carry out the EQIA on the service delivery model once a preferred bidder has been identified so that that bidder’s proposals can be examined and real data can be analysed, rather than doing the work in the abstract, when all the conclusions would be based on assumptions.

The outline business case has been made available to the trade unions, and I am aware that UNISON has seen it. The trust has abided by HM Treasury guidelines on offering people access to the outline business case, but it contains material that is commercially confidential. Under HM Treasury guidance the trust is perfectly entitled to hold back material that could be commercially confidential. Those are the rules that the trust has abided by in taking forward the project.

Dr Deeny:

I will let that subject go because of a lack of time, but we have asking for the business case for years, and I have never been shown it.

The Chairperson:

Perhaps you could put that request in writing again.

Dr Livingstone:

I am happy to take the matter up with the trust’s chief executive for you.

Dr Deeny:

Yes, I will put it in writing.

The Chairperson:

I wish to draw members’ attention to the fact that Mr John Cole, the chief executive of the Health Estates Agency, is now in attendance. You are very welcome, Mr Cole.

Mrs O’Neill:

What evidence can the Department provide to suggest that existing PFI/PPP projects are delivering value-for-money savings? Given that OFMDFM, DFP, and the Strategic Investment Board (SIB) all have a role to play in PFI procurement, where will the lines of accountability lie if a PFI project fails to deliver value for money?

Dr Livingstone:

The best advice that I can offer is to direct members to the 2003 National Audit Office (NAO) report, ‘PFI: Construction Performance’. That is the most independent authority that exists. The report examined numerous PFI projects in all sectors and found very high levels of satisfaction with the construction and operation of those projects. Seventy-six percent of projects were on time or ahead of schedule, so there is a very high satisfaction level with the outcome both in construction and operational terms.

As part of its analysis, the NAO also examined conventionally funded projects and found much lower satisfaction levels among those in the public sector. Therefore, there is now some evidence, which was not available 10 years ago when PFIs first arrived on the scene.

There are more than 500 such projects across the UK alone, and many more internationally. I suggest that — although it is not our view that it is the answer to all our investment problems — that growth in the use of the PFI/PPP models lies with the fact that they have delivered value for money. I would not say "value-for-money savings", as Mrs O’Neill did, because value for money is not about getting the cheapest item. Value for money is about getting the best quality product for the price that is paid. Certainly, all our projects are subject to very rigorous value-for-money checks.

Mr John Cole (Health Estates Agency):

The second element is accountability. Accountability will rest with the permanent secretary who is accounting officer for the Department and, ultimately, with the Minister.

Mrs O’Neill:

I suggest that there are more bad examples of PFI/PPP projects than good ones, and I am with Kieran Deeny in being completely opposed to PFI/PPP projects.

Mrs Hanna:

You are welcome, Mr Cole. PFIs were used during the mandate of the previous Assembly, and my experience has been that they do not represent good value for money.

The reason given for using PFIs was that Government Departments did not have the money to put up front and did not have the project management skills that were needed. However, I presume that some of those skills have now been developed.

I am concerned that we will end up with lots of clapped-out buildings all at the same time. If a number of PFI projects are begun now, then in 30 years time we will have to start all over again because responsibility for those projects will have ended. Also, I am concerned about staff — private companies sometimes bring in their own staff, so we may lose local employment.

Is it true that the Government can borrow money at preferential interest rates? If it were possible to do that, the Executive could borrow the money required to put up front. That would be a better way of proceeding, would it not?

Dr Livingstone:

It is undoubtedly the case that Governments, by their nature and size, can borrow money on the money markets at better rates. How much better will depend on the economic climate at the time. There have been many occasions in recent years where the rates at which some private companies have borrowed money was equal to, or only slightly worse than, that of Government. It is not always the case that there is a wide disparity.

Regarding clapped-out buildings at the end of 25 years, the evidence shows that it has been publicly funded projects that have ended up clapped-out. Public authorities invariably cut maintenance budgets first when money gets tight, and that results in a decrepit estate in all sectors.

The difference with PFIs is that the PFI operator is contractually bound to maintain a building to the required standard throughout the life of the project. That is the nature of PFI contracts, and the same type of contractual leverage does not exist in a conventionally funded project. We may have to do a bit of crystal-gazing because it will be another 15 years before we get to the end of the first 25-year period.

Mr Cole:

In addition, a building must be handed over in good condition at the end of the PFI contract — it must have been fully maintained and brought up to the required standard because the building will not have reached the end of its life at that point. It must be handed over in good condition and be functionally operational.

Ms Hanna:

That would require very tight contracts to be in place, because the same people will not be in place in 25 to 30 years time. There is a real concern that that just will not happen.

