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Hospitals and other healthcare developments in the UK are beginning to embrace a 'piecemeal' development model, as opposed to wholesale redevelopment. This process is being driven by a number of funding streams now available to developers.

There is an emerging trend for hospitals to be developed step by step in a number of smaller projects, rather than through the wholesale re-provision of healthcare facilities. There are four main sources of funding for new healthcare premises: PFI (Private Finance Initiative); LIFT (Local Improvement Finance Trust); conventional capital or 'prudential' borrowing for foundation trusts; and charitable donations.

PFI is generally considered appropriate for schemes with a value of more than £25 million. Finance is raised on the open market, usually through a bond issue, with a guaranteed return for the investor over a -xed term. The trust enters into a contract for a set period, usually between 25 and 35 years, and makes an annual payment to the concessionaire, or special purpose vehicle for a serviced building. Risks associated with construction costs, overruns, availability and (if included) facilities-management services such as catering, laundry and security are transferred to the private sector, thus assisting the project's risk transfer/value-for-money evaluation. Through PFI, there has been substantial investment in acute hospital care, with more than £3.2 billion of schemes operational and £4.1 billion under way. Recently there has been a shift towards more PFI-funded mental health facilities.

LIFT is a process similar to PFI, but is used for schemes of less than £25 million, generally in the primary healthcare sector.

More than 50 primary care facilities have been built in England using LIFT. Schemes are now emerging that combine primary care trust buildings and local authority schools.

Conventional capital from the Treasury is used mainly for smaller capital schemes, while 'prudential borrowing' is used by foundation trusts to fund schemes of an intermediate size, typically up to £40 million. The charitable sector continues to make a very significant contribution to healthcare, by funding capital projects as well as specific items of hospital equipment.

The recent trend towards smaller projects involving piecemeal development of hospital sites is driven by several factors.

The introduction of payment by results - a fixed tariff reimbursed to trusts for completed patient care - is predicated in part on the typical lifespan and costs of healthcare buildings, most of which are non-PFI facilities. Allied to this is the perception that PFI costs are inated because finance is borrowed at a higher rate than the Treasury rate and the view that healthcare facilities will be maintained and returned to the NHS at the end of the concession period in a better condition than would non-PFI facilities. The argument then follows that PFI is potentially 'unaffordable' under the payment by results regime.

Traditionally the revenue stream for a new facility is underwritten by the regional or strategic health authority.

However, foundation trust status brings with it new financial freedoms and associated financial risks. Because foundation trusts are more exposed financially, they are less interested in PFI and its associated long-term tie-in to what some perceive as expensive financial deals. A related factor is health secretary Patricia Hewitt's recent announcement of the very high priority being given to the NHS balancing its books in the financial year 2006-07 and even generating a surplus in 2007/08.

Foundation trust chief executive officers and prudent finance directors are attuned to this cost-conscious environment and when, in addition, there may be local opposition to PFI deals from staff and patients, it comes as no surprise that trusts are now tending to go for site developments in chunks - around £20 million to £50 million - using 'prudential borrowing' rather than PFI.

Some of these developments on hospital sites - and certainly the first four community hospitals - are being built using the Procure 21 framework, a government initiative that established approved suppliers and guaranteed maximum prices, sometimes with a profit share component should the scheme be completed at below the guaranteed maximum price. Once a successful development has taken place using P21, trusts are likely to continue to use their P21 partner for future schemes.

However, this does not signal the end of PFI. As the payment-by-results process is refined to be a more equitable reection of patient care costs, and as the financial regime of foundation trusts matures and is better understood, confidence is likely to return to the market and the number of large, PFIfunded healthcare projects may increase. The outcome of the case-by-case review of PFI schemes by Richard Glenn, now under way at the department of health, will help clarify the financial environment for PFI. A PFI-funded healthcare programme is arguably the only way to achieve the cash injection required to address the state of many of our healthcare premises, which are antiquated, poorly maintained and clinically inappropriate.

So what does this mean for the designers and builders of our new hospitals? The implications for architectural practices are clear. In the short to medium term, hospital construction opportunities will be for smaller schemes on existing, functioning hospital sites. The challenges of building on a live hospital site are vastly different and far greater than on a greenfield site. For architects, it places a premium on effective site master planning to ensure that hospital building projects take place in the context of a clear overall strategy, to avoid piecemeal development.

Finally, it is essential that NHS trusts are given an incentive to produce meaningful, comprehensive post-project evaluation reports if we are to improve the design quality of new hospitals.

Paul Ryder is healthcare group leader at architect RyderHKS, whose current healthcare portfolio in the UK exceeds £350 million

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