Agenda

1. Agenda • Where PFI/DBFO – Works Well • Where PFI/DBFO works less well • Do we need “F” in DBFO • Health PPP – adapting to the NHS Plan • A plea for “Horses for Courses” • Promising variants

2. Where PFI/DBFO Works Well • Large Projects • Fully specified output specification pre-bidding • Front-ended expenditure profile • No complex contractual interface on-site • Effective competition • Stable requirements over contract life

3. Do we need the “F” in DBFO? Public sector Purchaser • Same contractual risk transfer arrangements • Medium term contracts (7-10 years) • No commercial bank loans or completion guarantees – public sector funding • Banks provide guarantees/bonds to asset provider to secure completion obligations • Asset/services providers have equity at risk in form of deferred payments • An additional approach for smaller projects – not instead of PFI where works well Asset Provider Shareholder Joint Venture agreement SPV Service Provider Bank guarantees bonds

4. Health PPP – Adapting to the NHS Plan • Major rapid expansion in demand for patient services • Renewed emphasis on clinical governance/performance management/patient journey • Diversity in “final services” providers – public, private, not-for-profit

5. Lessons from Health PFI Experience • Innovation benefits from Health DBFO over-stated • Most gains arise from transfer of completion risk of major assets • Limited competition for major schemes, even more limited for small schemes • Conditions for “conventional” PFI to work well not common in health sector • PLEA FOR “HORSES FOR COURSES”

6. Final Services Contracting • Medium term contract for “Final Services” e.g. elective surgery • Purchaser – Strategic Health Authority and/or PCTs • Provider – Hospital Trust subsidiary/Private Sector/ Not-for-profit partnerships • Payment on successful performance • Prices set in contract – either bid with maximum or NHS regulated schedules • Financing from private sector (+ ? NHS Bank) • Protections re diversion of NHS resources/clinical standards/integration of patient journey

7. Performance risk transferred to PPP payment for outputs Price risk transferred to PPP pay agreed price, not costs Bank guarantees/bonds secure performance undertaking of PPP Level playing field for Hospital Trusts and private sector Final Services Contracting PPP Public sector Purchaser (SHA, PCTs) Private sector provider SPV Private sector finance Joint venture agreement Hospital Trust Subsidiary Bank guarantees/bonds Performance security from SPV To Purchaser

8. Advantages of Final Services PPP • Identifies quickest least cost way to deliver targeted extra services to patients • Retains PFI risk transfer • Removes bias against public sector efficient • Small packages easier to finance encourages new entry and maximises supply increases where needed • Medium term contracts provide reliable demand encourages new entry

9. Issues with Final Services Contracting • Extension of role of private providers • Avoid diversion of resources from NHS • Rules to facilitate Public/Private level playing field • Pricing of outputs – bid or regulated? • Accounting treatment of SPV liabilities • Are there sufficient new entrants?

10. Conclusions • PFI/DBFO works tolerably well for new hospitals • Need to develop new PPP options alongside PFI for expansions/reconfiguration of final services • Propose pilots of variants including final services contracting to test claimed advantages • If pilots successful adopt “Horses for Courses” approachwith PFI and wider use of variants

11. Strictly Private and Confidential Horses for Courses in Health PPP Dr Keith Palmer 10 September 2002