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On the first day of the month. the Department of Health and Social Care (DHSC) quietly slipped out a for bidders to come and talk about 拢1bn of work on the health estate. While the headline figure might already have been enough to get your attention, it was the nature of the procurement that was really startling.

Because this short note kickstarted the first procurement of what is effectively a private finance initiative (PFI) tender process 鈥� though you won鈥檛 hear the government call it that 鈥� in more than 10 years. The note was looking for market engagement around finding someone to design, build, operate, finance and maintain 鈥減rimary and community health infrastructure projects through a public-private partnership (PPP) model鈥� 鈥� ahead of beginning a formal tender process in June next year.

The tender can be seen as a sure sign that the government is serious about using an updated form of private finance to pay for building new social infrastructure, ahead of a promised final decision on the issue in the autumn Budget.

Last month鈥檚 government infrastructure strategy raised the possibility of using PFI-like models in two cases: neighbourhood healthcare centres and decarbonising the public estate. And some more detail on what this might look like emerged in the , published on July 3. However, nowhere has the government said so far exactly what form the PPP will take 鈥� though it has repeatedly talked about 鈥渓earning lessons鈥� from past experiences.

Here, we examine what can be said about what the model will look like, and what the chances are that the scope of any return to PFI could be expanded further?

Chink of light

The infrastructure strategy gave explicit government support for the use of 鈥減ublic-private partnerships鈥� to pay for new infrastructure. However, for the most part the strategy limited this government backing to projects where some kind of private income stream exists to ultimately repay the private financing of the project.

This covers all kinds of projects from water company investment in upgraded treatment works and toll roads, to redevelopment of public land to provide a mix of public and private uses.

Of course, while the sector welcomed the official backing for these kinds of projects, of which the fiendishly complex Euston station redevelopment is given as a prime example, the reality is this kind of financing is already allowed 鈥� if not always encouraged 鈥� anyway. Hence, while the strategy does appear to widen the range of projects likely to be endorsed, some feel this section does not offer much new.

One senior finance figure confesses to 鈥渘ot thinking much of the [infrastructure] strategy鈥� for this reason.

>> See also: The infrastructure strategy opens the door to private finance

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However, despite its broad focus on non-taxpayer funded PPPs, one short section of the document does reopen the door to the potentially revolutionary idea of PFI-style models. While the government does not use that term to describe them, it appears to be contemplating long-term deals in which private firms design, build, finance, operate and maintain public sector facilities, ultimately paid for by public sector spending 鈥� which is what PFI was.

Kevin Hawkins, operations director and head of social infrastructure at PFI specialist developer Kajima, says: 鈥淚t鈥檚 quite exciting, they鈥檙e tentatively reopening the door. It seems pretty positive.鈥�

According to the strategy, the government will only explore this in 鈥渧ery limited circumstances鈥�. Namely, for certain types of primary and community health infrastructure, and taxpayer-funded public estate decarbonisation projects. The chancellor Rachel Reeves is to make a final decision on whether to push ahead in her autumn Budget. It might not be much, but 鈥渋t鈥檚 the first chink of light we鈥檝e had since 2018,鈥� says Hawkins.

What鈥檚 the model?

The difficulty for potential investors, contractors and consultants, is that the strategy does not say what exact PPP structure the government will adopt. However, it does refer to the mutual investment model 鈥� a form of PFI developed by the Welsh government, as an example of something the UK government will learn from for English projects. The 10-year health plan for England, however, produced by the DHSC is more explicit.

It says the NHS will bring forward plans for a 鈥渞olling鈥� programme of neighbourhood health centres (see panel below), based on the New Labour NHS local improvement finance trust (NHS LIFT) programme which delivered around 350 community health centres in the 2000s. It also, once again, says this will build on the experience of the Welsh MIM.

Both NHS LIFT and MIM are variants of PFI that, unlike classic PFI, include the public sector as partial equity owners in the private sector delivery vehicles that are created to build out the projects (see box below). MIM, which so far has just a few projects under its belt after being developed from 2017 onwards, also sets a variety of social outcomes as specific additional contractual targets for the delivery partner, beyond delivering the facility itself.

Paul Deverill, head of PFI at consultant Ridge, says the lack of clarity on the model is acceptable given that the tendered market engagement can now be used to pin down exactly what the model looks like. 鈥淚 think, from what鈥檚 been said, the model we鈥檙e looking at is a version of MIM and the [Scottish government] hub models,鈥� he adds.

So, would using a LIFT or MIM-type model mean? Jonathan Barron, senior policy adviser at public healthcare industry member body the NHS Confederation, says LIFT鈥檚 shared equity model has been seen as 鈥渞elatively successful鈥�, while finding private finance for neighbourhood healthcare projects would be a way to free up public capital for other projects.

Kajima Partnerships Ltd is the developer partner for the Velindre Cancer Centre in Cardiff, the 拢312m project which is one of three major MIM schemes to have so far been contracted. While it is early days for MIM, Kajima鈥檚 Hawkins says his experience, 15 months into a 36-month build, has been good so far.

Referring to different PFI structures used in the UK in the past 15 years, Hawkins says: 鈥淲e鈥檝e worked on PFI, on PF2, on [the Scottish government鈥檚] NPD model. To me MIM seems to take the best parts of all of those models.

