Facility Management Services in UK Hospitals: in-house or outsourcing

This paper studies the institutional organization of UK hospitals through traditional procurement and private finance initiatives (PFIs). It first
describes the UK hospital sector with hard facility management (FM) services (e.g. building maintenance) and soft FM services (e.g. catering,
cleaning) that can be supplied in-house or outsourced. Builders are also bound to provide a partial warranty against construction risk. The paper then
shows that a PFI internalizes the externality between builders and hard FM service suppliers. It also requires the payment of a risk premium that can become too high under
strong hard FM risk. The builder's warranty creates a reverse moral hazard in traditional procurement, which becomes stronger for higher
hard FM risk. Traditional procurement provides no incentive to outsource FM services, whereas a PFI offers incentives
for soft FM services. PFI procurement is shown to be optimal under small and high enough hard FM risk.