With more than £1bn worth of PFI schemes in the bag, the DoH is turning its attention to medium and small projects. Seamus Ward reports

It was a sublime piece of political theatre. With an arch of his eyebrow and some nifty repositioning of policy, health secretary Alan Milburn told a King's Fund audience a few weeks ago that the NHS needed more beds.

Then he wheeled out an ironic coup de grace that produced many a wry smile - the answer to the beds problem was to use the private finance initiative to create a new generation of cottage hospitals.

One of the best-known object ions to PFI is that it leads to bed cuts. By using the initiative to increase bed numbers, the health secretary has denied campaigners against PFI an argument readily understood by the public.

But there are also two powerful subtexts to Mr Milburn's announcement. If you ever doubted it, PFI is here to stay.

And it will expand with an increasing focus on smaller schemes - cottage hospitals, community accommodation for people with mental illness, health centres and GP surgeries.

That said, large schemes will continue to grab the headlines.

Building work has begun on more than half the 31 privately financed hospitals given the goahead by the government since 1997. Some are even about to open their doors. Carlisle Hospitals trust has taken control of its new£65m buildings and is due to move in on 1 April, six weeks early.

Some elements of the£45m South Buckinghamshire trust scheme have been handed over and the trust is due to move in at the end of this month. It should begin using the remaining new buildings before the end of the year.

The£94m project at Dartford and Gravesham is also forging ahead. The trust says it should start occupying the new hospital in July and the move should be completed by mid-September.

Norfolk and Norwich Health Care trust says builders are 10 weeks ahead of schedule on its£144m scheme and it is predicting a handover next year.

With more than£1bn worth of large schemes in the bag, the Department of Health will now turn to medium and small projects - with a capital value of less than£25m. These have been a regular feature of NHS capital programmes for the past five years. MRI scanners, incinerators, multi-storey car parks and office space have all been procured under the initiative. But in many cases these deals have been little more than glorified leases, lacking many of the government's stated objectives for PFI - transfer of risk and value for money.

Now there is a desire to bring forward more 'true' publicprivate partnerships. Financiers, lawyers, builders and other private sector groups associated with PFI want to open up the primary and community care markets. Some financiers privately believe that the market could be more lucrative than the large acute sector because there is simply so much demand for capital investment. They look at the crumbling state of many GP surgeries and predict that primary care groups and trusts will create a need for high-tech health centres and community hospitals. There will also be a demand for information technology PFIs in the£3m to£10m range as the NHS implements Information for Health .

But just as it took years for the large schemes to begin to come through, it will not be plain sailing for small PFIs. Guy Pigache, director of project equity at Charterhouse Bank, says it is difficult to get the City excited about small PFI schemes.

'Anything below£20m is suboptimal, ' he says. 'You might get down to£15m, but you are not going to get most City players involved in anything lower than that.

'There are quite a few local and regional builders and local banks that will get involved, but in projects that size, you get the inexperienced buying from the inexperienced.'

Small and medium schemes can also have difficulties attracting facilities management companies because the income stream from providing services such as cleaning is limited.

Nevertheless, the problems that are particular to small and medium projects do not mean that the major financiers, lawyers and advisers are shunning them.

Quite the contrary.

'We are trying to get in place a scheme to address projects as low as£10m, not because that's the ideal size of market for us but because most primary care ideas will come in at around£10m or less, ' Mr Pigache says.

Industry watchers predict that PCTs will be one of the driving forces behind a new generation of small primary care and community schemes, but this could be years off. Certainly the shadow PCTs say they are not yet interested in wading into private finance deals. Ian Ayres, chief executive of Nelson PCG in south London, says it has too much on its plate gearing up for trust status. However, that does not rule out PCTs becoming involved in private finance schemes once they have found their feet.

John Chapman, a partner with lawyers Capsticks, says GP practices are taking out loans and mortgages to get new surgeries but are not yet using the PFI route.

They also have a new route to capital funding following the extension of powers developed under health action zones.

These new health authority powers include a fresh spin on private finance as they are now able to enter into joint ventures with the private sector to provide GP accommodation. Authorities can also now take a head lease on a property and sublet it to GPs or other primary care providers.

These measures will be used principally in deprived areas avoided by property developers.

For everyone else, PFI will be a major source of finance.

Anyone with an interest in making small and medium-sized PFIs a reality agrees that standard contracts need to be developed. A standardised contract has been published for schemes with a capital value of more than£25m and this has been an invaluable aid in speeding up the negotiating process.

Mr Pigache says a standard contract would encourage PFI in smaller projects, but standardised design - which has already been used in the education sector - could be an even greater aid to securing value for money: 'If you have someone saying: 'If that is the contract, then this is the building', it releases time to spend on other issues, ' he says. 'But no-one wants to buy that way. Everyone wants to have a say in their own building. It may work if we could get primary care to embrace standardisation of design as well as contract.'

Mr Chapman agrees that standardised contracts enable the parties to focus on the more important issues such as payment mechanisms. However, they do not cover all parts of a PFI deal. 'There is still quite a lot to be agreed - performance monitoring, payment mechanism, output specs, ' he says. 'The real benefit of the standard contract is that it enables the NHS to focus on areas where it can add value.'

Another approach used in the education sector and now the NHS is the 'bundling' of projects together to increase the attractiveness to the private sector. The NHS Executive feels this is the way forward, with perhaps a number of health centres being tied together as part of a scheme. Different types of GP accommodation could be bundled together with an acute project or even the refurbishment of local schools.

Mr Pigache believes that bundling works best when there is one body holding the purse strings. 'If you have a central organisation that controls the money - for example, a council that has 20 or 30 schools that it wants to upgrade - it can work.

'The council can say: 'Tough luck, this is what you've got'. If each school has a say, you have almost 20 projects at once.'

The success of bundling in the NHS will depend on the centre's involvement. 'If there was a central NHS unit saying how it is to be done, then it might work.

The need is there. We are thinking of ways in which it could work, but it is difficult, ' Mr Pigache adds.

Given the amount of energy the government, the NHS and the private sector have expended ensuring the success of large PFI schemes, it is unlikely it will be too long before they solve this particular problem.

Five years' hard graft: if at first you don't succeed. . .

Putting together a PFI scheme is not an easy option but Mike Lager, chief executive of Southampton Community Health Services trust, knows its frustrations and pitfalls better than most. He is now hoping his second attempt at a PFI will succeed. His trust is proposing a£21.5m, 112-bed purpose-built community hospital, taking services from three existing units on to a single, brownfield site. A full business case has been lodged with the Treasury, the private finance unit and the region.

Though on its own the Southampton project would be classed as a medium-sized scheme, it has been bundled together with four other local projects to produce a total capital value of around£100m. This has made raising finance a little easier, but experience has taught Mr Lager to have sympathy for those trying to launch smaller projects. 'It is difficult to raise money for small schemes. We looked at the need to provide community placements for our long-stay clients and it was very difficult to find private finance. In the end it was funded under the region's capital programme. It is far better if you can obtain money from the capital programme and get the 6 per cent return required, ' he says.

As with most PFIs, the road is long and arduous. 'My experience of obtaining capital through the PFI process is that it is totally frustrating, ' says Mr Lager. 'This scheme has been talked about for a number of years but it never found a place in the region's capital programme. Though it always had a lot of support, the only way of funding it was through the PFI and it has taken five years to get to this point.'