3.15 Authorities have to make an assessment of the likely cost of a project and confirm that it is affordable before taking the project to the market. This is a requirement for the approval of Outline Business Cases by all Departments. However, affordability issues often subsequently arise during the procurement, either as a result of changes in an Authority's requirements or because the bids received are more expensive than the authority expected. We found that, even at the point of preferred bidder selection, affordability had often not been completely resolved. Any changes made to the project or changes to the financial situation of Authorities necessitated a reconsideration of affordability, resulting in delays to the finalisation of a deal and sometimes requiring further changes to the project. A number of advisers put this point to us, including an adviser with extensive experience of procuring deals (see Box D). In addition, affordability problems often arose as a result of a longer than anticipated procurement process. A major example was the St Bartholomew's and London Hospitals re-development PFI scheme, where delay and substantial public and private sector costs were incurred while decisions were made (Case Example 2).
BOX D |
The difficulty of confirming the affordability of a project when the tendering period has been lengthy "Affordability curves can be very dynamic. This can lead to a vicious circle developing: the longer the procurement period, the more likely that the affordability equation will change, forcing scope changes and further procurement delays". (NAO interview with a PFI adviser) |
CASE EXAMPLE 2 |
Barts and the London NHS Trust - affordability and planning concerns led to delays during the preferred bidder negotiations At a capital value of £1,072 million, this 42 year project is the largest PFI hospital deal to have been signed in the UK. It will provide a new teaching hospital and a new cancer centre of excellence through the substantial redevelopment of the Royal Hospital of St Bartholomew and the Royal London Hospital. Financial close was reached in April 2006, following a tendering process that took just over 4 years, including a 28 month preferred bidder period. The preferred bidder period was expected to last just over a year. It took twice as long for two main reasons: ■ The redevelopment involved listed buildings in a conservation area and required approval from a number of bodies, all of whom individually needed to provide statutory consents. The preferred bidder's design was accepted without major changes at St Bartholomew's but the design of the Royal London Hospital required modification. Subsequent negotiations with planning authorities over changes to the project design caused a delay of ten months. ■ Although the Trust considered it had reached an affordable position both prior to and after preferred bidder selection, the size of the scheme meant that the deal was subject to review by the Department of Health and the Treasury. The full business case was submitted to the Department and the Treasury in November 2005. This coincided with a review of NHS finances that included all prospective PFI schemes. As a result of this review, which involved a delay of three months, the scope of the deal was scaled back. In total, the costs of the delays during the preferred bidder period added around £5 million to the annual unitary charge. However, this was offset by adjustments to the scope of the deal which resulted in a net reduction to the annual unitary charge of around 12 per cent (equivalent to £9 million a year). |