鈥淵ou鈥檝e got the public sector investor at the table and that means it鈥檚 a true partnership. And then the community value side creates a real focus around that.鈥�

In other respects 鈥� such as contractors working to a fixed-price, fixed-date contract 鈥� he says it is structured very similarly to PFI.

However, Jack Banks, partner at PPP consultant P2G, says that if the new model is based on MIM, there are definitely improvements that can be made. 鈥淓ven if MIM is the template, there should be a desire to look again and learn the lessons, to create something simpler, which is easier to contract.鈥�

Off balance sheet

The exact structure of the model is likely to be carefully calibrated by the National Infrastructure Service Transformation Authority (NISTA) and the DHSC in order to ensure it retains an off-balance sheet classification. An off-balance sheet rating would mean borrowing would not count against the government鈥檚 fiscal rules, potentially leaving more headroom to spend on other projects.

The mutual investment model seems to take the best parts of all of those [PFI-type] models

Kevin Hawkins, Kajima

 

The Treasury鈥檚 director general of public spending, Conrad Smewing, told MPs on the public accounts committee last month that the government was not influenced to go down a PPP route by its balance sheet classification, instead only considering whether 鈥渋t is better for the taxpayer in the long run鈥�.

But the reality appears to be something rather different.

Just weeks after Smewing鈥檚 comments, the incoming boss of quango NHS England, Jim Mackey, that one of his urgent 鈥�100-day鈥� priorities was to 鈥渋ntroduce an off-balance sheet capital investment mechanism鈥� 鈥� the mechanism later referred to in the infrastructure strategy. Ridge鈥檚 Deverill says: 鈥淒iscussing this with peers, all of the conversations are on the basis that this mechanism will have to remain off-balance sheet to be workable.鈥�

>> See also: Significant, welcome, sensibly cautious but most definitely promising 鈥� the experts鈥� verdict on the infrastructure strategy

Zoe Watters, an infrastructure adviser and former PwC partner, says that key to achieving this crucial accounting status 鈥� which MIM has but NHS LIFT projects no longer do 鈥� will be watching carefully the size of any equity stake offered to the public sector.鈥淲hether it鈥檚 counted on government debt is really about how much risk you鈥檝e transferred,鈥� she says.

鈥淪o you can take a public equity stake, and sit on the board, as happens with MIM, as long as that stake is not high. It鈥檚 the level of equity that drives it.鈥�

In practical terms, she says, any stake of above 20% would tend to create a structure that is hard to justify as being off the government鈥檚 debt. However, other issues will also need to be carefully considered, such as the potential share of gains from any future re-financing, Watters says.

Again, any public shares of refinancing gains will have to be kept to a low level in order to justify an off-books classification.

Positive

For many, the frustration is simpy that the government is not bolder. While the strategy restricts PFI-like structures to just two types of scheme, NHS England鈥檚 Jim Mackey has publicly stated his hope that major acute hospitals 鈥� that can now cost anything up to 拢2bn 鈥� could be funded via private finance in future years.

A successful roll-out of these two project types may well open to door to further project types. Why not use a working model that the market and government have got used to?

Carly Caton, partner, Browne Jacobson

 

Matthew Bevington, policy associate at think-tank the Future Governance Forum, says: 鈥淭he health industry has not given up on getting this applied to other sectors and acute hospitals. The NHS Confederation and other NHS bodies will be pushing for this to be applied more widely.

鈥淵ou could imagine the government thinking about expanding once this initial market engagement [on the tender] is done.鈥�

Likewise, Carly Caton, partner at law firm Browne Jacobson, says: 鈥淚 would say a successful roll-out of these two project types may well open the door to further project types. Why not use a working model that the market and government have got used to and geared up to deliver?鈥�

However, while the chancellor is expected to confirm the programme of PFI-style investment in neighbourhood health centres at the time of the Budget, commentators don鈥檛 think she will immediately expand the scope to other sectors.

Future Governance Forum鈥檚 Bevington says: 鈥淎t the moment I don鈥檛 think she鈥檒l do anything more. This has to play out first 鈥� see if there鈥檚 investor demand. If it works, then we鈥檒l see.鈥�

James Stewart, chairman of consultant Agilia Infrastructure Partners, says one of the strategy鈥檚 鈥渟weet spots鈥� looks to be social infrastructure projects, where the funding is supplemented with additional revenue streams. 鈥淚f there鈥檚 a spectrum of projects, with classic RAB [regulated asset base] like the Lower Thames Crossing at one end, to pure social infrastructure [without a revenue stream] at the other end,鈥� he says, 鈥渋t feels like this strategy is trying to look somewhere in the middle.

鈥淚t鈥檚 aiming at PPPs that deliver social value, but perhaps where there鈥檚 a land deal, or car parking charges, or something that can reduce the cost on the taxpayer.鈥�

From Kajima鈥檚 perspective, Hawkins is getting involved in the market engagement and is just excited about the possibility. 鈥淲e鈥檙e hopeful there鈥檚 a pipeline of work potentially here in two to three years鈥� time,鈥� he says. 鈥淭here鈥檚 absolutely the need. We鈥檙e up for a new pipeline.鈥