Select Committee on Health Memoranda


MEMORANDUM

Memorandum by the Department of Health

Table 4.8e (Continued)

REVENUE CONSEQUENCES FOR PFI SCHEMES—FINANCIAL CLOSE: AS AT 31 MARCH 1999

£million

Summary of Schemes
Year
Total Small Schemes
Schemes over £10m
Total Schemes

1997-98
4.1
4.1
1998-99
7.9
3.9
11.8
1999-00
17.3
22.7
40.0
2000-01
21.1
59.1
80.1
2001-02
21.6
117.8
139.4
2002-03
21.7
191.3
212.9
2003-04
21.7
191.0
212.7
2004-05
20.6
191.0
211.6
2005-06
19.7
190.7
210.5
2006-07
17.3
190.8
208.1
2007-08
16.8
191.0
207.9
2008-09
16.5
190.9
207.4
2009-10
15.9
189.3
205.2
2010-11
16.0
185.6
201.6
2011-12
15.9
186.6
202.5
2012-13
13.6
186.7
200.3
2013-14
13.7
187.1
200.8
2014-15
11.8
187.9
199.8
2015-16
11.2
188.8
200.1
2016-17
10.7
187.2
197.9
2017-18
10.8
186.1
196.9
2018-19
11.0
185.6
196.6
2019-20
10.6
186.0
196.6
2020-21
9.8
186.1
195.9
2021-22
9.7
186.0
195.7
2022-23
9.9
185.3
195.2
2023-24
6.8
182.8
189.6
2024-25
0.4
171.4
171.8
2025-26
0.4
164.1
164.5
2026-27
0.4
161.4
161.8
2027-28
0.4
161.9
162.3
2028-29
0.4
147.2
147.6
2029-30
0.4
126.1
126.5
2030-31
0.4
117.5
117.9
2031-32
0.4
76.6
77.0
2032-33
0.4
11.5
11.9
2033-34
0.3
4.2
4.4
2034-35
0.0
2035-36
0.0
2036-37
0.0
2037-38
0.0
2038-39
0.0
2039-40
0.0
2040-41
0.0
2041-42
0.0
TOTAL
387.6
5479.3
5866.9


Footnote

1.  These figures may not sum due to rounding.

4.8e.   Could the Department provide an update of the Departmental Report table showing the source and applications of HCHS capital, giving the outturn position for 1998-99.

SOURCES AND APPLICATIONS OF HCHS CAPITAL: 1998-99 and 1999-2000

£ million

Forecast
Outturn
1998-99
Plan
1999-2000

Sources:
Net Capital HCHS Expenditure
888
1,399
Plus:
NHS trust capital receipts
135
123
Retained estate receipts
326
214
Health Authority receipts
100
0
Total capital receipts
561
337
Gross HCHS Capital Expenditure
1,449
1,736
Applications:
Retained estate costs (1)
50
34
NHS trust capital receipts spent as capital (2)
135
123
Non NHS trust capital spent (3)
40
22
Modernisation Fund for Capital not yet allocated (4)
n/a
20
IM&T Modernisation Fund
n/a
50
Treasury Capital Modernisation Fund (5)
n/a
100
Initial transfers to revenue (6)
200
201
NHS trust voted capital
1,025
1,186
Total Capital Applied
1,449
1,736
Financing of
NHS trust capital:
Depreciation (7)
966
1,020
External Financing Limit (EFL)
59
167
Total NHS trust voted capital
1,025
1,186
Plus:
NHS trust capital receipts spent as capital
135
123
Total capital spent by NHS trusts
1,160
1,309
Financing of EFL:
Net borrowing from Secretary of State voted in estimates (8)
22
167
Change in market borrowing (non-voted) (9)
37
0
EFL
59
167


Notes:

  1.  These are the costs associated with the maintenance and disposal of the NHS retained estate funded from gross capital receipts on the retained estate.

