A HEALTHY WORKLOAD?

The health sector stands at the edge of a massive shift in its infrastructure as out go the big district general hospitals, so favoured in the 80's, and in come a plethora of smaller community hospitals.

District general hospitals will go as key-hole surgery cuts the length of stay needed. There will be cottage-type hospitals with minor operating theatres instead.

'We will see a huge swing from the long-term acute to short-term quick treatment. Rather than one or two major hospitals in areas such as ours, there will be six small cottage hospitals - a massive shift.' says a spokesman for St Helen's and Knowsley Hospital Trust, Lancashire.

This shift in healthcare infrastructure heralds a great opportunity for public/private jv's. Schemes of differing sizes and shapes are set to come forward. One approach can be seen in Huddersfield, where a northern developer has offered to re-build a œ700,000 healthcare centre for an NHS Trust because... In Ipswich, on the other hand, a Trust has put a clinical waste scheme out to design-build-operate. The builder, White Rose Environmental, is part of Yorkshire-based contractor Dyvell.

Perhaps a sign of things to come, studies for the Ipswich scheme found the best route forward to be to lease the land to a jv at a peppercorn rent - hospital waste would be burnt at a reduced price with the jv operator White Rose Environmental free to offer the balance of the incinerator's unused capacity on the open market.

Also in Ipswich, the town's largest hospital, Heath Road, needs a refurbishment of the staff restaurant and it is no surprise to hear that an approach from a jv made up of a builder, finance house and fast-food franchiser has already been made. 'The jv puts the money in - we get the refurbishment, they share the risk,' points out Mark Miller, finance director with the Ipswich NHS Trust.

Such schemes and speculative offers are typical of the way contractors are gradually feeling their way - hoping, through humble schemes, for that vital breakthrough that will lead to a trophy contract. Just how healthy the PFI picture is in healthcare depends on who you talk to. The message from the top is that everything is rosy, and that by 1997 the response to PFI will start to yield œ300 million-a-year of extra construction work.

But talking to contractors produces a much less glowing verdict. NHS trusts are proving to be less than perfect clients: joint venture proposals cost contractors three times more than a conventional tender bid, yet shortlists of six to seven rather than a more acceptable three to four are worryingly common. A tidy up in response to the Government's new 'best client practice' would be extremely welcome.

The push in public healthcare comes from the top, from the NHS Executive itself, which has told trusts they can't have capital for projects over œ600,000 unless they can show that all jv options have been fully explored. Plans for any large venture must show that the trust has looked to outside capital first.

But even with this vigorous - dare one call it healthy - push, there are still problems for contractors with what is still a new way of undertaking projects in a specialist market that was, until recently, predominantly 'public sector'.

Contractors attempting to find those tasty NHS fruits complain about the jungle they are hidden in. It's not a surprising grumble given that the public health sector has been divided up from a mere handful of regional health authorities into a seething mass of NHS Trusts - 500 at the last count.

Despite this, the fruits are very nourishing and worth seeking out. The NHS capital spend stands at œ1.7 billion, including refurbishment, and PFI is set to add to this.

Laing, an active player in the sector, has recently completed an œ80 million healthcare centre at Clydebank for Health Care International (Scotland), in which it has an equity shareholding - a great advertisement for attempts to win similar schemes in the trust sector.

In Leeds, a œ30 million medical/science park on a site owned by the St James' University NHS Trust is about to get underway. Laing and Guardian Properties both have equity stakes in Medipark, the NHS Trust's private sector partner. The scheme includes a 150-bed paediatric wing, a 90-bed patient hotel, car parking for 750 and a 30-bed private clinic.

Grand alliances with financiers and operators are being formed as contractors realise that joint venture partnerships are the way forward.

Astute contractors have realised already that not just any jv will do. The message from the Treasury, the driving force behind the new approach to Government capital spending, is as brutal as it is simple - contractors must appreciate that the quality of the operator partner is vital. Getting this right far outweighs the importance given to the contractor's own balance sheet.

The Treasury's approach follows dissatisfaction with the Channel Tunnel project which, went awry as a result of being contractor-led.

Mike Hampton, technical director, Kier Build, argues that the consequence can be seen in the Channel Tunnel Rail Link. 'The consortia in for that are all very much operator-led,' he points out.

Kier Build learnt the operator-is-vital-to-success lesson the hard way - its bid to pre-qualify for two private prison projects with jv finance partner Hambros and Detention Corporation fell flat 'because the operator didn't have prison experience'.

Kier Build is about to reveal details of a three-way jv with Cogefar, the Italian building contractor, and a successful American prisons operator.

