Feature / Introduction to…public-private partnerships (2)

The NHS partners with the private sector chiefly through the private finance initiative (PFI) and NHS LIFT (local improvement finance trust). NHS LIFT is similar to PFI, but has been used for primary and community facilities. All potential PFI and LIFT schemes must demonstrate value for money, based on whole life costs and benefits, against a public sectorfunded comparator.

Discounted cashflow investment appraisal techniques are used to determine the total value in today’s terms of all benefits and costs for both PFI and publicly funded options. The costs are subtracted from the benefits to give a net value, on which a decision can be based.

A recent Commons Treasury committee report on PFI said whole life costing should encourage innovation and deliver savings over the contract period, but it had not seen any evidence that PFI performed better in this area than traditional procurement methods.

A risk matrix assigns risks, such as construction, demand, residual value and financing risks, to the most appropriate party. Under previous accounting rules most PFI schemes were off-balance sheet – this lowered public sector debt.

However, the adoption of International Financial Reporting Standards in 2009/10 meant most PFIs moved on-balance sheet, though they are not included in the calculation of public sector net debt or in departmental expenditure limits.

Recently, the Department of Health reviewed 22 PFI deals in NHS trusts that said PFI payments were causing financial problems.

It concluded that in six trusts the scale of debt repayments together with other financial issues created concerns about their financial viability.

Subsequently, health secretary Andrew Lansley has attacked the costs of PFI, but he has also promised support to aspirant foundation trusts struggling to gain foundation status because of the costs of their deals.

For new investment at least, it seems the scheme could soon be abandoned. This month the Treasury launched a call for evidence on alternatives to PFI. But the government is not walking away from private sector involvement. It insists the replacement will use private funds, (albeit from a wider range of sources, including pension funds) and replicate PFI’s transfer of risk.