The procurement and approval process

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Figures are taken from original full business cases and may not reflect later adjustments. In some cases, figures represent the entire cost of running the hospital over 60 years, leading to very high net present costs; in others, only the services to be provided under the private finance initiative contract are included, so that the net present cost relates to the scheme alone and not to the costs of clinical activity.

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There are several problems with the risk adjustment carried out in the appraisal of private finance initiative schemes. Interest rates are after all largely determined by the level of estimated risk associated with an investment.

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A further problem is the tendency for trusts seeking approval for private finance initiative developments to ascribe risks to private finance initiative consortiums that option like pfi have not in fact taken on. Risk can only be transferred through the private finance initiative contract, by means of financial penalties imposed on consortiums for failing to meet their obligations.

This basic principle is consistently overlooked in economic appraisals of the private finance initiative.

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Construction period risks The bulk of the risk supposedly transferred relates to the building period, the first three to five years, rather than to the operational phase, the subsequent years.

In the Greenwich Hospital scheme, seven of the eight risks said to have been transferred to private investors option like pfi to the construction phase of the project and therefore could not threaten the income of the investors during the operational phase.

Findings A wide range of factors influence the choice of PPPs, including: budget enlargement; efficiency and value for money; certainty of expenditure and delivery; flexibility; financing costs; risk sharing; procurement process and transaction costs; legacy and public assets; and the wider impacts on the local economy. However, reasons why PPPs can provide improved infrastructure and services may not be realised due to in-built incentives, behavioural biases and implementation shortcomings.

This makes private finance initiatives a very safe investment. One of the main risks during the construction period is that of cost overruns. NHS trusts have based their estimates of the risk of construction costs overrunning on historical claims about the level of cost overruns associated with earlier publicly funded schemes.

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The increase in cost at this scheme was so extreme as to affect the annual cost performance statistics for the NHS as a whole. The average increase in cost over approved tender sums for NHS capital projects has been between 6. Moreover, many of the risks associated with public sector procurement arise from the relationship between NHS trusts and other parts of the public sector.

Such risks can be managed internally and it is strange to assume that they should, or indeed can, be transferred to the private sector. Even if they could, why should the taxpayer pay to offload a risk that can be addressed by internal action on the part of the NHS Executive?

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This suggests that in the view of funders there has been very little risk transfer. In practice, funders see little likelihood of the consortiums facing financial penalties under the contracts and have set interest rates accordingly.

High cost is ascribed to risk transfer but little risk is actually transferred.

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