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It has the distinction of being the first healthcare building to be completed as a pure government-approved private finance initiative project. Yet visiting the £3.5m Friary Community Hospital in Richmond, North Yorkshire, makes you wonder what all the fuss over private finance initiative is about.

Housed in a converted Victorian boarding school, the hospital is a welcoming, modest building that was developed in less than three years. Although the catering, cleaning, building management and maintenance are all carried out by the PFI provider, there is nothing to indicate that they are anything but traditional NHS services. Neither is there any obvious sign of money-spinning commercial ventures, high-profile facilities management or other revolutionary innovations.

Speaking to the hospital staff confirms the view that the building and the new regime are not the result of some alien commercial system imposed on the NHS by the private sector.

Jill James, team leader for the community hospital, says: "The development process worked well because we had a lot of involvement right the way through. It's their building, but they had to get it right for the users. Whatever we suggested, they always respected – and they took a very positive view. There are no conflicts of interest in the final building."

Perhaps the main reason there has been such a smooth development is that the scheme was originally conceived by the NHS trust. The Northallerton Health Services NHS Trust decided to relocate Richmond's three separate healthcare facilities to one building. The disused boarding school was offered by the borough council, a feasibility scheme was commissioned from the Taylor Young Partnership, and Primary Medical Property, part of the Morgan Sindall construction group, was brought in to develop the building and lease it back to the health authority.

Malcolm Garland, the trust's finance director, relates what happened next: "The leaseback scheme was marginally not affordable. But we quickly manoeuvred it into a full PFI scheme by introducing catering and services into the contract. Then, the scheme became affordable because the private sector came up with more creative solutions than the NHS had been able to."

Clive Eminson, managing director of Primary Medical Property, picks up the story: "Initially, we were happy providing a capital development including building repairs, maintenance, and mechanical and electrical supplies. As a property investment company, we are familiar with managing buildings in the health service. But with the PFI scheme, there were other things added to the menu. There was the provision of services such as cleaning, catering, grounds maintenance and portering. And there was also risk transfer from the client to us, and penalties if we couldn't deliver."

The private sector's ability to create solutions that increase value for money came into play when Primary Medical Property's consultant architect, Pearce Bottomley Rowntree, reworked Taylor Young's building layout to improve its efficiency. The architect also suggested combining the original scheme's three entrances and two waiting areas serving both the hospital and the GP's surgery.

More daringly, Primary Medical Property suggested adding a facility that had not been in the NHS trust's brief. "We were willing to speculate by adding a multipurpose room," says Eminson.

"It would cost us money to develop, but it would provide a long-term income."

When it came to detailed design of the building, Primary Medical Property had the advantage of being a sister company of Robert R Roberts, the company it negotiated its design-and-build contract with. Life-cycle costings were also examined.

"We took an investor's long-term view of the building works, so we were looking for affordability and ease of maintenance," explains Eminson. "For instance, we decided to carry out extra works to the roof and swallow the costs. And we made sure the services were robust and had proper back-up systems. And we introduced energy-saving features, such as heat reclaim on the ventilation system."

Despite these value-enhancing measures, the Richmond hospital contravenes two generally accepted principles of maximising value for money in PFI projects. Large new-build projects ensure economies of scale and uncomplicated construction, but, at Richmond, the PFI project has combined a small-scale scheme with the unpredictability of conversion. Although largely Victorian, parts of the building are 16th century, and the earliest building on the site was a 13th-century friary.

Conservation officers and fire officers both demanded design changes during the contract, often pulling in opposite directions, and archaeologists delayed external works by four weeks. Even so, Eminson is confident that the final account "will be within the boundaries as estimated".

As a work of architecture, the scheme gives new life to a historic building by allocating suitable new uses to existing rooms and by developing a sympathetic extension between blocks. On the other hand, design-and-build corner-cutting is evident, particularly where service runs have been concealed above dreary suspended ceilings of 1960s office-block vintage.

More drastic cost-cutting exercises have reduced the number of inpatient beds from 18 to 12. Even so, the facility provides health services in an accessible building near the centre of Richmond.

It delights the healthcare staff who work in it, with team leader James describing it as a "five-star establishment". And, according to architect Richard Appleyard of Pearce Bottomley, it has gained the support of "the whole of Richmond".

What, then, has made this trailblazing PFI scheme such a success? Partly, Eminson admits, its small scale has made the process easier. "Personalities are closer together than in a major hospital development. And as a company, we deal with investment, development and provision of services all under one roof, rather than being an amalgam of organisations.

"Communication and flexibility are the essence of it," Eminson continues. "There is a vast cultural gap between the public and private sectors. The secret is to respect and understand each other's needs and to try to be reasonable about meeting them. For instance, we can rent out the multipurpose room commercially, but we must be sensitive so that this doesn't conflict with the needs of the hospital."

The key qualities of communication and flexibility were adopted by others in the extended list of organisations, consultants and contractors involved in the scheme. For example, every drawing produced by the design-and-build contractor's consultants had to be vetted by two sets of consultants – one working for the NHS trust and the other for the PFI provider. "We never encountered a problem of differing decisions," says Pearce Bottomley Rowntree's Appleyard. "We had regular fortnightly meetings, but most of the discussion was carried out over the phone, fax and e-mail."

As Tim Straughan, whose development consultant Capital Solutions advised the NHS trust, comments: "This is a model for other developments – definitely something to shout about."