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Healthcare legal update: Achieving costs savings in NHS PFI/PPP arrangements

    • Commercial and IT
    • Health and life sciences - Healthcare e-briefings

    04-02-2014

    Many NHS Trusts benefitted from new facilities under PFI/PPP arrangements. Some Trusts are now asking whether these arrangements continue to be a benefit or have now become a burden. It was suggested, that payments for its PFI arrangements was one of the reasons why South London Healthcare NHS Trust became insolvent in 2012.

    Trusts as a matter of good practice should be reviewing their PPP/PFI arrangements to assess whether any savings can be made or efficiencies found. To assist, HM Treasury has published guidance which looks at a number of areas in which savings can be found in operational PFI/PPP contracts and also introduced a voluntary code of conduct to identity and deliver efficiencies in PPP contracts.

    The savings which Trusts can achieve can broadly be split into two areas, those achieved through more efficient management of the existing contract and those which are achieved through renegotiation of the contract. Areas the HM Treasury guidance suggests to renegotiate include:

    • Reviewing service standards – A Trust may find services are not needed at all or at the levels specified.
    • Removing/re-scoping soft or ancillary services or agreeing value testing – In some cases, it may represent better value for money to remove soft services from the contact.
    • Visibility of costs and impact on profits - If the contract services are provided at costs over the market rate and there is no value testing, the provider’s profits will be enhanced.  Conversely, if the services are being provided at less than the market rate, with no value testing, the authority needs to exercise care if the provider seeks to de-scope the services or attempts to introduce value testing.
    • Aligning timing of value testing exercise - Where a Trust is involved in more than one PFI, there may be scope for aligning up the value testing to save time and costs.
    • Taking back provider’s share of change in law risk - Trusts have commonly shared with providers the risk of capital costs of general changes of law coming into effect during the operational phase of a contract. There may be financial benefits in the authority taking back the provider’s share of risk.
    • Maximising volumes for purchasing energy - If the provider is purchasing the energy for the authority, it may be more cost effective for the authority to purchase the energy instead.

    Trusts could also explore whether the scope of the contract is still right for its needs and how any additional capacity can be utilised (e.g. subletting a ward).

    It is unlikely that a Trust’s PFI/PPP contract will allow it to unilaterally make amendments. A key step when considering making a variation to a PFI/PPP contract therefore undertaking a review of the contract to understand what levers the Trust has in order to bring the contractor to the table. Unless sufficiently incentivised some contractors may be happy for the current arrangements to remain in place.

    Trust should also consider whether any renegotiation is within the scope of the OJEU notice for the contract (or whether this would be a material change) and if the renegotiation gives rise to any governance or employment issues such as TUPE or redundancy.

    Conclusion

    We have advised a number of authorities on making changes to PPP/PFI contracts. This has allowed them to flex the contract to adapt to changing circumstances and make potentially significant savings. Trusts should take the same approach to renegotiation of contracts as if they were starting a new procurement i.e. know what they what to achieve and assess the risks before proceeding.

    For further information on renegotiation of contract please contact Jackie Heeds or Andrew Hirst, you can also visit our group dedicated to making savings in operational PPP/PFI contracts on LinkedIn.

    For more information contact

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