Waiting to get better

After the feast, the famine. For years the Department of Health (DoH) has laboured to spend an ever expanding budget in pursuit of such grand aims as building 100 major hospitals and slashing waiting lists. Now, it seems, this open handedness has caught up with it: the NHS deficit stands at around £1.3bn, largely due to spending on management consultants; its IT programme could end up £7.6bn over budget; and last week the DoH admitted that the health service will pay £53bn over about 30 years to companies involved in the PFI, for which it will get assets worth £8bn.

The bottom line for the construction industry is that the DoH is cutting capital investment. The spend is still vast – according to the Construction Products Association, the government is still on target to build those 100 hospitals by 2010; 65 of them are already operational, and many smaller schemes are now in the pipeline. But there has certainly been a rethink, and the government’s ambitions have been scaled back.

One of the changes has been a reduced emphasis on treatment in hospitals. A health white paper published in January outlined proposals for more care to be given off the ward; people with chronic diseases, for example, were to be treated in their homes.

Inevitably, these developments have implications for the construction industry, particularly those involved in the DoH’s three main procurement routes – the PFI, Lifts, and Procure 21 (see “Key terms”, right). Here, Building surveys the likely effects.

The PFI

It’s been a tough 12 months for PFI hospitals. At the end of last year, the DoH took fright at the £1bn-plus cost of the St Bartholomew’s and Royal London scheme in east London and decided to begin an emergency review of all upcoming schemes. As part of this process, each trust had to justify its spending plans.

This led to delays in the commissioning process, which have been compounded in some cases by delays in the reviewing process. The Plymouth Hospitals NHS Trust has two schemes worth a total of £609m. It was told it would get its review in May, but the delay “has gone on month after month”, according to a source close to the scheme. It is still not clear whether it will go ahead.

Even more frustrating is the experience of South Devon trust. Its £220m scheme was about to issue tender documents to its two shortlisted bidders, Bouygues and a Carillion/Innisfree consortium, when the DoH announced its review. After the review was completed in August, it became a smaller £160m scheme. The tender documents for this scheme were to be issued in November but, at the same time, the trust applied for foundation status. Now the documents are likely to be delayed until February. “It was deemed more appropriate to wait until we got foundation status,” says Bartley Quinn, the scheme's assistant project director.

More confusing for contractors and trusts has been the aforementioned white paper, which put further pressure on those trusts that wanted to invest in extra facilities. A DoH official says: “The focus of the 2000 NHS Plan was very much on hospitals. Five to six years on, the plan is to move out of hospitals. Capital plans have to adjust for that.” At South Devon, this meant reducing the number of planned beds by 40 to 360.

More important to the grand scheme of things, though, is the move to “PFI mark II”. The 23 hospital schemes that have been given outline approval – although, in many cases, they are still subject to review – will be the last to use the current form of PFI.

Earlier this year the Treasury released a document entitled PFI: Strengthening Long-term Partnerships. It was largely unappreciated at the time, but this included a number of proposals to wring better value for money from the PFI (see box over the page). For example, there was a suggestion to exclude soft services, such as catering and cleaning, from the 25-to-30-year contracts. These services provide the PFI consortium with guaranteed long-term revenue, but it has been shown that it is impossible to form a business plan for them over this length of time. If, for example, cheaper options became available, the trust may be unable to take them without breaching its contract.

A new team is about to take over the Treasury’s private finance unit after its current boss, Richard Abadie, leaves later this year. It has the job of teaming up with the spending departments to pilot the remodelled PFIs, probably in road and prison schemes.

It is still unclear, though, which recommendations from the Treasury report would be used in PFI mark two. Already, doubts are emerging over the idea of funding competitions (see box, overleaf).

A proposal that seems certain to be implemented is the project delivery organisation. This would programme-manage every stage of a scheme’s life cycle, and would, in effect, take over part of the client role. It would almost certainly be rewarded according to its success in pinning down costs. Laing, Babcock, Serco and VT are among those firms identified as candidates for this role, but the government has yet to hold talks with them – the reason being that it is not yet sure what it wants to talk about.

