Public-private partnerships (PPP), play a significant role in the UK's infrastructure landscape. Over the last three decades more than 700 PPP projects have been delivered across the UK, with around £56 billion of funding provided by lenders and private investors.
Understanding PPP
In a PPP setup, the public sector enters into a long-term deal with a private company (a Project Co) created specifically to fund a project using a mix of debt and equity. The Project Co is responsible for designing, building and financing the asset as well as operation and maintenance throughout the contract period (typically 25 to 30 years). To use these facilities during this period, the public sector pays a monthly fee to the Project Co. These payments cover the full cost of procuring the project (including the repayment of borrowed funds with interest), operation and maintenance costs and a return to investors.
There has been considerable focus in the market recently regarding the impending expiry of PPP contracts as the first of these groundbreaking projects approach their expiry dates. The process for handing back these PPP assets is governed by the terms of the contracts themselves, which can vary significantly from contract to contract. Early PPP contracts often feature very little detail around the mechanics to apply in preparing for handback and they can have particularly complicated structures that need to be unwound. This combination can result in protracted negotiation around asset transfer and service continuity as the end of the contract period approaches. This stands in contrast to many of the newer, standardized PPP contracts, where structures are simpler and assets will automatically revert to public ownership upon contract completion, provided they meet the required maintenance standards.
PFI and NHS Scotland
One sector which has seen significant investment in infrastructure through PPP is healthcare. PPP has facilitated the provision of new primary and acute care facilities, enhancing the NHS's capacity to provide healthcare services across the UK while spreading out the costs. Recent analysis by Audit Scotland has considered the current PPP landscape within NHS Scotland, and below, we explore both the challenges and opportunities this holds for those operating in the industry.
NHS Scotland's "Annual PPP Bill"
Audit Scotland's report highlighted that from 1997 to 2022, NHS Scotland entered into approximately 50 PPP contracts, resulting in the construction of facilities valued at around £2.2 billion. To date, the NHS has paid £4.8 billion in annual charges for these facilities, with an additional £5.8 billion expected to be paid before the final contract concludes in 2045/46. The analysis notes that NHS Scotland's PPP "bill" is set to peak over the next 3 years with an annual sum of around £400m due, reducing to £350m/annum in 2028/29. This is a significant cost to NHS Scotland at a time when its budgets are under considerable pressure and scrutiny.
In addition to the annual cost to NHS Scotland, Audit Scotland also express concern that some of these early health projects contain the requirement for NHS Scotland to make a lump sum payment to the Project Co on the expiry date, known as a "residual value" payment. Such payments are relatively rare but were a feature in some early PPP projects. Some residual value payments will be an amount that is specified in the project's financial model and therefore can be accurately budgeted for, others may be defined by reference to a market value calculation and therefore have the potential to result in dispute over the sum due.
The cost commitments associated with NHS Scotland's PPP contracts will form part of future budget planning and, given the spotlight on project expiry, both NHS Boards and project companies are focussed on ensuring that facilities are ready to be handed over in an appropriate condition and to ensure service continuity is possible. It is understood that Scottish Futures Trust is working closely with NHS Scotland in managing their contracts, including these preparations for expiry and much will be learned from market experience as the expiry market itself goes through a period of learning and maturation.
Positive Thinking
Although there is a lot of focus in the market about PPP contracts ending, Audit Scotland's data also shows there's much to be positive about. A significant number of PPP projects are less than halfway through their operational periods which means there is opportunity for improvements to be made and relationships to be strengthened. There's plenty of time left on these projects to analyse the contract terms, work on solidifying or improving the working relationships between the private and public sector parties and ensure the projects are working as intended.
Audit Scotland refers to six early PFI contracts in NHS Scotland nearing their end, including facilities like Larkfield, New Craigs Hospital, and Wishaw General, set to expire before 2030. However, there are also PPP health projects that are only just approaching their "senior phase" such as Dumfries and Galloway Royal Infirmary and the Balfour, Orkney. These newer projects have the advantage of being able to learn from their predecessors both in terms of day-to-day management of operational issues and to benefit from what is being learned now in relation to expiry and handback. This learned experience of project companies, FM providers, NHS Scotland and their advisers will be valuable in helping to improve service delivery, strengthen key relationships and smooth the return of these complex assets to NHS Scotland on expiry.
Looking Forward
As NHS Scotland, like many other procuring authorities, navigates the complexities of preparing for the expiry of its earliest PPP contracts, we must also recognise the opportunities that remain in learning from what has gone before. The PFI market isn't winding down yet; there's still plenty of time to make these contracts work better for both the public and private sectors. This phase gives the whole PPP market an invaluable opportunity to rethink strategies, learn from common mistakes and make positive improvements in how these complex contracts and relationships are managed.
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