  2.  These are the capital receipts generated from the sale of NHS trust assets. These receipts can be spent in addition to those voted in Estimates.

  3.  This is capital which is not spent by NHS trusts and is spent in Health Authorities or by Special Health Authorities such as the National Blood Authority and the Prescription Pricing Authority.

  4.  Of the £70 million Modernisation Fund for Capital £20 million has been retained centrally until decisions on the allocation of the monies for CHD and Pathology services are finalised.

  5.  The £100 million from the Treasury Capital Modernisation Fund has been retained centrally until decisions on the allocation of the monies are finalised.

  6.  This is to cover:

      (i)  the higher capital threshold in the NHS;

      (ii)  capital expenditure on Joint Finance and GMS

   which are recorded as revenue.

  7.  The element of capital charges included in HCHS revenue but earned by NHS trusts in prices and used to finance capital.

  8.  Net lending from voted monies to support NHS trust capital expenditure and short term cash flow needs.

  9.  The movements in borrowing cash and investments outside the public sector of monies not voted in Estimates in this financial year.

  10.  Figures may not sum due to rounding.

4.8e  Could the Department identify the real savings behind PFI and other schemes, broken down by category, for example, reduced staffing costs due to redesign of buildings, reduced maintenance costs, transfer of risk, for all or a couple of schemes?

  1.  Value for money is assessed by comparing the costs and benefits of the PFI option with the costs and benefits of providing a hospital with the same level of health care output from public funds. The majority of savings provided by PFI are due to risk transfer that is identified in the answer to 4.8f. Efficiencies brought about from rationalising facilities and operating from new buildings are in the main common to both options and therefore do not operate in favour of PFI. Those, if any, that are unique to PFI are not normally identified as part of the assessment and approval process. To isolate the various sources of savings and differentiate those unique to PFI would now be a very difficult exercise and require a major reappraisal of all business cases.

  4.8f.  Could the Department provide a breakdown of the net present value calculations upon which decisions about the private finance options are based? Could the Department indicate the sensitivity of these assumptions on factors such as risk, rate of interest, length of contract?

  The information for schemes over £10 million approved since the last enquiry are shown below

Table 4.8f

CALDERDALE HEALTHCARE—CENTRALISATION OF ACUTE HOSPITAL SERVICES

[Full Business Case Stage]
[Date of FBC Approval:  July-98]


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (60 years)
£'000s
Risk-adjusted
(EAC)
£'000s

77,744 (60 years)
PFI
1,336,015
4,510
1,340,525
78,741 (30 years)
PSC or CFO
1,320,450
41,705
1,362,155
78,999 (60 years)


Financial Close
Date of Financial Close:  July-98


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (60 years)
£'000s
Risk-adjusted
(EAC)
£'000s

77,818 (60 years)
PFI
1,337,277
4,510
1,341,787
78,653 (30 years)
PSC or CFO
1,320,450
41,705
1,362,155
78,999 (60 years)


  Could the Department provide a breakdown of the net present value calculations upon which decisions about the private finance options are based? Could the Department indicate the sensitivity of these assumptions on factors such as risk, rate of interest, length of contract?

  The information for schemes over £10 million approved since the last enquiry are shown below:

Table 4.8f

BROMLEY HOSPITALS NHS TRUST

Full Business Case Stage

Date of FBC Approval:  November-98


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (60 years)
£'000s
Risk-adjusted
(EAC)
(1)
£'000s

PFI
1,165,552
774
1,166,326
71,701
PSC or CFO
1,148,783
30,648
1,179,431
72,507


Financial Close

Date of Financial Close:  November-98


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (60 years)
£'000s
Risk-adjusted
(EAC)
(1)
£'000s

PFI
1,165,552
774
1,166,326
71,701
PSC or CFO
1,148,783
30,648
1,179,431
72,507

1.  EACs over 60 years

  Could the Department provide a breakdown of the net present value calculations upon which decisions about the private finance options are based? Could the Department indicate the sensitivity of these assumptions on factors such as risk, rate of interest, length of contract?

