Annex A: Evaluation of Risks in NHS PFI
It is up to individual trusts to initially assess
the value construction risk in their PFI schemes as they are best
placed to understand local circumstances. The NHS PFI Guidance
does, however, provide trusts with advice on how to quantify such
The value for money test compares the full life
cost of public provision (the Public Sector Comparator (PSC)),
with that of the private alternative, (PFI) and the value of the
risk retained by the public sector in both options.
To account for the fact that costs arise in
different years, a technique called discounting is used that applies
more weight to costs falling in earlier than later years. Future
payment streams are therefore discounted using the Treasury discount
rate, currently 6 per cent. The sum of the discounted costs is
called the Net Present Cost (NPC).
If the value of risk retained in the PFI option
is less than that for the PSC, risk has been transferred from
the public to the private sector. Table 1 below provides an example.
Table 1: VALUE
OF RISK (NET PRESENT COST)
|PSC Cost of Risk|
|PFI Cost of Risk|
|Value of Risk|
Thus, in the table above, provided the cost of the PFI option
(excluding risk) does not exceed the publicly funded alternative
by £10 million or more, it will be better for the taxpaper
to accept the PFI option.
To help trusts calculate risk values the PFI Guidance outlines
22 typical construction and development risks. (Attached as Appendix
1). This list is not exhaustive since not all the risks here are
relevant to all schemes. Individual schemes may also identify
additional one-off construction risks.
The PFI Guidance also outlines how individual risks could
be allocated between the NHS and the private sector.
To value construction risks, trusts usually hold workshops
that bring together a team of experts. This team might consist
Director of Finance;
Facilities Management Adviser;
PFI Project Manager;
Estates management Adviser;
For each risk in turn the workshop will:
Identify and define the risk;
Determine its impactfor example, changes to design may
be required if a particular risk arises;
Provide a commentary that outlines the estimated cost of addressing
the risk should it arise;
Determine the probability of the risk arising;
Outline the years over which the risk is likely to arise (for
construction, such risks should only occur during the scheme's
Determine how much risk is retained by the trust under the PSC
and PFI options;
Provide evidence for the underlying assumptions.
For each risk the above information is pulled together in
a risk description table an example of which is provided as Appendix
Having determined the most likely cost of each risk over
the life of the project, the agreed value of the risks are incorporated
into the discounted cash flows to calculate the Net Present Cost
of Risk under each of the options.
The biggest construction risk values tend to be allocated
to cost and time overruns. Such risks are often quantified together.
The value of cost overruns is typically based on a percentage
of the schemes capital costs, which itself is based on historic
evidence obtained from the NHS Estates database. A cost overrun
is where the cost to the NHS is higher than that agreed in the
contract. This could arise because the NHS changes the specification
of the materials used in the scheme. A time overrun is where delays
in completion means that, for example, the construction workforce
must remain on site for longer than was priced for. Since the
cost of time delays will also feature in historic cost overrun
figures, it is reasonable to estimate the cost of time delays
based on historic cost overrun figures.
Some trusts also quantify additional time overrunsfor
example time overruns may mean expected savings from rationalisation
of facilities management or clinical services are delayed.
When scrutinising business cases, DH compares risk values
presented in cases with evidence from the NHS Estates Database
and the experience from previous PFI schemes in order to check