Will PF2 give health sector schemes a ‘shot in the arm’?

27-Sep-2013

Exploring how two major hospital schemes will roadtest the Government\'s new approach to public/private funding for improvements to the healthcare estate

Two major hospital developments are providing a much-needed shot in the arm for the struggling UK healthcare construction sector as well as roadtesting the new PFI procurement approach.

The Midland Metropolitan Hospital is effectively a pilot scheme for the new PF2 funding channel, which was announced by the Government earlier this year. It replaces the old system first introduced in 2007.

Also in the pipeline is the giant 11-storey Royal Liverpool Hospital.

There is now clearly high level support for the Midland Metropolitan Hospital project, which will effectively be a pilot scheme for the new PF2 approach and there are benefits to testing such an approach

The last government financed the building and maintenance of vast numbers of hospitals by asking the private sector to bear the big costs in return for regular payments from the public sector, in effect renting the space back from the developer.

But the Treasury under George Osborne became concerned that huge long-term liabilities were being created for taxpayers - and that lousy negotiation by civil servants was allowing private companies to make huge windfall profits.

So, in his last autumn statement Osborne unveiled what will be called Private Finance 2 (PF2), which will involve the public sector taking stakes of up to 49% in individual private finance projects - 20% stakes are likely to be typical -and appointing a director to the boards of each project, ensuring that the taxpayer gets a share of any profits from the deal.

Each private finance project will also now have to publish its financial performance every year and the Treasury will publish a running total of taxpayers\' cumulative liabilities in order to allay concerns that these are becoming unaffordable.

In addition, there will be an attempt to speed up the signing of deals, which can take up to five years at the moment. This will be done by setting an 18-month deadline at which point, any public sector money allocated to the project would be reallocated.

Contracts under PF2 are also supposed to be smaller, simpler and less leveraged and will involve less debt finance. This means they will no longer include what is known as soft facilities management or contracts for catering, cleaning, security and IT.

And where, in the past, a typical PFI deal would be funded to the tune of 90% by debt, that debt proportion will fall to 80%.

Described as ‘a new, faster and more transparent approach to securing investment in public infrastructure’, the Government will become a shareholder in future projects to ensure a more collaborative approach to improving project performance and managing risk, and will share in the financial rewards alongside private sector shareholders.

So what does this mean for a construction industry that is suffering from a lack of capital and the impact of the NHS reforms?

PF2 is a new, faster and more transparent approach to securing investment in public infrastructure

Regionally the value of detailed planning approvals in the health sector grew in only three parts of the UK last year, the East and West Midlands and the North East of England.

However, London and the South East remained key markets, accounting for 12% and 17% of UK planning approvals respectively, alongside the North West and the West Midlands.

There was a similar story for the value of contracts being awarded. The value of underlying contract awards fell 6% during 2012. While contract awards in the fourth quarter of 2012 were 46% down on the previous quarter, this followed an exceptionally strong third quarter performance.

Given the downward trend in planning approvals and contract awards during 2012, healthcare construction market experts at Glenigan anticipate that project starts will slip back this year.

But its resident health sector expert, Cherida Edwards, said the two big schemes were helping to provide much-needed work and could be the all-important shot in the arm that is needed.

“There is now clearly high level support for the Midland Metropolitan Hospital project, which will effectively be a pilot scheme for the new PF2 approach and there are benefits to testing such an approach,” she said.

Sandwell and West Birmingham Hospitals NHS Trust is currently updating plans with a view to submitting a refreshed version of the development to the Department of Health before the end of the year. It is then likely to take five to six years to undertake the PF2 negotiations and actually build and commission the new hospital.

In the North West, the luxurious Royal Liverpool Hospital will create as many as 750 jobs during the construction process.

The hospital will offer all patients single rooms with en-suite facilities and flat-screen televisions as standard.

A hybrid planning application has already been submitted and phase 1 - The new Royal Liverpool University Hospital building - will be constructed following the granting of planning permission and discharge of pre-commencement conditions. There will be a 38-month construction period with an anticipated completion date of 2017. Phase 2 comprises the decommissioning and demolition of the existing hospital, Duncan Building and associated structures, and phase 3 will see completion of the final landscaping, access and car parking scheme to serve the hospital.

The fact that the Treasury has come forward with a JV structure for its replacement PFI model is exactly what we articulated as being a wise move and a good way forward for both the private sector and public sector

PF2 is Described by the Government as ‘a new, faster and more transparent approach to securing investment in public infrastructure’. The Government will become a shareholder in future projects, to ensure a more collaborative approach to improving project performance and managing risk, and will share in the financial rewards alongside private sector shareholders.”

David Pokora, executive director of the Lift Council, the representative body for organisations involved in NHS Local Improvement Finance Trusts (NHS LIFT), through which public/private consortiums fund and build community and primary care facilities, said: “LIFT is very much a joint venture partnership, so having had the experience now for coming up to 7-8 years of working in a joint venture (JV) effectively with private and public sectors as equal partners in a company, we strongly feel this is the way to go.

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“The fact that the Treasury has come forward with a JV structure for its replacement PFI model is exactly what we articulated as being a wise move and a good way forward for both the private sector and public sector.”

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