Dr Livingstone:

The member is right. I had discussions with HM Treasury on the point that if one concentrates on asset procurement and does not think so much about contract management, all of the benefits that could be gained would be lost. HM Treasury has taken more seriously the need to have people and systems established in the public sector to ensure that contracts are managed effectively. One reason why there is such a large deficit in Northern Ireland’s infrastructure is because the public sector has not been good at maintaining its assets. Invariably, every time there is a cut in budgets the maintenance budget goes first; buildings become decrepit, and capital needs increase.

Mr Cole:

As regards PFI contracts ending at the same time, we are not procuring everything at the same time: there will be a phased approach.

Ms Hanna:

Would that be over a fairly short period?

Mr Cole:

It would be over the next 10 to 15 years.

The Chairperson:

I am aware that Mr Cole has come all the way from Enniskillen. Unfortunately, I have a very urgent meeting. You are all welcome to stay for a cup of tea. That is least we can do. Perhaps you might like to mingle with the members if they are not in too much of a rush to leave the meeting. We are going to end the meeting at this point. Thank you.

Reply from the Minister for Health, Social Services and Public Safety to PFI/ PPP issues raised 14 June 07

Officials’ evidence to Assembly Health Committee on PFI/PPP – 14 June 2007 – Follow-up Questions

Question
What are the criteria used to compare the relative costs of a PFI scheme against a standard public procurement model for the Omagh and Enniskillen hospital projects?

Response

The HM Treasury Value for Money quantitative assessment model is used to provide a high level evaluation of the likely relative value for money of PFI versus conventional procurement for a project. The output from this model is a comparison between the risk adjusted Net Present Value (NPV) of the Public Sector Comparator (PSC) or traditional procurement and the PFI option, as estimated at Outline Business Case (OBC) stage immediately prior to procurement. The estimated NPV is the sum of the discounted benefits less the sum of the discounted costs using the following criteria:

 The whole life costs of the PSC, including capital, lifecycle and operating costs;

 The whole life costs that would be borne by a PFI provider, including capital, lifecycle and operating costs;

 The interest rates, bank margins, finance costs, etc that impact on the PFI company’s funding costs;

 Optimism bias – this is an adjustment made to OBC costs and duration to reflect the general optimism of appraisers’ tendency to overstate benefits and understate costs and timescales.

 Risk transfer on potential additional costs to the private sector partner under PFI for design, construction and development, and planning approval. It is expressed as a percentage of the initial capital costs. The level of risk transfer is likely to vary between schemes and each scheme needs to make a realistic assessment of the level of risk transfer achievable.

 Transaction costs – these represent the risks of higher contract management costs during construction which are partially transferred to the PFI provider under the PFI option. Under the PSC the Trust can have many supply contracts to manage, but only one in the case of a Private Sector Project Company under PFI.

Question
During the evidence officials said that an EQIA had been completed and that a further one would be undertaken once a preferred bidder had been identified. Can a copy of the original EQIA be provided to the Committee?

Response

The Trust published the original EQIA report in October 2006 on ‘The implication for staff of the method of financing the project and the relocation of jobs’. I have provided a PDF copy of the Executive Summary report with this response. The full report, which is well in excess of 100 pages, is being prepared in hard copy and will be forwarded shortly to the Committee.

Question
Officials agreed to pursue the refusal to provide a copy of the Outline Business Case with the Western HSC Trust. Can a copy be provided to the Committee?

Response

The Outline Business Cases for the New South West Acute Hospital at Enniskillen and Omagh Local Hospital Complex are already available from the project website on www.newhospitals.org as a link from the Acute Hospital Project webpage. At this stage commercially sensitive information has not been presented in line with HM Treasury guidelines to protect the integrity of information which may influence the outcome of the current procurement process.

Question
What is the rationale for allowing a developer to provide ancillary and catering services as part of a PFI contract? The Committee is concerned that this could result in less favourable working conditions for staff as well as allowing less local control over cleaning regimes or the quality of catering provided. There are also concerns that it could impact on local employment.

Response

The rationale for inclusion of ancillary and catering services in PFI contracts, as set out in HM Treasury guidance, is that it can offer value for money through the better integration of design with ongoing service provision and a single point of responsibility. Current Treasury guidance, and UK Government policy, requires that a procuring authority which proposes to use PFI must undertake a value for money assessment to determine inclusion or exclusion of soft facilities management services within a PFI procurement.

The application of the policy in respect of inclusion of soft FM in PFI procurements for health and social care projects in Northern Ireland is currently being reviewed by the Department.

