Treasury announces formal study to identify savings in costly PFI contracts
JUST days after Tees, Esk and Wear Valleys Mental Health Foundation Trust became the first NHS organisation in the country to buy itself out of a multi-million pound PFI deal, the Government has published a pilot project identifying scope for further savings on the contracts.
Lord Sassoon, commercial secretary to the Treasury, has launched the study to try and find possibilities for financial savings on the contracts, which will cost the public sector more than £8billion in repayment fees during 2011/12 alone.
The move comes just days after BBH revealed that the Tees trust had taken advantage of a get-out clause in its 2003 deal with developer, Aviva, for the construction of the £16m West Park Hospital in Darlington.
Under the terms of that agreement, the trust would have paid Aviva the equivalent of £32m over the 30-year term of the original contract – twice the amount initially invested.
Instead, it has paid £18m to officially terminate the deal, funded through a £41m balance it had built up by the end of last year from its £250m annual turnover.
The launch of this pilot, along with our next round of engagement with industry on a PFI code of conduct, indicates our determination to drive out costs while ensuring frontline services are maintained
Now, the Government is hoping other trusts, and the wider public services, can follow suit by buying themselves out, or altering the terms, of contracts to make them more affordable.
As part of the Treasury review, a team of researchers including commercial, legal and technical advisors, will closely examine the contract for Queen’s Hospital in Romford to try and identify ways to reduce the costs. The lessons will then be used to drive further savings across the PFI portfolio.
Lord Sassoon said: “PFI contracts are not immune from savings. The launch of this pilot, along with our next round of engagement with industry on a PFI code of conduct, indicates our determination to drive out costs while ensuring frontline services are maintained.
“It is critical that the Government urgently addresses every opportunity for savings across all contracts, no matter how complex they may be. We owe it to the taxpayer to eliminate wasteful practice and gold plating in contracts.”
The pilot study has been welcomed by Health Minister, Simon Burns, who told BBH: “We want to make sure the NHS does everything possible to find savings that can be re-invested into frontline patient care. The focus must be to find efficiency gains and savings within the PFI contract itself, allowing the quality of care and patients themselves to remain the priority.
We owe it to the taxpayer to eliminate wasteful practice and gold plating in contracts
“Our plans to modernise the NHS will already save the NHS £5billion over the next five years, but the NHS must continue to seek savings in big ways, and small. The findings from the work at Queen’s Hospital can be shared with all those trusts with PFI projects.”
The purpose of the pilot is to identify the nature and level, both of savings and improved contract flexibility, which could be achieved in other accommodation-based PFI projects in areas such as:
- Optimising contract and asset management
- Validating insurance cost/gain sharing arrangements
- Identifying where additional costs are being incurred for unnecessary service levels
The findings from the work at Queen’s Hospital can be shared with all those trusts with PFI projects
The Treasury published draft guidance on how to make savings in operational PFI contracts in January. This guidance, aimed at public sector contract mangers, intends to help them identify and implement savings measures in their own contracts, reducing costs while maintaining frontline services.
The guidance will be revised following completion of the new pilot and measures implemented to roll out the findings and lessons learnt to all operational contracts.
In the meantime the Government is continuing to seek a voluntary code of conduct with industry – investors, contractors and lenders – to ensure their positive engagement in reducing the cost of contracts and addressing issues likely to be generic across sectors, such as agreement to update older contractual provisions and enhance transparency of financial reporting.
- Companies:
- Queen's Hospital Romford
- West Park Hospital
- Tees Esk and Wear Valley NHS Foundation Trust
