3 THE PFI HOSPITAL MARKET
14. The Department pointed out that recent PFI deals
had been affected by high rates of construction cost inflation.
Heavy global demand for building materials combined with a relatively
large supply of government building projects in the United Kingdom
market have contributed to recent construction cost inflation
in both the public and private sectors. Since 1998, when the Trust
entered into its PFI deal, building cost inflation has been 60%,
with inflation on private sector building projects higher than
that experienced in the public sector. The Department estimates
that, if the Norfolk and Norwich PFI hospital deal were entered
into today, construction cost inflation would have increased the
construction costs by 64% (Figure 5).
Figure 5: Construction cost inflation
|PFI Hospital building cost inflation
|The Department's estimate of the effect that construction cost inflation would have had on the Norfolk & Norwich hospital building costs
||64%||The Department (note)
|Building cost inflation (public and private sector combined)
|Public and private sector building inflation on tenders including PFI
||60%||The Royal Institute of Chartered Surveyors (RICS)
|Private sector building inflation
|Private sector building cost inflation on tenders
|Public Sector Building Inflation
|Public sector building cost inflation on tenders including PFI
|Public sector building inflation on tenders excluding PFI
|49%||The Department of Trade and Industry NHS Estates
|General building cost inflation relating to contract variations (public and private sectors)
|Maintenance cost inflation
|Retail price inflation
||19%||The Retail Prices Index
Note: The Norfolk & Norwich hospital PFI contract in 1998
was based upon building costs per square meter of £1,589.
In summer 2005 the Department's information was that the building
work for a PFI hospital outside London, comparable to the Norfolk
& Norwich hospital, had been priced recently at £2,600
per square metre. That is equivalent to construction cost inflation
15. The Department had not fully analysed the pricing of deals
in the PFI hospitals market or identified all the lessons from
the Trust's handling of this deal. Based on current pricing information
from market sources, the Department estimates that construction
cost inflation on its PFI deals has been in the range of 57% to
89% between 1998 and 2005. This wide range reflects the different
types of PFI hospital buildings procured by the Department. The
Department's PFI construction inflation has been higher than the
average public sector building inflation during this period of
56%. The Department believes that its costs have been influenced
by improvements to patient environment and relatively expensive
refurbishments of existing hospitals. It is unclear whether the
Department's experience of PFI construction cost inflation has
been different from other areas of government as neither the Treasury
nor individual departments maintain detailed data on PFI construction
16. The Department collects a range of data to assist its monitoring
of its PFI projects. The data includes construction and service
price trends from the NHS, financial models relating to its PFI
projects and other pricing data from the Treasury. Despite this
information, the Department has not fully analysed all the factors
which will have affected the pricing of current PFI hospital deals.
So it is not possible to judge, for example, whether increased
familiarity by the private sector in estimating and managing the
costs of PFI projects is leading to lower prices.
17. Additional capacity has been added to a number of PFI hospital
projects because of the commitment to reduce waiting list times.
Buying more capacity after a contract has been let may enable
NHS Trusts to treat more patients but, as the Trust acknowledged,
also carries the risk that the contract variations will be expensive.
The Trust's PFI contract payments had increased by a fifth (£7.1
million a year) to secure 252 additional beds and other variations.
The Trust's bed numbers have increased from 701 to around 950
and it is also providing an expanded range of services. The Trust
had taken steps to check that the cost of the variations was in
line with the pricing of the original contract.
18. After sharing in refinancing benefits, NHS Trusts with early
PFI deals continue to pay a premium on the financing costs compared
to current deals. This is because the financing costs on early
PFI deals reflected the risks of an immature market and the public
sector will only get, at best, 30% of subsequent refinancing gains.
By closing this early PFI deal in 1998, the Trust is, therefore,
paying a financing premium which helped to establish the PFI hospital
market. The benefits of establishing the PFI hospital market have
been widely shared among many PFI hospital projects. Around 40
large PFI hospital contracts have now been let and PFI contracts
for a further 40 smaller new facilities have also been awarded.
The additional financing costs of early PFI deals which helped
to establish this PFI market were, however, borne by a relatively
small number of NHS Trusts, Norfolk and Norwich being one of nine
initial deals which were closed in 1997 and 1998. The Trust has,
however, been able to deliver clinical benefits by having early
use of the new hospital. The Department also believes that the
additional construction costs the Trust would have paid if it
had built its new hospital today would balance the lower financing
costs that would now be available; but this is a different issue
which could not have been anticipated when the Trust entered its
PFI contract in 1998.
C&AG's Report, Figure 17, p17; Ev 25 Back
C&AG's Report, Figures 16-17, p17; Ev 26; Qq 24, 101-113,
C&AG's Report, para 2.1, Figure 15, p16; Q 21 Back
C&AG's Report, para 3.3 and Figure 24, p22; Ev 19; Qq 87-100,
C&AG's Report, para 1.5; Qq 22, 24-25, 73-74, 90-91, 157,