The New Royal Infirmary of Edinburgh Hospital at a Meeting of the Trust Board on the 11Th September 1996
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The &ew Royal b2Jinnay of Edinburgh Full Business Case July 1997 Public COPY For enquires specific to this project please contact: John J Owens Chief Executive Royal Infirmary of Edinburgh NHS Trust 1 Lauriston Place ! EDINBURGH EH3 9YW Tel: 01315363000 Fax: 0131 536 3002 For enquires specific to the PFI please contact: Ross Scott Private Finance and Capital Unit St Andrew's House EDINBURGH EHl3DG Tel: 0 13 1 244 2076 Fax: 013 1 244 3993 RIE Full Business Case 1 EXECUTIVE SUMMARY 3 STRATEGIC CONTEXT 4 PUBLIC SECTOR COMPARATOR 5 PROCUREMENT AND SELECTION OF THE PREFERRED BIDDER 6 PFI PREFERRED OPTION, PAYMENT MECHANISM AND PROJECT AGREEMENT SUMMARY 7 ECONOMIC ANALYSIS 8 FINANCIAL APPRAISAL OF OPTIONS 9 ASSESSMENT OF NON-FINANCIAL FACTORS 10 UNIVERSITY 11 ASSESSMENT OF RISK TRANSFER AND FRS 5 12 POST PROJECT MANAGEMENT 13 POST PROJECT EVALUATION RIE Full Business Case I. Executive Sutr~mary Purpose This Executive Summary provides the introduction for the Full Business Case (FBC) for the reprovision of a E180m New Royal lnfirmary of Edinburgh (NRIE) hospital bl.~ildingon a greenfield site at Little France in the South East of Edinburgh. The scheme wol-~ldalso include the provision of a new building for the University of Edinburgh Medical School. The University of Edinburgh are submitting a separate Full Business Case for the construction, maintenance and servicing of the Medical School. The FBC conforms in full with the guidance offered in the Scottish Capital Investment Manual. The FBC is intended to permit the Trust's main purchaser, Lothian Health, and the Scottish Office to test the robustness of the Trust's proposals and to allow the funders for the preferred Private Finance Consortium, Consort Healthcare, to begin their due diligence work in preparation for financial close of the contract. Background The decision to build a new Royal lnfirmary Hospital was taken in response to Lothian Health's Acute Service Strategy which was published in 1993. It identified four principal objectives: to improve the effectiveness and quality of care; to ensure Lothian remains a centre of excellence; to create conditions under which staff can reach their full potential; and to release resources for re-investment in primary and community healthcare. In November 1994, the Secretary of State for Scotland approved in outline the building of a new Royal lnfirmary of Edinburgh at Little France. The full background and strategic context to the decision to build a new Royal lnfirmary is given in Chapters 2 and 3 of the FBC. Financing Options & Procurement Following the announcement of the Government's Private Finance Initiative, it became clear that a scheme the size of the proposed new RIE Full Business Case Royal lnfirmary Hospital would be required to examine the use of the Private Finance Initiative to fund the New Royal lnfirmary of Edinburgh Hospital. In order to do this, a Public Sector Comparator was developed to test the viability of the privately financed option. The Trust advertised in the Official Journal of the European Communities in January 1995 for suitably qualified consortia to come forward with expressions of interest for the design, realisation, build, finance, equipping, facilities servicing and the supply of the majority of the non-clinical support services of a large teaching hospital to be constructed on a 73 acre site at Little France. The Trust also corr~mencedwork upon its Public Sector Comparator, summarised in Chapter 4 of the FBC and corr~pleteda detailed manpower forecast also. 1.3.3 Following screening, pre-qualification and shortlisting, the process of which is outlined in Chapter 5 of the FBC, three consortia were selected to go forward to the negotiation stage of the process. The consortia originally were: Alliance Healthcare (John Laing Construction Ltd): John Laing Pic, British Linen Bank Ltd, The Miller Group Ltd; Consort Healthcare: BET Plc, BlCC Plc, The Royal Bank of Scotland Plc; Pentland: Wlmpey Healthcare, Serco Services Ltd, Morrison Construction Group Plc, Impregilo. 1.3.4 The Pentland consortium subsequently withdrew from the bidding process on 17 April 1996 following an asset swap. The withdrawal of Pentland led to a re-organisation of the membership of the Consort Healthcare consortium. This changed to comprise BlCC Plc, Morrison Construction Group PICand the Royal Bank of Scotland Plc. Completed bids were received from both Alliance Healthcare and Consort Healthcare on 3 June 1996. The Trust recognised throughout the process that the selected option must represent economic value for money, be affordable to both the Trust and its principal purchaser, Lothian Health, and must demonstrate a significant level of risk transfer from the public to the private sector. In order to be able to demonstrate whether or not these standards