18
PFI case study
The re-development of the Cruciform Building
University College London
Contents
Foreword
Executive summary
Background
Procurement process
The agreement
Value for money and risk transfer
Lessons learned
Acronyms and abbreviations
Foreword
This case study was produced with the assistance of Jack Foster, Director of Finance, and Allan Mitchell, Assistant Director of Estates and Facilities, both of University College London, and Sheldon Taylor of Ernst and Young.
Readers should note that the redevelopment of the Cruciform Building was a response to the 1992 Tomlinson Inquiry, and the project received directly targeted public funds. As a result, both the Department for Education and Employment and the HEFCE became involved in the approval process. This is not standard practice for PFI projects in the higher education sector: higher education institutions are normally free to enter into contractual agreements without further consultation.
Executive summary
1. The PFI project undertaken by University College London reached financial close on 5December 1997. Its origins lay in the 1992 Tomlinson Inquiry, which led to the creation of an enlarged medical school and a need for additional teaching and research space. The 90-year-old Cruciform Building in nearby Gower Street, designed by Sir Alfred Waterhouse, offered an ideal location.
2. The Cruciform development did not begin life as a PFI project. Having identified an opportunity for PFI to add value to the development, the college moved forward to financial close in little more than a year. The data bank built up prior to this decision undoubtedly speeded up the process.
3. With its advisers, the college short-listed six consortia for the project. The selected consortium consisted of Jarvis Construction (UK) Ltd, Jarvis (Facilities Management) Ltd, Rotch Property Group Ltd and a lender (later Newcourt Capital Inc. of Canada). Following wide-ranging negotiations, a full business case was submitted in early May 1997, and approval received in July.
4. In common with most PFI transactions, the project agreement between the private sector and the college established the main parameters of the scheme. However, the project’s complexity and the variety of interests involved produced a number of supporting documents, particularly with termination issues.
5. The college believes that the project offers a number of lessons to higher education institutions contemplating similar schemes. Extensive pre-planning allowed it to minimise the effect of the unforeseen, while stark deadlines drove negotiations at a rapid pace. Above all, by demonstrating genuine commitment, both to the preferred partner (with whom the college had a strong existing relationship) and to the project itself, the college lessened the chances of stagnation, and was able to resolve the problems that presented themselves along the way.
Background
The Private Finance Initiative in higher education
6. The Private Finance Initiative (PFI) is a procurement methodology with three main features:
· it focuses on the procurement of a service, rather than the provision of the assets required to deliver the service
· the risks associated with the project are borne by whichever party to the deal can manage them most effectively, so as to achieve best value for money
· the transfer of risk is reflected in the payment method.
7. The Higher Education Funding Council for England (HEFCE) expects higher education institutions to base their investment decisions on seeking best value for money, and encourages them to consider PFI, and other innovative forms of procurement, as ways of achieving this. However, the HEFCE recognises the status of institutions as independent bodies, and there is normally no requirement on them to test for a PFI solution. This reflects current Government policy. Furthermore, there is normally no requirement on institutions to seek approval from the HEFCE, the Department for Education and Employment (DfEE) or the Treasury.
8. However, when this particular project was undertaken there was a requirement to test PFI because, as a Tomlinson project, it was to receive specific public funding.
University College London
9. Founded in 1825, University College London (UCL), the original University of London, is the oldest higher education institution in England after Oxford and Cambridge. With an annual turnover of £320 million, 15,000 students and a staff of 6,000, it is now one of the UK’s largest institutions and a major centre of excellence for teaching and research.
10. The Medical School’s tradition of achievement and innovation goes back to its foundation in 1828, as the first university faculty in London with a hospital for teaching purposes. This success is continuously enhanced by outstanding academics – including three Nobel Laureates – and advances in research and teaching. The present development of the Cruciform Building, previously University College Hospital, is set to extend this distinguished reputation. It will accommodate the Wolfson Institute for Biomedical Research, allow some 300 scientists to develop novel treatments for chronic degenerative diseases, and provide state of the art facilities for training the clinicians of the future.
The needs
11. The merger of the UCL Medical School, the Royal Free Hospital School of Medicine [RFHSM] and the postgraduate Institutes of Child Health, Neurology and Ophthalmology (and latterly the Eastman Dental Institute), followed the 1992 Tomlinson Inquiry. The mergers would result in the creation of an enlarged medical school within the college, the Royal Free and University College London Medical School.
12. As well as teaching accommodation, the college needed additional research space. It had previously identified a need for an additional 25,000 m2 of space, of which approximately 10,000 m2 would be required for the merging institutions and for planned expansion of research. The merger process began with the submission of an initial case for capital funding in November 1994. This demonstrated the need for new teaching facilities for the combined medical course, and the financial viability of a new research institute of approximately 300 staff. The college refined and amended the submission in discussion with the HEFCE and submitted an outline business case in October 1995.
13. The college’s strategic objectives outlined in the October 1995 business case were to:
o build on the current strength in basic medical and biological science, with high quality basic science on all major sites of the school
o continue to strengthen clinical science and further promote the links with appropriate basic science and the necessary clinical activity in the main university hospitals and community NHS trusts
o develop a science-based undergraduate curriculum which has a single set of core requirements but which encourages diversity of individual experience
o preserve the individual strength of the currently separate institutions while merging them into the college, thereby deriving the benefits of a multi-faculty university in providing academic stimulus and attractiveness to students and to outside bodies in terms of new developments
o acquire additional space to enlarge the research base of the combined Medical School by attracting external funding for further first rate research groups.
14. Good progress was made and formal mergers accomplished with the Institute of Child Health, Institute of Neurology and Institute of Ophthalmology by 1 August 1997. However, the most significant of the merger proposals, with the RFHMS, depended on the successful outcome of the Cruciform Building redevelopment.
