3.27 The unitary charge is the annual sum paid, for the lifetime of the contract to the PFI contractor once the service becomes operational. Changes to the unitary charge figure were made in just under 60 per cent of projects between selection of preferred bidder and financial close21, and the size of the overall change was usually within 10 per cent of the initial figure (in both directions).
3.28 Although these changes to the unitary charge were usually relatively small, they masked what was often a great deal of movement during preferred bidder periods, a phase when competitive tension is absent and changes should be minimal. For instance:
■ 30 per cent of procuring authorities responded to renewed pressures that their project was unaffordable, in many cases because of increases to the scope or specifications of the project, by increasing the length of the contract. This masked the effect of any changes by reducing the level of the annual payment. However, in doing so, the total cost of the project over the lifetime of the longer contract was increased. Although maintaining affordability for these authorities, such changes contradict value for money guidance recently issued by the Treasury which emphasises the importance of setting the length of a contract to match the optimal period over which services need to be provided.
■ Many procuring authorities benefited from favourable movements in interest rates or other financial terms. This benefit often offset the cost of delays or of project changes and therefore limited the impact on the unitary charge. Such benefits were fortuitous and the limited impact on the unitary charge was not a reflection of better value for money.
■ It was common for procuring authorities to make both additions and reductions to the project scope during preferred bidder negotiations. The value of these changes, on average, was just over £4 million per project per year - the equivalent of 17 per cent of the value of each project as it was at preferred bidder selection. The more changes there are the more likely it is that value for money was at risk during the preferred bidder stage, even if the changes cancelled each other out to some extent in terms of their impact on the unitary charge.
3.29 One-third of projects overall made changes during the preferred bidder period that, in our judgement, could be considered major changes. Such changes could be described as major changes, not just on the basis of their value, but because basic elements of the scheme were being altered. They included changes to the balance of new buildings and refurbishments, the addition or removal of major equipment components, changes to the agreed services to be provided, significant changes to the design solution and major changes made to the agreed risk allocation during this period. Case example 5 provides an example of a project where the change - and resulting impact on unitary charge - was particularly large.
CASE EXAMPLE 5 |
Queen Mary's Hospital, Roehampton - a major variation was made to the deal during the preferred bidder period The Queen mary's Hospital site in Roehampton accommodates a range of services provided by three South West London NHS Trusts. An Outline Business Case for a new community hospital on the Queen mary's site was approved in April 2000 and, following a competition, a preferred bidder was selected in April 2002. The Project was signed in may 2004 and new integrated community hospital facilities became operational in February 2006. During the course of tendering and negotiating the project, two changes were made: one delaying completion by ten months, the other increasing the present value of the deal from around £350 million to £650 million. PFI policy change: transfers of staff At the start of the project it was assumed that facilities management services staff would be transferred to the successful bidder. Just before a preferred bidder was to be selected in June 2001, the Department of Health selected the project as a pilot for a new approach to soft facilities management services provision (the Retention of Employment Model - RoE). This approach meant that existing soft facilities management services staff would retain their NHS employment terms and conditions, but be managed by the private sector service provider. The development of the model, testing and subsequently resolving a number of significant issues, delayed the PFI procurement by ten months. Scope change: addition of mental health facilities At around the same time, local health authorities undertook a consultation on the provision of mental health services for adults and older people living in parts of South West London. Following the consultation and a subsequent evaluation of options, they concluded that the mental health facilities currently provided on the Queen Mary's site should be re-provided on the same site in a new facility, adjacent to the proposed community hospital. This was found to be unaffordable as a project in its own right. However, because of delays to the community hospital resulting from the introduction of RoE, it was considered possible to merge the two separate projects, retaining overall affordability without further delaying the Community Hospital project. There were significant legal and financial risks Extending the scope of the PFI project to incorporate mental health services provision without running a separate competition posed a significant legal risk, as advice had suggested that this might breach Eu regulations. To mitigate this risk, the remaining bidders were consulted and indicated they would not contest any decision to proceed with an integrated Community Hospital. In the event of a challenge by any of the previously de-selected bidders, the Trusts felt that the original grounds for their de-selection would have continued to hold. The legal and value for money risks of proceeding without a competition had to be balanced against: ■ another round of tendering at an estimated cost of £160,000; and ■ a delay of seven to nine months caused by re-tendering. It was felt that any further delay would impact adversely on the Community Hospital, putting back the intended improvements to patient services and attracting unsympathetic local and media attention for what was seen as a high-profile PFI scheme, delayed already by the RoE negotiations. It was therefore decided to test the viability of developing an integrated scheme under the extant PFI procurement exercise. The Trusts issued a revised output specification to the preferred bidder. The preferred bidder and the Trusts then undertook separate evaluations to establish the most appropriate way of incorporating the integrated facilities into a single Community Hospital within the constraints of the Queen Mary's site, and both concluded that the majority of the mental health facilities should be accommodated on an additional floor, above the community hospital accommodation. The decision to include mental health facilities in the scheme was agreed in principle by all the key stakeholders including the Strategic Health Authority and Private Finance unit of the Department of Health. The addition of integrated mental health facilities to the project increased the whole-life cost of the project by some £300 million. To test the price offered by the preferred bidder, the Trusts obtained independent advice on what the additional facilities should cost. The Trusts worked up a Conventionally Funded Option (CFO) on the basis of the PFI design and the Trusts' architects prepared a 1:200 design solution. This was achieved using the footprint of the original PFI scheme design, which was further developed by the Trusts and their advisers as a CFO to provide a basis for evaluating development of the PFI design. The additional work to be undertaken was costed on an open-book basis, with margins no greater than the reference bid agreed at selection of preferred bidder. The independent cost estimate and the price offered by the preferred bidder were within 10 per cent of each other and further negotiations resulted in a five to six per cent reduction in the preferred bidder's price. |
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21 This excludes projects which made changes to the unitary charge purely on the basis of inflation or changes in interest rates.