Private Finance Initiatives and Outsourcing of Facilities Management in UK Hospitals

A substantial share of hospital expenditure is devoted to hard facilities management in building maintenance, and soft services such as catering, cleaning, laundry, waste management, and security. This article examines how these services are delivered-insourced or outsourced-under traditional procurement and Private Finance Initiative (PFI) arrangements. We show that PFIs create incentives to internalize externalities between construction and maintenance while encouraging outsourcing to specialized providers to mitigate operational risks. Under traditional procurement, builders' warranties generate reverse moral hazard by increasing their exposure to future maintenance problems. The analysis characterizes the choice between PFIs and traditional procurement as a trade-off between moral hazard arising from outsourcing, warranty provisions, and operational risks associated with maintenance and soft services. PFIs are preferred when hard facilities management risks are either very low or very high, whereas traditional procurement is optimal when service quality is critical, maintenance risks are moderate, and warranties are limited.