NAO Recommendation1

PAC Recommendation1

Has the West Middlesex deal met the Recommendation?2

Healthcare strategy

The local Health Authority and Regional Office should confirm that the project will contribute to the best use of the Department's funds within the plans for health services in their respective localities. (Rec. 1)

The Department should think carefully about the flexibility required to meet developments in service delivery and changes in demand. Before committing to any long-term PFI contract, it should consider how these requirements for flexibility can be addressed. (Rec. 1)

The need for any long-term project should be assessed against the local healthcare strategy and the costs and benefits involved should be compared with those of alternative options for improving services. (Rec. 2)

The Trust produced a strategic outline case (SOC) (in line with Departmental Guidance). This was agreed by the local health authorities and the Regional Office who consider it would meet local needs. To address possible long-term changes in demand, the hospital design incorporates both upward and downward flexibility in bed numbers. However, given uncertainties in healthcare planning, it is not clear how West Middlesex would be used in the long term.

Affordability

Trusts and Health Authorities should agree likely funding limits at the outset and should evaluate these proposals against future spending plans at key stages of the procurement. (Rec. 1)

Trusts should provide bidders with clear guidelines on their funding limits to help secure bids which the Trust and the Health Authority can afford. (Rec. 1)

Before approving any long-term project, the Department should identify in full the funding implications and then keep track of these as the project develops. (Rec. 3)

The SOC (1998) stated that the local health authorities required that £1.6m of savings should be achieved for their approval to the project.

An affordability ceiling was stated in the final invitation to negotiate (FITN) tender documentation provided to bidders and the Trust monitored the bids against this ceiling during contract negotiations.

Analysis of value for money

Trusts should carry out a rigorous review of the calculations which compare the expected costs and benefits of the proposed PFI project with the conventionally financed alternative. These comparisons should also be updated to take account of all significant changes to contract terms prior to letting the contract. (Rec. 2)

NHS trusts should formally update their value for money comparisons to take account of changes to contract terms as they arise. (Rec. 6)

NHS trusts should seek to evaluate all reasons for any movements in the prices proposed by bidders. (Rec. 16)

The Trust compared the costs of the PFI deal with the estimated costs of a public sector comparator (PSC). This was reviewed by the Department who were satisfied with the calculations.

The Trust and its financial advisers updated the risk analysis for incorporation into the PSC in the light of changes in contract terms and the results of negotiations. A record of contract changes was maintained and the resultant effect of these changes on the financial comparison. The Trust's financial adviser was satisfied with the reasons for changes and that the resulting increases in costs to the Trust represented value for money.

Calculation of the public sector comparator

The costs of the PSC will include provision for possible cost overruns in building the hospital. The accuracy of these calculations might be improved by refining the data available on cost overruns on past traditional hospital procurements to be consistent with the status of the cost estimates used in the public sector comparison under review. The calculations of the various provision for cost overruns should be reviewed carefully to avoid any possible double counting. (Rec. 3)

NHS trusts and other public sector bodies should prepare PSCs carefully and should subject them to independent checking to minimise the risk of undetected errors. (Rec. 4)

Trusts should make reasonable assumptions about their ability to improve their future procurement performance when preparing their PSC. (Rec. 10) 

The Department should periodically recheck the assumptions for capital and operating costs made in previous value for money assessments against actual experience to inform assessments for future projects. (Rec. 8)

NHS trusts should take full account of the financial consequences of risks retained resulting from differing usage levels when comparing the possible use of the PFI against the option of a conventionally-funded hospital. (Rec. 7)

The Trust and its financial advisers reviewed the initial financial comparison and certain amendments were made. The Department then reviewed the final PSC.

The cost overrun risk was quantified on the basis of the latest rolling average of actual cost overruns on public schemes collected by NHS Estates. The possibility of future improvements in public procurement is one of the elements covered by the sensitivity analysis.

The Department's review made use of past data on costs, overruns and risk allocations to inform this review. The Department was satisfied that these were reasonable in the West Middlesex deal.

Sensitivity analysis was carried out on the effect of operating cost changes on the valuation of both the PFI and PSC options3. This analysis concluded that the PFI option was cheaper where there was an increase of either 10% or 20% in operating costs but more expensive where operating costs decreased by 10%.

Use of public financing

The Department should continue to give proper consideration to the option of using public finance in all hospital projects. (Rec. 11)

The importance of this project was such that London Regional Office (LRO) would have used conventional financing if PFI was considered to be inappropriate.

Advisers

Trusts should normally go out to formal competition to commission advice on a PFI project. (Rec. 5)

NHS trusts should ask their advisers for carefully prepared cost estimates, to update these if there are changes to the work required, and to closely monitor actual costs against the estimates. (Rec. 17)

The legal and financial advisers and the Project and Estates Manager posts were all subject to competitive tendering.

The Trust monitored the level of fees, reconciling the fees charged for a programme of work against previously estimated costs for the work as provided by the relevant advisers.

Central advice/procurement costs

The Department may wish to consider the scope and benefits of commissioning certain advice centrally on common issues, and benchmarking advisers' costs with those incurred on other PFI projects, to help reduce the overall costs to the Department of individual trusts commissioning advice separately. (Rec. 6)

The Department has assured us that lessons have been learnt from this project and the other early PFI hospital projects, and that measures introduced, such as contract templates and new procedures for the reporting and monitoring of project costs, will lead to significant improvements. We expect to see major reductions in the costs of letting PFI hospital contracts particularly as the need for new legislation, which gave rise to delays in this project, should not arise in later projects. (Rec.18)

The Department has introduced a standard contract and other new guidance for PFI hospital deals. The West Middlesex deal was the first one on which the new contract template was used.

Adviser costs on the first 18 major hospital PFI schemes (greater than £25m) averaged 3.9% of their total capital value. Some reductions have been observed in later schemes (eg. Dudley's adviser costs were 1.4%) and the Department of Health expects the downward trend will be confirmed by the 29 schemes which were given the go ahead in February 2001.

Competitive process

Trusts should seek to maximise the extent of competitive tension in the bidding process for PFI projects. They should ensure that bidders feel able to comply with their bidding requirements and the timetable for submission of bids remaining sensitive to the effect of bidding costs on the willingness of bidders to participate in a competition. When selecting final bidders trusts should assess the comparative merit of bids on the basis of overall value for money, not just price. (Rec. 4)

NHS trusts should assess carefully the risks to achieving an effective competition and manage these accordingly. (Rec. 15)

The Trust held informal discussions with key PFI bidders to stimulate interest in the project. It was able to ensure that six bids were submitted at the preliminary invitation to negotiate (PITN) stage. This was reduced to three bidders at the final invitation to negotiate (FITN) stage. To save time and costs the Trust elected to go straight to a single preferred bidder without an intermediary stage involving two final bidders. This step was taken with the agreement of all three final bidders and the Department. The Department is now recommending this approach on other PFI projects.

Evaluation of the bids was based on both financial and non-financial criteria.

Returns to the contractor

NHS trusts should relate the returns sought by members of private sector consortia to the risks which they will bear. (Rec. 12 and 13)

NHS trusts should reach a clearly agreed position on refinancing with their private sector partners when closing a deal. (Rec. 14)

The Trust's financial advisers considered that the financing for the Bywest bid offered competitive rates which were reasonable for the risks being undertaken.

Bywest and the Trust agreed a 70:30 split on any re-financing gains that might subsequently occur on the deal.