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Signs of life in PFI monster

AGENDA

The massive Barts and Royal London hospital project is nearing financial close but, with Government NHS funding shifting to Payment by Results, is it affordable?

Andrew Hankinson reports

THE DEPARTMENT of Health is about to bring to life a £4.6 billion monster in the form of the new Barts and Royal London hospital project.

The project is the biggest let yet under the Government's Private Finance Initiative. Financial close between the client, Barts and the London NHS Trust, and the team chosen to carry out the work, Skanska and financier Innisfree, is due ? apparently ? soon.

Once the documents are signed there will be no going back. But some have lots of questions they still need answering: for example, is it really affordable? What is delaying financial close? Why is it costing so much? And is there too much risk involved with new NHS finance?

One NHS insider said: 'I'm not surprised it's taking a while to agree a contract. A lot of people are saying that Payment by Results ? whereby a hospital is paid only for the treatment it carries out rather than given a conventional budget ? has killed PFI. It used to be relatively easy for trusts to predict their budget. You got the same as last year with a bit more or less.

'Now, with market forces through choice for patients and Payment by Results, if a hospital is in the papers for the wrong reasons nobody will go there and it won't make any money. It makes it much harder to predict future revenues.

'I'm not sure what would happen to a trust if its income dropped and it couldn't pay the PFI contractor.

But I'm sure a developer could catch a big cold on one of these deals.' The redevelopment of St Bartholomew's Hospital, better known as Barts, and the Royal London Hospital has been in the pipeline since 1997 ? the year Labour took power.

Following a Government review of London's health services, Barts and the London NHS Trust was asked to d raw up an outline business case for project.

It was eventually decided that the Royal London in Whitechapel, in the heart of the East End, would be redeveloped as the biggest hospital project in Britain.

The decision was also taken to close Barts, which has been at its Smithfield location in the City since 1123, and turn it into a specialist cardiac and cancer centre.

Services will be transferred across town to the Royal London.

Once it was decided what to do, the project was advertised in the Official Journal in 2002. But there the problems began. The trust had been hoping for at least three firms to compete for the then £600 million deal, but could only attract two suitors.

One contractor who decided not to bid said: 'It was one of those jobs that was just too big. To get involved you had to be 100 per cent committed, as it was going to cost a fortune to bid for.' The two teams that eventually decided to take the plunge were led by French contractor Bouygues and Skanska. The Skanska team was eventually appointed preferred bidder in December 2003.

Yet the problems have continued to pile up thick and fast ? notably concerning the twin drivers of any project of this size: planning and finance. Planning problems ? the Greater London Authority had called in the Royal London part of the work ? meant the trust bust its original end of June target for financial close.

Then the trust said it was aiming for financial close by the end of August but that too came and went. Even now there are problems with planning as a group of residents near the Royal London is trying to instigate a judicial review into planning consent.

All this delay is not only adding to the cost of the scheme ? an inevitability, it seems, with PFI hospitals ? but leaving people to privately wonder whether it will ever get under way.

According to the minutes of a meeting in June of the North East London Strategic Health Authority ? which is overseeing the project and must approve the full business case ? executive director of investment Anne Smart admitted: 'Barts and the London Trust is currently vulnerable as the PFI project still needs to be signed off.' Her report revealed that for every month after August without financial close the trust would be adding a further £500,000 to its bill.

But the trust cannot say when it expects to reach financial close and a spokesman would only speculate that it hoped this would be by the end of the year.

The main sticking point right now is the NHS trust's business case, which was approved this week by the health authority but which still needs Treasury approval.

The health authority's subcommittee told its main board that progress had been made towards concluding the business case with regards to commercial and financial issues ? but there were still some outstanding matters such as risks and affordability.

So what the right hand gives the left takes away. A report presented at the same meeting on Tuesday said the financial imbalance at the health authority for 2005-06 had now been elevated from a 'high' risk to a 'severe' risk.

In June the authority had said: 'The business case is exceptional in respect of the degree of change (and hence uncertainty) associated with the NHS financial regime (both revenue and capital); the lengthy timescale over which the project is completed (10 years); and the scale of the capital investment.' The report highlighted that risks such as construction inflation, design changes, Government policy and planning could still have an impact on the project.

All these problems are starting to ring alarm bells in the industry. The bigger the project, it seems, the harder it falls ? evidence A: the £1 billion Paddington Health Campus.

Other hospital debacles, such as Whipps Cross in east London and Derriford in Plymouth, even managed to collapse with bidders in place. At least the Derriford scheme has managed to salvage something from the ashes in that it might be recast as a series of smaller projects.

Changing Government policy, as evidenced by the Payment by Results initiative, is being seen more and more as the main hindrance to PFI deals being signed off. Mark Knight, chief executive of the HealthCare Financial Management Association, which represents NHS finance staff, said: 'There is widespread recognition in the Payment by Results regime that there could be problems in agreeing PFI deals. I think the Government is now taking steps to address this problem.' But the risks involved obviously seem worth it for some contractors when such huge amounts over such long periods are up for grabs. Contractors like PFI because of the guaranteed income streams it produces.

The capital cost of the Barts and Royal London scheme was originally estimated at around £600 million but that has now risen to £1.2 billion ? or £1.9 billion if interest, fees and operating costs over the 10 year construction period are included.

The total whole-life cost of the scheme will be around £4.6 billion. That means Barts and the London NHS Trust will have to pay Skanska Innisfree £115 million every year for the next 40 years.

Wendy Mead, a councillor at the Corporation of London and the chairman of the Save Barts campaign, is worried about what will happen to the hospital if the business case does get approval and the scheme finally gets off the ground.

She said: 'Healthcare is suffering under PFI. Skanska will get its £115 million every year before any healthcare has even taken place. In fact healthcare is the only area that isn't ring-fenced and that is what is eaten away when trusts run into hard times. We have never seen this scheme as being successful and our worry is that to cut costs Barts may be cut from it altogether.' The trust admits the Government's tariffs under Payment by Results may yet change and it will need to carry out constant reviews of its affordability.

Skanska and the trust will be hoping the monster does not tu rn on them over the next 40 years.

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