Early steps
15. An important part of the college’s PFI process was the way in which it progressed the early stages of this project under a traditional tendering route. This brought significant benefits to the PFI negotiations.
16. The college established a working group consisting of the Provost (the principal academic and administrative officer of the college), the Dean of UCL Medical School, the Dean of the Royal Free Hospital School of Medicine, the Dean of the UCL Faculty of Life Sciences, and Professor Salvador Moncada, who would be joining UCL to lead the new research initiative. They were joined by the Director of Planning and Resources, the Director of Financial Accounting and Mergers, and the Assistant Bursar.
17. Though the group considered a range of options, the preferred route was to purchase and redevelop the Cruciform Building, previously occupied by University College Hospital - the only site available and capable of meeting the requirements. Additionally, its Gower Street location was ideal. The college proposed to redevelop the Cruciform Building completely to provide 8,750 m2 net of teaching and research space while leaving the facade largely unchanged.
18. A Grade II listed building designed by Sir Alfred Waterhouse and completed in 1906, the Cruciform Building had undergone many alterations, mostly subject to ‘Crown Immunity’ and thus avoiding planning or listed building criteria. English Heritage indicated that it would be necessary to repair and overhaul the exterior of the building and remove some of the non-conforming additions so that the building was visually more in keeping with its origins. There was also a need to upgrade the main fabric and core services of the Cruciform Building, and undertake alterations to the existing buildings of the two medical schools at UCL, the Royal Free Hospital and Whittington Hospital sites. As capital values were low, these latter alterations were eventually undertaken through conventional procurement.
19. The college’s initial bid for HEFCE funding under Tomlinson was made in November 1994. It proposed that approximately half of the Cruciform Building (phase 1) should be developed, using HEFCE grant funding. This would provide state of the art facilities for medical education, allow teaching of a significantly enlarged intake of medical students (following merger with the RFHSM) on a single site, and provide core facilities for the remainder of the building. The development of research facilities (phase 2) depended on the college attracting funding from external sources other than the HEFCE, and was to be let as a separate contract.
20. The college developed the business case further during 1995, working closely with the HEFCE to ensure that final proposals conformed to guidelines issued for Tomlinson funding. Following approval in principle to a grant of £14.5 million, it appointed a design team through notices in the Official Journal of the European Communities (OJEC). It developed an overall design strategy together with detailed designs for phase 1 of the redevelopment (the repairs and alterations to the fabric of the building, the core services and the fitting out of the teaching areas) and began a traditional procurement process. This project timetable anticipated the letting of tenders at the beginning of 1996, with completion of the teaching areas by September 1998.
21. It was decided that the redevelopment, procured with public funds under Tomlinson, should be subjected to PFI testing. As a result, both the HEFCE and DfEE became involved in the approval process.
22. The college submitted an outline business case (OBC) in October 1995 on the basis of traditional procurement. The development of designs for phase 1 of the project therefore continued, with the intention of keeping to the original timetable of letting contracts in 1996 with completion of works in time to use the building for teaching at the beginning of the 1998-99 academic session. In December 1995 the HEFCE formally confirmed its approval of the college’s OBC and project funding of £14.5 million, but the PFI test requirement remained subject to further discussion with the Treasury.
23. Following submission of the October 1995 OBC, the college:
· purchased the Cruciform Building from the Secretary of State for Health and undertook certain decontamination works using a combination of charitable and HEFCE funds
· began alterations to the UCL, Royal Free and Whittington sites.
24. In February 1996, the college was notified of the decision requiring it to PFI test the Cruciform element only, of the various developments. At this point, the design for phase 1 of the project was almost complete and the college had begun the tendering process. Despite the decision to PFI test, the college was allowed to progress PFI in parallel with the traditional procurement route (‘dual track’) to avoid unnecessary delays should the case for PFI not be proven. In October 1996 a notice was placed in OJEC inviting tenders for the entire building contract under PFI, following legal advice on EC procurement-related issues.
25. In the event, the ‘dual tracking’ approach was not feasible since contractors were not prepared to commit resources to two tendering routes simultaneously. All the same, the preparation of what became the Public Sector Comparator (PSC) from a set of fully worked up tender documents had the advantage of:
· better informing the PFI tenderers of the college’s requirements
· considerably shortening the PFI tendering period
· enabling the speedy evaluation of the PFI tenders against the PSC
· allowing contractors to be short-listed and interviewed under the initial OJEC notice for traditional tendering which assisted the same process under PFI.
Procurement process
Introduction
26. The Cruciform Building did not begin life as a PFI project. The contract for its refurbishment was relatively small (around £30 million) and, with a 90-year-old listed site, the options for innovation and commercialisation were limited.
27. After entering the initial stages of the PFI process the college identified an opportunity for PFI to demonstrate value for money. In little over a year from the OJEC notice, financial close involving private sector partners was reached on 5 December 1997. The refurbished research and teaching space is scheduled for occupancy in September 1999, in time for the academic session 1999-2000 and the intake for the enlarged Royal Free and University College Medical School.
28. The key stages in the procurement process are set out below.
Key stages – PFI procurementOutline business case approval / February 1996
PFI OJEC advertisement / October 1996
Short-listing and issue invitation to negotiate / November 1996
PFI tenders received / February 1997
Selection of preferred tenderer / April 1997
Submission of full business case / May 1997
Financial close / December 1997
Project team
29. A core negotiation team was assembled by the college prior to the OJEC advertisement and then maintained until financial close. The core negotiation team’s brief was to:
· report to and keep updated the senior college management, including the Provost, senior scientists and administrators at all key points during the process
· maintain contact with the HEFCE and DfEE throughout the process and involve them in negotiation and approvals as required