Can PFI climb up off its sickbed? After the Bart's brouhaha, what's next for the axe?

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The Independent Online

Just a few weeks ago, all was going swimmingly. Along with its sister hospital the Royal London, the cardiac and cancer specialist St Bartholomew's was to be overhauled through an ambitious £1.15bn private finance initiative (PFI) scheme.

The project, put together by a consortium led by Swedish construction giant Skanska and specialist banker Innisfree, had been many years in the planning and was direly needed. Bart's - which first started treating the sick in 1123 and narrowly escaped closure in 1998 - may be a centre of excellence, but its buildings and facilities are dilapidated. Likewise the Royal London, which, as a trauma specialist, played a major role in treating the 7 July bombing casualties.

But then the Government got cold feet. Last week it emerged that approval of the east London PFI scheme had been delayed and an independent review of the proposals launched.

The decision sparked outrage, among both doctors and MPs. Many were concerned that without the project, the hospitals would not survive, leaving the hundreds of thousands of people they treat - in one of the poorest areas of the country - without sufficient healthcare. The local NHS trust, meanwhile, could be liable for a £100m bill from the Skanska consortium.

But the affair has also cast another cloud over PFI, the public- private partnership (PPP) programme that has been mired in controversy since it first emerged in the early 1990s.

Two other schemes, in Plymouth and at Hillingdon Hospital, in Uxbridge, west London, were halted as the Department of Health reviewed the affordability of £12bn worth of PFI health projects. An application by the University Hospitals of Leicester to become a foundation trust was put on hold while its PFI scheme was scrutinised. And Birmingham's Queen Elizabeth Hospital failed to get its £550m rebuild approved by Monitor, the trust regulator.

Nor are these rare incidents. A proposed £1.1bn healthcare centre at Paddington Basin in central London has been scrapped, while the Queen Elizabeth Hospital in Woolwich, a once groundbreaking PFI-built project, has plunged £29m into the red. PPP has also come in for criticism in a number of other areas, such as prisons, education and defence.

The main reason the Government has pulled up on Bart's is the cost of the project. Health Secretary Patricia Hewitt said this had doubled since it was first proposed. Under PFI, hospitals are built with private money and leased back to the NHS, which repays the cost over 25 to 40 years. There are now concerns over whether Bart's and Royal London will be able to settle the bill in the long term

But, argue those in the know, this is not another case of PFI failing. "It has been very successful and has evolved since the mid 1990s," claims one expert closely linked to the Bart's scheme. "The issue in the market at the moment is on the NHS side of things. It sets the brief, which the private sector follows."

The expert is referring to the Government's emphasis on patient choice and the income of hospitals being linked to performance. If patients choose other hospitals over Bart's and the Royal London, the money won't follow.

Additionally, the Government is not entirely sure whether it is in favour of large, centralised hospitals like Bart's. In an upcoming health White Paper, it will consider other options, such as advanced doctors' surgeries where routine procedures can be carried out.

"Everyone likes a good story, but it's important to remember that some 700 PFI schemes have been procured," argues Richard Tierney, head of PPPs at accountants BDO Stoy Hayward.

"Any chance of returning to the old days of direct public sector procurement was dealt a body blow by the huge cost over-runs on the Scottish Parliament building," he adds. "As yet, no one has come up with a credible plan B to replace PFI. Although it isn't perfect, 90 per cent plus of the schemes run smoothly and deliver real value for money for the tax payer."

Also, the cost increases in the Bart's project have to some extent been unavoidable. Construction is predicted to take nine years and, as Chris Elliott, managing director of Barclays Private Equity, points out: "Six, seven, eight years of construction costs are very difficult to price, particularly in London where you have the Olympics coming online." The 2012 games will push up building prices across the board as demand for labour and materials rises.

This is one reason why PFI may not be suited to deals of this scale - the timescale is so long that costs will inevitably rise. Critics also argue that because the brief is set at the planning stage, there is little flexibility for either side to change it later.

As a result, new ways of structuring PFIs are being looked at. "The Lift initiative, where the public and private sides get together in the development stage, means things cost less," says Mr Elliott, who is responsible for Barclays Infrastructure Funds. "It is much more productive. The two parties are working towards a common goal." Under Lift (local infrastructure trusts), public and private money is used to build smaller health facilities on shorter-term leases.

Similarly, the £2bn Building Schools for the Future (BSF) programme is seen as a sensible way forward. The idea is to refurbish all secondary schools.

John Pilkington, managing director of Amey Ventures, the PFI procurement arm of support services group Amey, says the individual schemes are big projects but are done in "bite-sized chunks", allowing for more negotiation between the two sides throughout and greater flexibility. Amey has just been named preferred bidder for a BSF scheme in Bradford.

Over the years, PFIs have enabled the Government to undertake a major programme of building and refurbishment. Although introduced by the Conservatives in 1992, Labour expanded the scheme in 1997 as a way of investing in public services following decades of neglect. Britain now has the largest hospital-building scheme in Europe.

The private sector has reaped the benefits too. Only last week, for instance, PFI specialist John Laing confirmed it would meet full-year financial targets because of growth in government demand for work on public roads and accommodation.

Of course, private firms pulling in big profits has in itself been a source of controversy - especially when their services fail to live up to expectations. One such example is Tube Lines, one of the consortiums involved on the London Underground. It reported a 37 per cent surge in annual profits last year, despite operating the Northern Line, universally regarded as one of the worst-performing tracks.

But the consortium - of which Amey is a member - has always argued that the Northern Line is the busiest, deepest and most complex line, and that after being starved of investment for decades, it will take years to overhaul.

Mr Pilkington at Amey argues that PFI is "not all about investment" but also the long-term commitment of private firms to public projects. He claims that PFI provides "modernisation at the front line, delivers operational assets on time and to budget, [and] maintains assets for the lifetime of the concession".

And while the private sector can make money, the risks are also there for all to see. Amey was forced to issue a number of profit warnings three years ago and, its share price sliding, was taken over by Spanish group Ferrovial. Jarvis, meanwhile, came within a whisker of collapse after expanding too rapidly into the PFI market, causing it to run out of working capital.

"It's very difficult to have a balanced debate. Even the Conservative Party criticises PFI and they invented it," notes the PFI expert. "There's an argument about the private sector being involved, but the private sector has been building hospitals for as long as I can remember."

Whether Ms Hewitt will continue to allow it to do so, in the current form at least, will not be known until the end of this month, when the review of the Bart's scheme is completed.

But unless the Health Secretary and her fellow ministers can come up with another way of funding much-needed public projects, no obituaries should be written for PFI.