With the elections on the way, the NHS has predictably become a political football with accusations and counter accusations flying around in the mediasphere. One of the major points of contention is private-sector involvement in this much-loved public institution. The recent announcement of the financial deficit at King’s College Hospital NHS Trust – a figure reportedly not far off £200m for 2018-19, which includes the costs of their private finance initiative (PFI) – is an example of just this.
PFI Debt – A Key Factor Contributing to the Deficit
According to the Care Quality Commission (CQC) “The trust reported the largest deficit in the NHS in England in financial year 2017/18 and is on track to do the same in financial year 2018/19. Excluding discretionary funding from the Sustainability and Transformation Fund (STF) or Provider Sustainability Fund (PSF), the trust reported a deficit of £141.4m in financial year 2017/18 and is forecasting a deficit of £193m in financial year 2018/19. This is against a plan of £146m in year. Accordingly, the trust’s position has worsened over the previous year.”
With the deficit reported for 2016/17 being almost £49m, this shows that the last three years identify a very worrying trend in the wrong direction. The figures include:
- Fines for missed targets
- Extensive use of agency staff
- Significant delays to a new critical care unit
- Loss of expected income due to ‘poor operational performance’”.
Interestingly, the trust’s takeover of the Princess Royal University Hospital is another factor cited because of costs associated with severe staff shortages at that hospital. When the trust took over the Princess Royal it also took over the incumbent PFI responsibilities on that property, built using PFI funding under a Labour government years earlier.
Management of Complex Contracts
There are fewer and fewer fans of PFIs these days and one Conservative minister rather unflatteringly commented that “PFIs lock hospitals in for a long period of time to sometimes eye-watering and escalating repayment regimes”. The government’s 1% cap on annual budget rises has not helped when demand for care has been stretching the trust’s resources for years.
Sara Gorton from Unison is reported as saying “Massive gaps in staffing mean sky-high agency bills, making it harder than ever for the trust to get back on an even keel, while demand on services is continually growing.”
According to a spokesperson for King’s, they are optimistic about getting out from under the weight of this debt problem because “a number of changes have been implemented that will enable the trust to improve its productivity and stabilise its longer-term stability” and “Following a number of successful recruitment drives in the last year, King’s has cut its nursing vacancy by half.”
The trust has been in Financial Special Measures (FSM) for the last two years. The CQC report says this would mean that “the trust benefits from significant external resource (both from NHS Improvement and external consultants), and accordingly some of the grip and control [that presumably the King’s spokesperson was referring to] is due to temporary resource.”. In addition, they warn that the trust will need to “deliver additional efficiencies going forward”.
The report states that “Management of complex contracts has historically been a weakness at the trust, and the PFI contract and the soft FM component in particular are areas that the trust requires further work to unpick. The trust notes that management of their PFI operator is challenging, particularly with the capacity that the trust operates with”.
Six Actions for Reducing PFI Debt, Quickly
It is all too commonplace for organisations with PFI agreements to struggle under the weight of those financial responsibilities. However, our experience of optimising PFI agreements evidences there are six key actions for rapidly and effectively reducing PFI costs:
1. Do you monitor, meet and track?
Maintaining close control over your PFI responsibilities, tracking progress, scheduling actions and including all key stakeholders in meetings to put the power of your shared mind to the task of identifying problems and finding solutions is a good start.
Essentially, developing streamlined management and accountability are key to keeping costs down.
2. Are you getting what you’re paying for?
Part of the monitor, meet and track highlighted above is a regular assessment of whether your contractors are delivering on their PFI contract responsibilities to the agreed degree. Both of these elements are important.
If the ongoing maintenance of buildings paid for under a PFI contract, for instance, are lacking in any way, you may lose access to them for a period of time. Do you know what mechanisms exist in your contract to reduce or stop payments until the issues are resolved?
For you to be successful in saving money through only paying for what you rightfully should be paying for, accurate and ongoing data capture is a must and to do so sets the ground-rules in action that will shape the relationship going forward.
3. Can you keep costs of change to a minimum?
A PFI contract can run for decades. In that time, technology, end users and other issues can demand the minimising of outgoings, and may necessitate a desire to make a change to your PFI agreement. However, these changes will often come with associated costs, i.e. your contractor will often charge administrative and/or legal fees. To keep those costs to a minimum you need to consider three things:
a) What are the costs involved? It’s important to know what your rights and responsibilities are under your PFI agreement. The costs associated with change should be highlighted within your contract.
b) Are the changes absolutely necessary? Changes based on preference rather than need could cost you a significant sum, so it is your responsibilities to conduct a proper assessment on all requested changes.
c) Timing of changes. The cost of change and their urgency will determine whether each will need to be assessed individually or whether they can be grouped together to lower overall costs.
4. Know your contractor’s refinancing cycle
In your agreement with your contractor, they are usually allowed to refinance the deal at different milestones to take advantage of changes in interest rates to borrow at a lower interest figure. This is a big deal for your contractor because if they can get a lower interest rate, but you maintain your original payment level, they increase their profit margin.
You may therefore find that some contractors are a little reluctant to share the timings of their refinancing cycle. It is, of course, important that you persist in your efforts to uncover it (under the ‘open book’ provisions of the contract) because this is an opportunity for you to justifiably request a renegotiation of your deal with them, giving you a platform upon which to justify a reduction in alignment with their costs.
5. Control of benchmarking and market testing
Most PFI contracts will have periodic benchmarking and market testing built in to ensure that services are being offered at a fair price throughout the length of the agreement.
You can either drive or be driven in these renegotiations, inadvertently allowing your contractor to ramp up their prices (should they be so inclined) or to ensure that all the opportunities are taken to realign costs to actual market values, through thorough assessments of what is ‘reasonable’ in the marketplace for the services you are receiving.
For you to control proceedings, you will need to have a full and complete appreciation of the exact services and the role your contractor is delivering, how the services may have changed since their inception, how the market sees those services and whether there are more efficient ways of achieving the outcomes/output required on the contract.
We wrote a more complete review of this process in an article titled PFI Benchmarking and Market Testing – How to Get the Services You Need at Reduced Cost, which may be of interest to you.
6. Addressing the fixed PFI contract myth
Renegotiation is not only possible, it’s a normal part of the process and is expected by your prime contractor. To consider this as a way of reducing your costs, it’s important to remember that evidence is vital. If you consider that more efficient methods or technologies could reduce costs on your contract as you’ve seen them used elsewhere in the marketplace, then note the evidence.
If you feel that inefficiencies are inherent in your current arrangement then identify, record and develop a conclusive picture of why for your renegotiations. Simply walking in and demanding a reduction in costs will unlikely get you anywhere. You need evidence to show that reductions are practical, expected and required.
PFI contracts can last for 10, 20, 30 years or longer, and as many factors can change over this period, it’s important to stay on top of the management of your contract, your assessment of the costs and the market’s views of those costs and processes.
These arrangements have had a significant amount of bad press, but while you may still have years locked into yours, you do not have to suffer excessive costs or inefficiencies. Following the six tips above can deliver substantial cost savings if approached in the right way.
King’s seems to be in a particularly bad way, with debt rising year on year, but there is still time to turn things around. Management have indicated that they are implementing change and the CQC have warned of a number of recovery limiting or debt contributing factors.
It’s therefore now up to King’s to listen to the guidance they’re being given and to act accordingly to bring these debt figures, including PFI costs, down, in order to move them in the right direction.
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