PPPs: A policy in search of a rationale?

Private finance and 'value for money' in Britain's public hospitals

Allyson M Pollock, Jean Shaoul & Neil Vickers

Summary

The private finance initiative (PFI) brings no new capital investment into public services and is a debt which has to be serviced by future generations.

The government's case for using the PFI rests on a value for money assessment skewed in favour of private finance.

The higher costs of the PFI are due to financing costs which would not be incurred under public financing.

Many hospital PFI schemes show value for money only after risk transfer, but the large risks said to be transferred are not justified.

The PFI more than doubles the cost of capital as a percentage of trusts' annual operating income.

Introduction

Since 1992 the British government has favoured paying for capital works in the public service through the private finance initiative (PFI) - that is, through loans raised by the private sector. For public hospitals, this means that a private sector consortium designs, builds, finances and operates the hospital. In return, the National Health Service (NHS) trust pays an annual fee to cover both the capital cost, including the cost of borrowing, and the maintenance of the hospital and any non-clinical services provided over the 25-35 year life of the contract. The policy has been controversial because of its high cost and the impact on clinical budgets.1

When first introduced in 1992, proponents claimed that the PFI would lead to more investment without increasing the public sector borrowing requirement. The UK budget surpluses of recent years (£23 billion - $A60 billion - for 2000-01 alone) have, however, been much greater than the total of £14 billion ($A37 billion) in private investment deals signed in 1997-2001. The present generation of taxpayers could have funded considerably more capital investment out of existing revenue, instead of displacing the cost onto future generations.2

Furthermore, there is no evidence that the PFI has increased overall levels of service. On the contrary, the policy's use in the NHS has had two main effects. Firstly, it has displaced the burden of debt from central government to NHS trusts, and with it the responsibility for managing spending controls and planning services, thereby hindering a coherent national strategy.3 Secondly, the high cost of the PFI schemes has presented NHS trusts with an affordability gap. This has been closed by external subsidies, the diversion of funds from clinical budgets, sales of assets, appeals for charitable donations, and, crucially, by 30 per cent cuts in bed capacity and 20 per cent reductions in staff in hospitals financed through PFI.4 Though NHS funds have increased since 1999, there is no evidence that much has flowed through to baseline services.5

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