May 1998

The Accounting Standards Board issued an Exposure Draft on the proposed accounting changes to the Financial Reporting Statement 5 (FRS 5). The Exposure Draft deals with the accounting assessment of whether PFI transactions should be "on" or "off" the public sector balance sheet. Mike O’Brien, Managing Director of Healthcare Group, has submitted comments on this Exposure Draft as follows:

"THE PRIVATE FINANCE INITIATIVE EXPOSURE DRAFT – DECEMBER 1997"

I am responding to the request for comments on the Private Finance Initiative Exposure Draft.

I am a Chartered Accountant (FCA) and the Managing Director of Healthcare Group Limited, a company specialising in the co-ordination and management of private sector consortia proposals for NHS PFI projects. My comments are based on my detailed knowledge and experience of NHS PFI projects.

What payments and variations are relevant?

The basic tenet of PFI is that the public sector ("purchaser") contracts with the private sector ("operator") to provide a service solution, which offers (a) better value for money ("VFM") and (b) less risk to the purchaser, than a publicly funded solution.

When bidding for NHS PFI projects each potential operator expects to undertake an integrated service-based approach to the design and construction phase of the project. The design is primarily influenced by (a) the purchaser’s output requirements combined with (b) the operator’s service solutions to the purchaser’s output requirements.

This means that each potential operator is likely to propose a different site layout and size/shape of buildings with cheaper/more expensive building design/methods/materials. Each potential operator is intending to provide the full service for the entire contact period (generally 25/30 years) and there are many areas where initial design input (even if involving significantly higher construction costs) may lead to a long term reduction in annual costs; and consequent better value for money for the purchaser.

The operator is normally required to maintain the buildings to a specified standard throughout the contract term and is financially penalised if this is not achieved. This maintenance obligation significantly influences the "lifecycle" design of the buildings. As an example, the frequency of lift/roof replacement in a hospital will have major cost implications for the operator, which will not be recoverable from the purchaser.

Soft services (catering, cleaning, laundry etc) also have design/cost implications that need to be addressed as part of the design process. For example, the long term cost of catering will depend on whether a full kitchen is included within a new hospital (a common alternative being the purchase and re-heating of pre-prepared food at ward level). Equally the cost of cleaning will depend on the size of the buildings and the building materials used; which are aspects addressed as part of the design process.

As a potential operator we need to consider all aspects of an integrated service solution and make proposals to purchasers that offer best value for money and transfer of risk over the (25/30 year) life of a contract. It is my understanding that the concept of a "unitary" payment is intended, inter alia, to recognise the integrated nature of PFI proposals. The Exposure Draft (paragraph F11) recognises the relationship between service costs and design in the context of roads, but does not recognise that this relationship is even stronger in PFI hospital projects.

Accordingly, in my opinion, the view proposed in the exposure draft (paragraphs F5 and F9-F11) does not recognise the integrated and non-separable nature of hospital PFI projects. I believe the correct view is the stated alternative – namely that a "PFI contract is for the provision of a stream of integrated services and the property and service elements are necessarily interrelated to provide the outputs required by the contract……"