‘Buying out’ a PFI contract would be a nuclear option – the better solution would be to simply manage it better, writes Sharon Renouf

Sharon Renouf

Sharon Renouf

Sharon Renouf

The revelation from Jim Mackey, head of NHS Improvement, that there is a working group looking at the possibility of buying out some private finance initiative contracts is perhaps no surprise.

But should trusts be looking to get theirs added to the list? What other options are there?

Certainly a buyout is a ‘nuclear’ option. It’s likely to be very expensive. Voluntary termination, which usually carries a six month notice period, means that trusts would have to repay not only all the borrowing, but the break costs to compensate the funder for loss of interest, plus the profit the PFI contractor would have expected to make over the remaining life of the contract.

Certainly, a trust will need a strong business case that shows a buyout would be better value for money than seeing the contract out. Sometimes business cases fall down.

There’s also the question of who would put the money in. Would it be a commercial lender, the local authority (perhaps using their access to pension fund money), or the Department of Health (themselves short of capital)?

Certainly, a trust will need a strong business case that shows a buyout would be better value for money than seeing the contract out. Sometimes business cases fall down.

A PFI contract will also be easier to buyout if it’s funded by bank finance rather than a bond, as with a bond there are multiple investors to deal with and complicated breakage cost provisions meaning greater uncertainty of a robust business case.

The same applies if looking to refinance a PFI – which is a lower key alternative to a buyout. Indeed, a refinancing could be an option many might consider given that interest rates today are generally more favourable than ten years ago. The trust could also share in the upside of any refinancing gain.

Aside from a buyout or a refinancing, what other options are there?

The better run the PFI by its owners, the more they can expect to receive by way of compensation, if there is a voluntary termination.

As Mr Mackey said, it may simply be a case of managing the PFI better.

There are a number of ‘good housekeeping’ items that trusts should be doing as a matter of course to make sure the contract is working as favourably as possible.

Often however this is happening to only a limited extent.

Measures include: making sure indexation increases have been accurately applied (i.e. that they’re not being overcharged); ensuring that any savings in insurance premiums (which are usually reset every five years) are being shared; and operating the payment mechanism as intended – are deductions being made if promised service levels and KPIs are not being met?

In addition, trusts need to make sure they’re not paying the PFI contractor for claimed costs/expenses that are already covered by insurance policies or at private sector risk.

Proactive approach

Even if a trust is keen to terminate there is every reason to manage the contract properly so as to ensure that the amount of compensation payable accurately reflects the private sector’s level of performance.

The better run the PFI by its owners, the more they can expect to receive by way of compensation, if there is a voluntary termination.

The PF2 guidance has been adopted by a number of trusts looking to make savings. Some of the provisions which can be amended with little impact on the day to day working of the hospital are the trust assuming more risk of changes in law that require capital expenditure (with the PFI provider giving up its associated ‘change in law’ fund) or risks associated with energy consumption when in practice it has been difficult to show where the building is energy inefficient as distinct from the way in which it is used by the NHS.

Some trusts have also decided to take ‘soft services’ such as cleaning or catering out of the PFI and either run these themselves or outsource them separately – this can often represent a significant saving.

It is worth noting that a mix and match approach may be needed so as to ensure the balance sheet treatment of the PFI is not unravelled by multiple changes to the risk profile of the deal.

A step towards this would be a thorough review of the soft services specifications to identify any areas which provide the trust with a higher standard of service than is necessary (e.g. a 24 hour restaurant facility when overnight vending would be adequate) with a variation to reduce the requirement and cost.

Then there is the ‘Holy Grail’ of accessing some of the ‘lifecycle’ pot of money at the end of the contract. This may prove difficult, but if the contractor is racking up penalty points for failing to meet various KPIs or service level agreements, perhaps there could be some leverage for a compromise deal to be reached. The jury is still out on this one.

It is worth noting that a mix and match approach may be needed so as to ensure the balance sheet treatment of the PFI is not unravelled by multiple changes to the risk profile of the deal.

Whether twisting or sticking, there are many issues to be considered – but there are usually some significant savings and efficiencies that can be found if trusts take a proactive approach to contract management and engage positively with their PFI partner.

Sharon Renouf is head of health at Bevan Brittan LLP