Question
Officials denied claims by Unison that the Enniskillen and Omagh projects both feature a consultancy report that reduces the number of posts by 25%. Unison had argued, for example, that a number of the calculations for the Omagh project were positive for PFI only because they included the 25% job cuts. Officials also stated that efficiency gains would be achieved from the rationalisation of the three existing hospitals into two new hospitals. Can the Department explain the extent of those anticipated efficiency gains and, in particular, the impact on jobs in support services?

Response

No reduction in whole-time equivalent posts has been stipulated to potential bidders, in either the South West Acute or Omagh Hospital Complex projects.

In August 2006, figures were shared with UNISON which, on early analysis, demonstrated that facilities management staff were expected to be part of its public-sector model and the Trust must rationalise three hospitals — the Erne Hospital, the Tyrone County Hospital, and the Tyrone and Fermanagh Hospital — into two. At that stage, the Trust anticipated that a rationalisation of certain facilities management services would bring about an efficiency gain of up to 20% in terms of whole-time equivalent staffing numbers during the five years leading to the creation of the two new hospitals. However, during the past six months that analysis has been revised. The Trust is now anticipating a reduction of 39 whole-time equivalent (9% of the total) posts and resultant efficiency gains as a consequence of the reduction from three hospitals into two.

Question
In evidence to the Committee Unison claimed that the business case for the Omagh project identified an affordability gap of approximately £20 million. Can the Department explain the background to this and how it will be addressed?

Response

Issues to do with financial affordability parameters for projects of this nature need to be treated as commercial in confidence, particularly at this stage of procurement.

As with all new major capital revenue developments however, whether conventional or PFI, there will invariably be an additional funding requirement in respect of higher servicing costs. These relate to new service models of delivery in line with ‘Developing Better Services - Modernising Hospitals and Reforming Structures’ policy. Furthermore there will be additional capital charges for financing and higher depreciation costs to cover higher capital value of new buildings.

All Trusts are expected to meet a proportion of these in particular where this relates to contributions from existing services which are not required in the reconfigured model. The remainder will have to be found from the overall Departmental funds available which reflect the Executive Committee’s views on overall priorities.

Question
What work is currently being undertaken by or on behalf of the Department to produce a strategic delivery plan (SDP) for future primary care facilities in Northern Ireland and to what extent is the SDP likely to involve PFI procurement, such as that used in England (NHS Lift) and Scotland (the hub initiative) to improve the primary care estate?

The Department has been exploring how current models of primary care infrastructure delivery in GB and NI might be applied to develop the optimum procurement delivery model for the PCCI Programme.

As the PCCI Programme is complex in terms of scale and the multi-site/multi-facility nature, the Department, after careful consideration, has determined that no single established procurement route provides the flexibility required to deliver this programme effectively. However PFI specifically is not considered appropriate for use as part of the strategic delivery plan (SDP) for primary care facilities.

Procurement models in GB such as NHS LIFT in England and the emerging hub initiative in Scotland have been examined, specifically around the potential value for money benefits that can be achieved through these types of PPP arrangements which differ from PFI. Both initiatives cannot however be readily or immediately adapted for Northern Ireland, and further work is in progress to assess their potential in the longer term.

In the short term consideration is being given, based on an independent assessment, for use of a range of procurement methods to achieve a best value for money model. These include a combination of use of Performance Related Partnering (PRP) and Third Party Development (3PD).

Existing procurement arrangements in Northern Ireland for primary care facilities already include Performance Related Partnering (PRP) developed by Health Estates. PRP relies exclusively on public funds but does not test or achieve the transfer of significant risks such as residual value, operation, maintenance and life cycle costs.

A more traditional approach to private investment in primary care infrastructure, which in fact pre-dated both initiatives in GB, is Third Party Development (3PD). This provides a less complex option than more established PFI and PPP models, does not require any legislative amendments, provides the option to apportion risks to those parties best suited to manage them and has a track record of delivering affordability and value for money benefits for facilities of the scale of those in the PCCI Programme.

The Department is currently examining the potential to develop a procurement delivery model which includes these procurement methods enabling maximum flexibility in terms of risk transfer and funding. 

Question
Clarification sought by Caral ni Chuilin regarding estimated costs for the Enniskillen and Omagh hospital projects, whether these were capital or PFI costs.

Response

The figures of £229 million and £150 million quoted respectively for the South West Acute and Local Hospital projects in previous briefing on PPP/PFI submitted to the Committee, are the published estimated construction costs based on the approved Outline Business Cases.

These figures exclude potential future inflation arising in the period before aware of tender and other contingency costs. However they effectively reflect the scale of capital expenditure needed to deliver the required service outcomes, whether PFI or conventional funding is used.

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