It does seem that the government will want to shorten the lengths of hospital PFI contracts, some say to 10-15 years. This would eliminate some of the controversy over the size of payments to the private sector and allow more opportunity for trusts to change horses if they are unhappy with a consortium’s performance. Schemes worth more than say £500m would have longer contracts to ensure that the consortium is adequately rewarded for taking on so much risk, but 25-35 years is likely to become the exception rather than the rule.

If the pilots are, as intended, announced next year, they will probably overtake many of the PFI mark-one hospitals that have not yet gone to market. The £204m Leeds Teaching Hospital, for example, is not due to invite bidders until 2008. It could be that some of the present PFI schemes do not survive in their current form.

Lift

The fourth wave of Lift schemes is out to market – and it could be the last. A parliamentary select committee late last year questioned whether Lift was value for money, and one of the largest fourth-wave projects, the £120m Kent Lift scheme, was scrapped in September.

However, this will still leave more than 40 Lift companies in existence, each of which has a contract of up to 25 years. And these companies face a big problem: deal flow.

A potted history of the first Lift agreement to be signed demonstrates this blockage in the system. A Global Solutions/Babcock & Brown consortium signed a deal to form the east London Lift in May 2003. The press release announcing the deal gave a broad timetable for its first four projects in the scheme. Of these, only one was completed on time: the £4.9m Church Road primary care centre. One was 15 months late, and another was delayed eight months. The fourth, the Vicarage Lane one-stop primary care centre, did not come with a detailed timetable, but was surely meant to be ready by now – instead, it is under review.

In total, only six schemes in east London have reached financial close when the consortium had been given the impression that as many as 10 should have been completed by now.

Ian Hurlstone is a director at architect Hunter & Partners, which is part of the Lift consortium in east London. He says the problem has been the tortuous negotiation process: “We have found the run-up to financial close frustrating and it hasn’t given us the ability to plan our workload in the way a partnering arrangement should.”

Bob Parkin, who is general manager of Newham’s primary care trust, confirms that the problem is not with the Lift company’s construction capabilities: “Reaching financial close is the most challenging aspect, as there are a large number of stakeholders with their own teams.”

The problems were exacerbated when it was decided to turn 28 strategic health authorities (SHAs) into 10 “mega-authorities” from 1 July this year. These have been charged with approving the budget for an entire region, so possess real authority. Leading businessmen such as George Greener, the former chairman of British Waterways, have taken senior positions on their boards.

“The new SHAs have many more delegated powers,” says one market observer, “and those now running them are serious grown-ups, asking very serious questions.”

The problem is that deal-making stalls while these grown-ups take a closer look at the existing estate to decide whether it could be retained rather than rebuilt.

At the next level down, primary care trusts, which set their own budgets within the priorities of the SHAs, have also been merged, cutting the number by about half. The Oxford PCT, for example, has been merged with others surrounding the city and this has been blamed for delays in bringing Lift projects to financial close. A scheme source says: “Inevitably since the mergers were announced, the client has not been in a position to make financial commitments.”

Procure 21

The £2bn Procure 21 framework scheme is suffering similar problems to Lift. One contractor taking part in the initiative says its reorganisation has slowed down cash flow, and approvals for capital projects have come to a virtual halt. The contractor’s argument is that the new people running the trusts and health authorities do not understand the systems in place, so they are unable to approve proposals quickly for fear they might be overspending.

Work flow has been so slow that four contractors – Wates, Taylor Woodrow, Amec and Carillion – left the framework earlier this year. They were paying a membership fee of £500,000 a year and, as Paul Drechsler, chief executive of Wates, told Building in June: “If you pay an annual fee, you expect to get a benefit … Procure 21 was a very unique and ineffective procurement route.”

A major problem was that most of the work has been distributed to just two firms, Laing O’Rourke and Kier. At least one contractor thinks it is entirely possible that more firms might leave the framework.

However, it is understood that the scheme has a lot of government support, and once the enlarged SHAs and PCTs are up and running, it should work far more smoothly. Rob Smith, the DoH’s head of Procure 21, only took over at the start of this year but has already proved a popular appointment.

It is believed that Smith is working with officials from the DoH, the National Audit Office and the DTI to formulate a plan to secure Procure 21’s future. Essentially, it is likely to be refocused, presumably ensuring a more equitable distribution of deals once they start coming through again.

Read more about NHS procurement in the archive section