Does PF2 hold the cure for health construction recovery?

Health related construction is going through a difficult period. Indeed, its prospects were rated the second worst of all sectors in Glenigan’s recent Construction Prospects for 2014 report. The overall NHS budget has been maintained, however the capital spending budget has been falling in real terms since the 2010 spending review, stifling starts of new projects in the sector. 

The underlying value of health project starts is forecast to fall by 12% next year, despite being buoyed by growth in private sector investment in nursing homes and research facilities. This assessment specifically excludes projects over £100million in order to provide a clear view of the underlying trend within the sector. 

Despite this bleak backdrop, however, some major hospital projects are still going forward. Three major hospital projects (schemes with a construction value of £100million or more) have started on site during 2013, compared to none during 2012. These were the publicly funded second phase of the Ulster Hospital development in Belfast (Glenigan ID: 11276520), the private finance initiative (PFI) funded Alder Hey Children’s Hospital in Liverpool (Glenigan ID: 5090201) and the new, state of the art cancer centre at Guy's Hospital in London.

The government has revamped the PF2 scheme to encourage private sector investment into hospital facilities. The Midland Metropolitan Hospital (Glenigan ID: 08194445) is widely expected to be the pilot scheme for hospital Private Finance 2 (PF2) arrangements, with Chancellor George Osborne saying in his 2012 Autumn Statement: “It is a very good project and I hope that we will be able to proceed with it”.  This was despite misgivings over the costs of PFI arrangements expressed by Prime Minister David Cameron earlier in the coalition.

The media has recently reported that seven NHS trusts are paying more than 5% of total revenue on servicing PFI repayments, with Peterborough and Stamford Hospitals NHS Trust resorting to a £44million bail-out from the Department of Health to cover its PFI liabilities.

With squeezed NHS capital budgets, the attraction of the private finance scheme is clear. However some NHS trusts are already supplementing scarce government funding by working with the private sector, universities and charities outside the PFI framework. 

Glenigan Economist Tom Crane examines two projects which have followed this route in London and Cambridge.

Another way?

Last month work commenced on site on the £160million cancer treatment centre at Guy’s Hospital for which £25million of the funding has come from the NHS Foundation Trust, £40million from charities and fundraising and £15million from King’s College London. The £80million shortfall will be covered by a loan and a quarter of the building will be let to a private sector health provider via a 25-year lease, thereby covering half of the cost of the building. 

A similar ‘Strategic Partnering Services’ public-private partnership has been set up between Cambridge University Hospital Trust and John Laing Investments, primarily for the construction of the Cambridge Biomedical Campus. The first step of this will be to deliver the Forum development (Glenigan ID: 13323601), expected to start on site in the second half of 2014. This will include a post-graduate medical education centre, a private hospital, a 198-room hotel and a 55-seat conference centre.  The trust will provide land for the venture, while John Laing will procure all the financial resources required to design, build and operate the Forum, while Laing O’Rourke has been appointed as main contractor. Rather than providing new facilities, this project will provide a long term revenue stream for the NHS hospital trust to support public provision of healthcare. 

The new approach set out by the government is sensible and should help to reduce costs compared with earlier arrangements.  The public sector will now take a more equal role as an equity partner, with greater transparency over costs and profits, as well as the right to appoint a director to each scheme. The guidelines also suggest that ‘soft’ services such as cleaning and catering are removed from main contracts and procured separately, following concerns that the public sector was receiving poor value under the initial private finance initiative. 

Indeed the initial premise of the PFI, that it is a valuable ability to be able to spread the cost of a major asset like a hospital over the period of its use, is more relevant than ever given the falling NHS capital budget and the state of the national finances in general. 

But PF2 is no free lunch; NHS trusts must be aware of the future liabilities involved and weigh up their options. Guy’s Hospital and Cambridge University Hospitals show that sometimes a better deal might be out there.

For more information about Glenigan’s 2014 forecasts for the health sector, contact Tom Crane on 0207 715 6297 or email tom.crane@glenigan-old.thrv.uk 

Do you think PF2 will be key to construction recovery in the health sector during 2014? Or should NHS trusts forge partnerships outside of the government framework? Let us know your thoughts via the Glenigan Twitter page (@Glenigan) or the Construction Project Intelligence group on LinkedIn.