In January 2001, the West Middlesex University Hospital NHS Trust (the Trust) let a contract under the Private Finance Initiative (PFI) to a private sector consortium called Bywest. The contract required Bywest to redevelop the Trust's site at Isleworth, West London and then to provide ongoing maintenance and facilities services. The Trust expects the net present value of the contract payments over the 35 year contract period to be some £120 million.1
On the basis of a Report by the Comptroller and Auditor General2 the Committee took evidence from the West Middlesex University Hospital NHS Trust and the Department of Health (the Department) on whether the analysis of the PFI deal had been correctly prepared and interpreted, and what lessons could be drawn for the NHS and more widely for negotiating future PFI deals.
Our key conclusions are:
• Spurious precision in public sector comparators is unproductive. When using a public sector comparator to aid decision-making on PFI deals, public authorities need to recognise the degree of uncertainty inherent in such comparators. In this case, the Trust's advisers strove to make slight adjustments to the calculations, well within the range of error inherent in costing a 35 year project, to ensure that the PFI cost appeared marginally cheaper than the public sector comparator. Yet this work added nothing to the quality of the Trust's decision-making on the deal.
• Departments should base decisions on PFI deals on a realistic and comprehensive analysis of costs, benefits and risks. Instead of placing undue weight on the public sector comparator, the Trust should have attached importance in its assessment to wider factors such as the advantages of passing appropriate risk to the private sector and the potential risks involved in a contractually binding 35 year partnership.
• There is scope for action by the NHS to reduce PFI advisory costs. This deal was only the latest in a long series of hospital PFI deals, yet the Trust spent £2.3 million on advisers on this deal, virtually the same amount as those incurred by the Dartford & Gravesham NHS Trust in letting the first PFI hospital contract four years earlier. To counter the risk that the decentralised approach of the NHS to negotiating PFI deals might lead to reinventing the wheel, the NHS should establish a database of what advice on PFI has already been commissioned by NHS bodies. Where, as in this case, useful innovations are made, such as the use of a new standard NHS PFI contract, a streamlined bidding process and a price commitment by the preferred bidder, the NHS should promptly disseminate the lessons learned.
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1 Based on discounting future cash flows at 6% in real terms in line with Treasury guidance at the time the contract was let. The Department estimates that the total cash payments under the contract, including increases allowed under the contract for inflation, will be over £470 million (Ev 23).
2 C&AG's Report, The PFI Contract for the redevelopment of West Middlesex University Hospital (HC 49, Session 2002- 03)