  The information for schemes over £10 million approved since the last enquiry are shown below:

Table 4.8f

OXLEAS NHS TRUST

Full Business Case Stage

Date of FBC Approval:  December-98


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (50 years)
£'000s
Risk-adjusted
(EAC)1
£'000s

PFI
223,320
4,005
227,325
13,727
PSC or CFO
221,899
12,949
234,848
14,011


Financial Close

Date of Financial Close:  December-98


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (50 years)
£'000s
Risk-adjusted
(EAC)1
£'000s

PFI
223,320
4,005
227,325
13,727
PSC or CFO
221,899
12,949
234,848
14,011


1.  PFI over 25 years, PSC over 50 years.

  Could the Department provide a breakdown of the net present value calculations upon which decisions about the private finance options are based? Could the Department indicate the sensitivity of these assumptions on factors such as risk, rate of interest, length of contract?

  The information for schemes over £10 million approved since the last enquiry are shown below:

Table 4.8f

WELLHOUSE NHS TRUST

Full Business Case Stage

Date of FBC Approval:  Feb-99


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (60 years)
£'000s
Risk-adjusted
(EAC)1
£'000s

PFI
188,033
5,365
193,398
11,124
PSC or CFO
177,344
20,859
198,203
11,277


Financial Close

Date of Financial Close:  Feb-99


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (60 years)
£'000s
Risk-adjusted
(EAC)1
£'000s

PFI
187,805
5,365
193,170
11,111
PSC or CFO
177,344
20,859
198,203
11,277


1.  PFI over 30 years, PSC over 60 years

  Could the Department provide a breakdown of the net present value calculations upon which decisions about the private finance options are based? Could the Department indicate the sensitivity of these assumptions on factors such as risk, rate of interest, length of contract?

  The information for schemes over £10 million approved since the last enquiry are shown below:

Table 4.8f

GREENWICH HEALTHCARE NHS TRUST

Full Business Case Stage

Date of FBC Approval:  July-98


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (60 years)
£'000s
Risk-adjusted
(EAC)1
£'000s

PFI
1,405,774
3,748
1,409,522
83,112
PSC or CFO
1,377,296
49,906
1,427,202
82,895


Financial Close

Date of Financial Close:  July-98


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (60 years)
£'000s
Risk-adjusted
(EAC)1
£'000s

PFI
1,405,774
3,748
1,409,522
83,112
PSC or CFO
1,377,296
49,906
1,427,202
82,895


1.  EACs over 30 years.

  Could the Department provide a breakdown of the net present value calculations upon which decisions about the private finance options are based? Could the Department indicate the sensitivity of these assumptions on factors such as risk, rate of interest, length of contract?

  The information for schemes over £10 million approved since the last enquiry are shown below:

Table 4.8f

WORCESTER ROYAL INFIRMARY NHS TRUST

Full Business Case Stage

Date of FBC Approval:  March-98


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (60 years)
£'000s
Risk-adjusted
(EAC)1
£'000s

PFI
1,079,665
13,701
1,093,366
63,818
PSC or CFO
1,074,529
23,767
1,098,296
63,999


Financial Close

Date of Financial Close:  March-98


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (60 years)
£'000s
Risk-adjusted
(EAC)1
£'000s

PFI
1,081,982
13,483
1,095,465
63,939
PSC or CFO
1,074,529
23,802
1,098,331
63,999


1.  EACs over 60 years.

  Could the Department provide a breakdown of the net present value calculations upon which decisions about the private finance options are based? Could the Department indicate the sensitivity of these assumptions on factors such as risk, rate of interest, length of contract?

