Agenda

1
Agenda

• Where PFI/DBFO Works Well
• Where PFI/DBFO works less well
• Do we need F in DBFO
• Health PPP adapting to the NHS Plan
• A plea for Horses for Courses
• Promising variants

2
Where PFI/DBFO Works Well

• Large Projects
• Fully specified output specification pre-bidding
• Front-ended expenditure profile
• No complex contractual interface on-site
• Effective competition
• Stable requirements over contract life

3
Do we need the F in DBFO?
Public sector Purchaser
Asset Provider
Shareholder Joint Venture agreement
SPV
Service Provider
Bank guarantees bonds

• Same contractual risk transfer arrangements
• Medium term contracts (7-10 years)
• No commercial bank loans or completion guarantees
  public sector funding
• Banks provide guarantees/bonds to asset provider
  to secure completion obligations
• Asset/services providers have equity at risk in
  form of deferred payments
• An additional approach for smaller projects not
  instead of PFI where works well

4
Health PPP Adapting to the NHS Plan

• Major rapid expansion in demand for patient
  services
• Renewed emphasis on clinical governance/performanc
  e management/patient journey
• Diversity in final services providers public,
  private, not-for-profit

5
Lessons from Health PFI Experience

• Innovation benefits from Health DBFO over-stated
• Most gains arise from transfer of completion risk
  of major assets
• Limited competition for major schemes, even more
  limited for small schemes
• Conditions for conventional PFI to work well
  not common in health sector
• PLEA FOR HORSES FOR COURSES

6
Final Services Contracting

• Medium term contract for Final Services e.g.
  elective surgery
• Purchaser Strategic Health Authority and/or
  PCTs
• Provider Hospital Trust subsidiary/Private
  Sector/ Not-for-profit partnerships
• Payment on successful performance
• Prices set in contract either bid with maximum
  or NHS regulated schedules
• Financing from private sector ( ? NHS Bank)
• Protections re diversion of NHS
  resources/clinical standards/integration of
  patient journey

7
Final Services Contracting PPP
Public sector Purchaser (SHA, PCTs)
Private sector provider
SPV
Private sector finance
Joint venture agreement
Hospital Trust Subsidiary
Bank guarantees/bonds
Performance security from SPV To Purchaser

• Performance risk transferred to PPP
  payment for outputs
• Price risk transferred to PPP
  pay agreed price, not costs
• Bank guarantees/bonds secure performance
  undertaking of PPP
• Level playing field for Hospital Trusts and
  private sector

8
Advantages of Final Services PPP

• Identifies quickest least cost way to deliver
  targeted extra services to patients
• Retains PFI risk transfer
• Removes bias against public sector
  efficient
• Small packages easier to finance
  encourages new entry and maximises supply
  increases where needed
• Medium term contracts provide reliable demand
  encourages new entry

9
Issues with Final Services Contracting

• Extension of role of private providers
• Avoid diversion of resources from NHS
• Rules to facilitate Public/Private level playing
  field
• Pricing of outputs bid or regulated?
• Accounting treatment of SPV liabilities
• Are there sufficient new entrants?

10
Conclusions

• PFI/DBFO works tolerably well for new hospitals
• Need to develop new PPP options alongside PFI for
  expansions/reconfiguration of final services
• Propose pilots of variants including final
  services contracting to test claimed advantages
• If pilots successful adopt Horses for Courses
  approach with PFI and wider use of variants

11
Strictly Private and Confidential
Horses for Courses in Health PPP Dr Keith
Palmer
10 September 2002