had been achieved, the Trust developed a Public Sector Comparator (PSC). The PSC outlines the financial and economic consequences of a totally Exchequer funded New Royal Infirmary of Edinburgh project, and was submitted to the Scottish Office and Lothian Health on 29 May 1996, prior to the receipt of PFI bids. The PSC is summarised in Chapter 4 of the FBC and has been RIE Full Business Case updated from the originally published document to reflect three PI-incipalchanges: the forecast of a 4 year build for the public sector option is not feasible. Advice from construction companies is that it ,will take a minimum of 5 years. Accordingly, the construction life of the public sector option has been extended from a single phase 4 year construction to an 8 year three phase construction in line with a more realistic public funding scenario. A 5 year phased build PSC option is also presented as a sensitivity; the construction costs have been based on an 869 bed hospital and to incorporate other design changes to produce an efficient and effective design; and the removal of the Lauriston Site and also the Blood Transfusion Service from the financial model. 1.3.6 Chapter 5 details the methodology and results of the financial and non - financial selection criteria used to determine the identity of the Trust's preferred PFI bidder. As neither Alliance Healthcare nor Consort Healthcare provided fully compliant bids on their initial submission on 3 June 1996, particularly in terms of their proposed payment mechanisms, both were invited to resubmit their bids. The revised offers were to be based on the original Invitation To Negotiate (ITN). However, in the revised bids, equipnient procurement was now deleted, the Trust had sin-~plifiedthe payment structure and some revision of the Project Agreement terms had been made. The consortia were asked to resubmit their bids by 21 August 1996 and both achieved this deadline. 1.3.7 Consort Healthcare was selected as preferred bidder for the New Royal Infirmary of Edinburgh Hospital at a meeting of the Trust Board on the 11th September 1996. 1.4 Risk Transfer 1.4.1 The risk transfer methodology and results are detailed in Chapter 11. However, the Trust has attempted to analyse and quantify the risks inherent in the project in three main areas: Risks transferred exclusively under PFI; Risks transferred under both PSC and PFI options; and Other cost pressures absorbed by the PFI consortium (Sensitivity risk transfer). 1.4.2 The analysis of risk transfer is important for two principal reasons. Firstly, it is an essential requirement of the PFI process to be able to demonstrate a substantial transfer of risk from the public to the private sector. Secondly, the Trust must satisfy the requirements of Financial Reporting Standard 5 (FRS 5). This Standard requires that assets should appear on the balance sheet of the organisation that retains the majority of the risks of ownership and operation of the RIE Full Business Case asset. The Trust's auditors have confirmed that the proposed off balance sheet treatment is acceptable. The Trust, therefore, has demonstrated that these risks have passed to the PFI consortium, Consort Healthcare. 1.5.1 The affordability of the preferred option to both the Trust's principal purchaser, Lothian Health, and to the Trust is of primary importance. Therefore, the Trust has set out to demonstrate the viability of the scheme within this context. Lothian Health Acute Services Strategy requires that acute services reduces their cost base by f 15m to allow reinvestment for Primary Care and Community services. The specific target for the RIE is f II m. Lothian Health made it clear that the FBC would only be approved if this objective was achieved. 1.5.2 Appendix A of the FBC outlines the financial implications of the preferred option. Appendix A gives details of the income and expenditure assumptions that the Trust has made in forecasting its financial position forward to 2003104. The analysis indicates that the Trust would be able to achieve a surplus of income over expenditure off17k in 2003104. 1.5.3 Appendix A takes as its starting point the income projections outlined in the Integrated Healthcare Plan prepared by Lothian Health. As a result, the Trust's income assumptions are in line with those of its major purchaser. 1.5.4 Total new equipment required at the new site has been estimated at f38.4m (excl. VAT). After deduction of duplication, discounts and equipment transferred this figure is reduced to f28.8m (excl . VAT). This will be funded in two ways. ' Firstly, the purchase of items of equipment worth more than f5k each may be financed by pursuing a separate PFI procurement. Approval of this approach has been granted by the Scottish Office if required. This is expected to amount to f20.2m (excl. VAT). Secondly, the purchase of items of equipment worth less than f5k each will be financed via a non- recurring revenue grant from the Scottish Ofice.