The private finance initiative in the NHS

ISSN 1744-7038 (Online) ISSN 1744-702X (Print)

Research Executive Summaries Series

The Private Finance Initiative in the NHS Vol. 1. No. 1 May 2004

By Jane Broadbent Jas Gill and Richard Laughlin

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The Private Finance Initiative in the NHS

Research Summary: The Private Finance Initiative in the NHS A new research report on the Private Finance Initiative (PFI), with particular emphasis on the NHS, is set to help improve our understanding and practice of PFI decision processes.

This CIMA research report by Professors Jane Broadbent and Richard Laughlin and Dr Jas Gill from the University of London provides a timely analysis of PFI both generally and in the NHS.This report provides clear recommendations as to how pre-decision appraisals and post-decision project evaluations are undertaken and can be improved.

All directors and senior managers in both the public and private sector, who may be involved, currently or in the future, in PFI projects will be interested in this report. It will help them to ensure the purpose of PFI is achieved: namely the provision of public sector services by the private sector that are better value for money relative to traditional forms of public procurement of these services.

The recommendations allow managers to focus on establishing robust and more sophisticated management accounting information systems to support pre-decision appraisals and post-decision project evaluations of proposed PFI projects. In so doing it distances itself from some of the more questionable macro fiscal arguments in support of PFI and consequent financial accounting concerns with the balance sheet treatment.

The report encourages well-constructed pre-decision appraisals. It focuses on improvements in the use of a ‘public sector comparator’, which is the comparison between the net present cost of the estimated cash flows associated with the scheme and those of a public sector funded approach. The project with the lower net present cost is usually favoured. However, this quantitative appraisal, the authors argue, building on recent views of Government, needs to be accompanied by a qualitative analysis of the options, including views of a wide range of stakeholders.This would make the pre-decision appraisal more complex but more inclusive of both quantitative and qualitative factors leading to improved decision making.

Despite this strong call for more qualitative factors to be taken into account, the report also analyses the quantitative assessment of costs and particularly the estimation of the risks that are assumed to be transferred if the PFI option is pursued.

Based on an analysis of 17 of the first wave PFI projects in the NHS, the report demonstrates that the transferred risks are split as follows: - approximately 50 per cent construction risk - 43 per cent of the risks to do with operational risk - and about 7 per cent related to other factors.

The Private Finance Initiative in the NHS

The estimation of these risks, along with the estimation of contracted costs, for contracts that can last from between 30 and 60 years, is recognised in the report as highly complex. However, these calculations are presented and discussed.

The report recommends that post-decision project evaluations of PFI must be broader.

What is happening when projects are up and running is that evaluations are based on the monitoring of the building availability and facilities management contract . Other quantitative risks, qualitative factors such as shared risks, cultural change factors and other stakeholder views are largely ignored.

The report calls for, and offers advice on, the construction of a wider, more quantitative and qualitative, post-decision project evaluation system, which will provide the base for periodic merit and worth evaluations of PFI over the duration of the long-term contracts.

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A copy of the full report is available for download from the CIMA website: www.cimaglobal.com

CIMA (The Chartered Institute of Management Accountants) represents members and supports the wider financial management and business community. Its key activities relate to business strategy, information strategy and financial strategy. Its focus is to qualify students, to support both members and employers and to protect the public interest.

The Chartered Institute of Management Accountants 26 Chapter Street London SW1P 4NP T +44 (0)20 7663 5441 F +44 (0)20 7663 5442 E technical.services@cimaglobal.com www.cimaglobal.com