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Published: 20/03/2003, Volume II3, No. 5847 Page 35

Procurement is taking centre stage in a new-look NHS in which the private finance initiative and public-private partnerships are having enormous impact.T im Stone reports

In the past, the concept of procurement has suffered from a slightly grubby image - sandwiched between the making of major decisions and their implementation. In too many cases, good practice in this area was treated almost as an afterthought. The current public service reform agenda has turned all this on its head. Three key factors now drive a different view of where procurement fits in the overall chain of events.

First, there is a greater recognition that decisions taken at higher levels in the public sector normally have consequences and obligations which last for generations. This is easily seen in current acute hospitals which were originally designed and built as isolation hospitals around the time of the First World War and whose current usage is utterly different from their original purpose.

Second, the implementation of major decisions has historically focused on current costs with little visibility or accountability for the long-term consequences and, even more importantly, no 'corporate memory' from which the system can learn and improve. Procurement has been placed at the very end of this process, with a focus on immediate cost and a disconnection from the original decision-making.

Third, there has been a fundamental change in what public services buy. The focus is no longer on assets but on the supporting services that enable delivery of public policy objectives to the required levels of quality and consistency.Assets are now largely relegated to their proper position, which is purely to support delivery as opposed to being seen as an end in themselves. This balance requires a more adult approach to judgements about cost versus performance than has historically been the case.

The issue of assets versus services is only beginning to surface in the wider context outside the very specific PFI/public-private partnership arena. For now, the focus remains on derivatives of the traditional PFI/PPP approach.

Current procurement thinking can be classified into three broad types:

The provision of a fully specified service (or asset) as might be typified by a conventional PFI transaction Beginning with an output specification and definitions of what level and quality of service is required, a payment mechanism is developed which then accurately ties reward to the utility value of the service delivered. Simply put, this means that the loss of payment when a special care baby unit is not available for use is significantly more than if the chief executive's office is not available for use.

This process provides what economists refer to as a strong incentive and what engineers might term a 'stable negative feedback system'.

The deal is then developed to a fine degree of precision, documented carefully and then implemented. At the same time, significant effort is expended in trying to build a partnership style of behaviour between provider and user.

The provision of a delivery mechanism

One approach is the batching of acute hospital transactions if, for example, a partner is sought to develop five new or refurbished hospitals. The first hospital, and contract award, might follow from the full design and pricing of the first hospital exactly as for a traditional PFI deal. The other four are then let at the same time (perhaps with outline designs) but the pricing of them would follow on exactly the same basis (of costs, risk pricing, risk allocation etc) as the first. The competitive tension provides a rigour in the agreement on price, but four out of the five intrinsic deals will then have a materially simpler and faster contractual development and much lower bidding costs.

A partnering arrangement where both parties agree an approach to a common identification of priorities and a common basis for a specification and payment mechanism to motivate delivery to an agreed quality and consistency This is a particularly mature version of the delivery mechanism approach.Once it became a well-polished process, the truly valuable skill would be recognised to lie in the project and programme management.

The third-deal model would then be the competition to appoint a financially robust programme manager to manage the integration risks, the financial consequences and then to complete all the 'commodity' elements of the design, build, finance and operate stages.

This means the architecture as opposed to healthcare planning; the construction as opposed to the construction planning and management; the provision of the funds as opposed to the financial structure; and the physical cleaning and catering as opposed to its management.

These models could represent the future of procurement in public service delivery.The key issue today is the development of the skills and overall capacity to develop and implement these processes.

Both are in short supply in the UK as a result ofmany years'poor management of the consequences of decision-making. It is no surprise, therefore, that the two contenders for the largest, and arguably most prestigious, hospital deal currently being bid are of French or Scandinavian origin.

Tim Stone is international chair of PPP advisory services at consultants KPMG.He will be speaking on 'Clarifying the mechanisms of procurement'at the 'PFI in Healthcare Construction' conference, organised by HSJ , Construction News and The Architects' Journal . It takes place on 25-26 March in London.For more information, call 020-7505 6044 or visit www. pfiinhealthcare construction. co. uk