  The information for schemes over £10 million approved since the last enquiry are shown below

Table 4.8f

SOUTH MANCHESTER NHS TRUST

Full Business Case Stage

Date of FBC Approval:  July-98


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (60 years)
£'000s
Risk-adjusted
(EAC)1
£'000s

PFI
2,084,000
40,000
2,124,000
125,700
PSC or CFO
2,066,000
60,000
2,126,000
125,700


Financial Close

Date of Financial Close:  August-98


Option
NPC pre-risk
(60 years)
£'000s
NPC of risk
retained (60 years)
£'000s
Risk-adjusted
NPC (60 years)
£'000s
Risk-adjusted
(EAC)1
£'000s

PFI
2,084,000
40,000
2,124,000
125,700
PSC or CFO
2,066,000
60,000
2,126,000
125,700


1.  EACs over asset life.

4.8f  Could the Department indicate the sensitivity of these estimates to assumptions on factors such as risk, rate of interest, length of contract?

  1.  PFI offers better value for money by giving the private sector the incentive to use its skills and experience for the benefit of the NHS. PFI is not constrained by capital so more innovative design solutions can be put forward. In addition, PFI contracts are structured so that the private sector companies that provide the hospital facility have the same interests as the NHS in ensuring that a hospital is built and maintained to the highest standards. Where they are best placed to manage, risks are transferred to the private sector. Thus the risk of construction, times and budget overruns, standards of service support and maintaining the hospital in a fit state rest with the private sector. This enables the NHS to concentrate on its core functions and allow PFI to offer the taxpayer better value for money than traditional procurement.

  2.  Value for money for the public sector is assessed by comparing the costs and benefits of the PFI option with the costs and benefits of providing a hospital with the same level of health care output from public funds. Since the cost of the PFI option will include the value of risk which has been transferred to the private sector, but the publicly funded solution excludes the costs of risk we retain, a simple comparison would understate the true cost of public capital.

  3.  Therefore, as part of the economic appraisal, there is a requirement to include the expected value of risk held by the public sector under each of the options. By adjusting for the costs of the risks retained, it ensures comparisons are made on a like for like basis.

  4.  The tables listed below do not allow direct comparisons between the different schemes. Investment appraisal conventions allow different approaches to evaluating and comparing costs. For example, provided the conventions are consistently applied in each appraisal, costs common to both alternatives can be either included or excluded and differences in costs can be scored rather than actual costs. Unless all the appraisals are re-calculated, it is not possible to say what basis costs have been included.

  5.  The robustness of the ranking of the options is tested using sensitivity analysis. The effect of varying assumptions regarding the costs of risks are carried out in each case. Each scheme has a different risk profile so without conducting a detailed analysis of each business case it is not possible to provide reliable information.

  6.  The risks most commonly tested for sensitivity are interest rates, inflation, and variations in the construction cost and timetable of the public sector comparator. Generally speaking, because many of the costs of the PFI option are fixed, the changes that could affect the financial appraisal ranking relate to the public sector comparator costing less to build than anticipated.

  7.  The interest rate is determined at financial close with the purchase by the private sector of a fixed rate hedge. Before then, changes in the interest rate are a public sector risk (or benefit). If the estimated rate changes between approval of the full business case and financial close to alter costs by more than 10 per cent, or to change the ranking of the options, full business case approval lapses, and the case must be re-submitted.

4.8g  Could the Department update the information given in Table 4.8h on donated capital additions by NHS Trusts and provide regional summaries?

  1.  Table 4.8g.1 sets out information on the capital expenditure which has been financed by charitable donations broken down by NHS Trusts for 1997-98. The data has been taken from the summarisation of schedules of NHS Trusts (England) 1997-98.

  2.  Table 4.8g2. provides a year on year comparison by Region.

  3.  A donated asset is an asset acquired after the establishment of the NHS on 5 July 1948, from other than exchequer sources, which has been:

    (i)  received as a gift; or

    (ii)  purchased out of income received as a gift;

provided that consideration is not given in return.

  4.  Many assets are funded jointly by donation and NHS funding. The proportion of the asset which is classified as donated will remain unchanged throughout the life of the asset.


 
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