But back in the health sector Kier, after talking to four potential healthcare partners, has turned two down. 'We look to get into formal agreements with the remaining pair,' Hampton reveals. 'We've seen from our prison experience that quality operator-partners are essential.

'Kier is interested in projects in the health sector of over œ15 million. We're not looking at schemes less than that. We've had approaches.'

But Kier's endeavours in the prison sector were not to no avail - its partnership with Hambros, the merchant bank, still holds.

'Hambros is good at putting Treasury-acceptable packages together,' reports Hampton. 'We find that raising finance is not a problem.'

Hambros is also a finance partner for Tarmac, though this contractor is also working with the Royal Bank of Scotland, Richard Ellis Corporate Finance, and Lazards.

In the past, the Treasury has provided money for NHS capital projects at a relatively low rate of interest. The downside of the deals, however, was that the capital charges lasted for 80 years.

So it's no wonder NHS Trust finance directors are keen to talk to private sector joint ventures, where the parties can be tied in for a much reduced term.

Contractors are finding that negotiating the length of jv deals calls for considerable skill: the client looks for as short a period as possible, while the jv partners expect a longer return. Currently, the range is 10-25 years, with 15 years being the most frequent compromise.

Colin Clark, business development director with special responsibilities for health at Laing Building, says: 'The higher rate of interest on money raised in the City isn't a problem for the Treasury because interest charges are only a small part of a wider package that offers overall benefits.

'Take an NHS Trust that has inherited three hospitals, for example. The plan to close one and extend the other two, saving on running costs, would be a unique package. A jv partnership could solve problems in a way that leaves the Trust with value-for-money. And remember there's always an Audit Commission check.

'Anyway, interest rates are of little importance when the Treasury doesn't have funds.'

Clark expected progress with the Government's PFI would have been quicker. 'But both the Treasury and the health sector have been on a learning curve,' he concedes. 'One thing is for sure, however, and that is that the Government wants to see risk transfer.'

As one of the most active players in the healthcare sector, Laing has built close contacts with numerous NHS Trust finance directors and chief executives of NHS Trusts. Half-a-dozen proposed projects look 'particularly strong'.

While Laing doesn't want to reveal details of its financial jv partners, Higgs & Hill's strongest link is with Kleinwort Benson, its jv partner in Carlton Gate. This œ3.75 million contract with North Thames Regional Health Authority involves a D&B scheme for nursing and staff accommodation and is set to finish in autumn 1995. The project puts Higgs & Hill ahead of the field, being the first major jv project to win Treasury approval.

Andy Akerman, finance director, Higgs & Hill, is talking to several NHS Trusts, the focus being on car parks and patient hotels.

'With hundreds of Trusts to deal with, it's hard for a contractor to recognise what each customer needs and to offer an imaginative solution,' Akerman finds.

'Some sections of the health sector don't yet fully understand what the PFI can offer, how it can unlock value.'

Only financially sound contractors will establish jv partnerships because funders are being asked to take a substantial risk - they only get paid when the project is built. So what does a financier look for?

'The contractor has to survive to finish the job, rather than go broke part-way through, so financiers want to see the cash position and the future cashflow,' reports Akerman.

'Financiers also look at the size of your business in relation to the project - it helps them assess the prospect of you overcoming problems rather than walking away if difficulties should occur. A contractor of our size could handle a œ30 million project alone, whereas with a œ100 million scheme we would link up with a partner.'

As well as financiers, NHS Trusts - as clients - are keen to run their eyes over contractors' books. Recent market research has shown that they favour jv deals involving big name contractors such as Tarmac, Higgs & Hill, Kier and Laing.

Initially, an NHS Trust would ask to see a contractor's accounts for three years. Once through that hurdle, it's into a combined briefing - with contractors finding that the same select band are called together on most occasions.

'But don't forget that contractors have to be careful too,' says David Steele, director of Tarmac Health Estates, who believes that there are too many trusts and that mergers will continue - mergers perhaps being a polite word for bankruptcies.

'There is no guarantee from Government that a new trust will take over the jv's contract with a former trust,' warns Steele. 'You just have to hope that if you had a sound idea in the first place then it will stand up no matter who runs the trust.

'At Tarmac we look carefully for a critical mass turnover in an NHS Trust. We also look at its people, are they the 'can-do will-do' type, are they achievers, have they a good reputation?'

There's no doubt that the public healthcare sector will continue to need modernisation, particularly as modern surgical techniques are introduced. But contractors shouldn't put all their focus on finding high quality jv partners in order to jump in: the status of the Trust itself is just as important.