Select Committee on Health Minutes of Evidence

Examination of Witnesses (Questions 160 - 179)



  160. Can I go back to the ones that have been approved already, where we have lost somewhere in the region of 2,500 beds; can you tell us where the replacement of those, which budgets that is going to come from, in restoring those bed numbers?
  (Mr Coates) I do not recognise the figure of 2,500 bed losses. We have done some work, and of the 34 schemes so far approved there has been a total loss in general and acute beds, which is the measure used in the NBI, I understand, of 493 beds; that is 322 beds in the 25 PFI schemes we have, and 171 in the nine publicly-funded schemes that we have approved since 1997. I make that to be an average of 13 bed losses in each PFI scheme, and 19 in each publicly-funded scheme.

  161. I think it is going to be difficult to compare the figures. I was relying on figures which were produced in the BMJ, which showed that the PFI was associated with reductions in bed provision of 30 per cent and cuts in operating budgets and staff numbers of up to 30 per cent, and that in the first 11 `first wave' schemes, financed through the Initiative, over 2,500 beds would be lost over five years?
  (Mr Coates) Potential total bed losses, not G&A beds we are talking about in the National Beds Inquiry, that would include maternity beds, mental health beds and long-term care beds. A bed is a bed, by whichever measure you want to put on it.

  162. In terms of the National Beds Inquiry, and specifically related to those, under which budget head will those replacement beds come from?
  (Mr Coates) From within existing HES allocations to health authorities. Would it be helpful to look at the numbers in the economies you have gone through, in terms of bed numbers; because I think that they do demonstrate that we have tried to approach these schemes properly and professionally, and that the numbers of bed losses are perhaps not as acute as people fear. Of the total bed losses in the PFI schemes, there are 322; that is counterbalanced by a total of 628 additional beds in intermediate and other areas of care in the local economy, giving, we believe, a net gain of 306 beds in those particular localities. And as far as publicly-funded schemes are concerned, as I say, there is a net loss of 171 beds; we believe there are 106 additional beds being replaced in other areas of the economy, giving a net loss in publicly-funded schemes of 65 beds. Overall, we believe there is a net gain of 241 beds, as a result of these schemes.


  163. Is it possible, Mr Coates, for you to let us have that in writing, as soon as possible, because I think we need to look at this; because, clearly, the advice we are getting is somewhat different from what you have got and I think we need to look at this in some detail? Would you mind dropping us a line as soon as possible?
  (Mr Coates) Yes.

Dr Brand

  164. We need a classification of beds, and also what beds are closed as a result of the revenue consequences of a PFI contract, not necessarily associated with the building you are replacing; because there is quite a lot of closure of community hospitals, surrounding hospitals being reduced in size, so it depends on the size of the area that you are looking at?
  (Mr Coates) Yes, I agree.
  (Mr Reeves) Can I make just two points, Chairman. One of the questions from Mr Austin was about the increased number of beds in the future, and where is the money coming from. The spending review makes it very clear, both in terms of the number of intermediate care beds and intermediate care places, where the money is coming from. What will happen in terms of the number of PFI schemes in the future, we are talking about 38 major schemes, 31 minor schemes, so I think in terms of the fundability, if you like, of the capital programme in the NHS, we do not have any concerns around what the implications of the National Beds Inquiry have said. I think the second point is, going back to Peter's very valid point, and we are happy to share the paper, which incidentally I have seen, which talks about the changes in the number of beds. And if I can just quote from what the NBI is saying, that in terms of when we think, and this is something which the Secretary of State said last year, and the quote is: "Service configurations based on assumptions about major bed variations are unlikely to be attainable unless expanded intermediate and community services are put in place," and that is exactly what we are trying to undertake in terms of this exercise of 34 schemes to date. And what it does show, I think, is two things. One is, whether it be funded through PFI or through Exchequer capital, there has been a reduction in terms of general and acute beds, and that is consistent with what has been going on for a number of years, incidentally. I came to this Committee six years ago and said how wonderful we had done in terms of through-put increases, which has an implication in terms of reducing beds. So that is the first point. But, secondly, more importantly, we are thinking now in a whole-systems approach and a holistic approach, whereby it is not just about general and acute beds in isolation, it is about the whole spectrum of care and different types of modes of care, and that includes primary, community and intermediate. And, again, this analysis shows quite clearly that the number of intermediate care beds has increased to an even greater extent; there has been a reduction in terms of general and acute beds. And that is totally consistent with this movement, or this statement within the NBI inquiry that suggests we want to think about the totality of care, not just in terms of general and acute but in terms of all modes of care.


  165. Can I ask you, Mr Reeves, are you satisfied, and Mr Coates as well, that the procedures that we have in place now for processing capital schemes are sufficiently sound to take account of that broader picture that you are rightly describing? I am very conscious that we have a scheme in West Yorkshire, a PFI scheme, at Halifax, which has, in a sense, gone through in isolation, without a wider look at the knock-on effects for areas within 13 miles or more, and that we do not seem to have the mechanisms to ensure that that situation takes place. We have got a bid coming up in Wakefield, as you are probably aware, which is a whole district approach, but it has been a very clumsy process to draw in all the key players, from not just the immediate area but way beyond the immediate area, who have a thought on a capital scheme, and their views on a capital scheme, particularly taking account of the knock-on effects of Halifax for areas way beyond Halifax. Do you feel we need to look at that process?
  (Mr Reeves) Yes, I do, Chairman, I agree with all the comments you have made. If I do look back over the last five years of PFI, we have moved forward, I think, quite clearly and discernibly forward, as opposed to backwards, as some might suggest; we have moved away from the old days, where it used to be purely the local trust that used to put its hand up and say, "I need a local hospital," the phrase we had at the time was `let a thousand flowers bloom', and that was the wrong way, it was all supply-led. What we are doing now, and we have had them for the last two or three years, is to think much more in terms of demand and need, and that is why we have the CPAG process, even though, yes, there are teething troubles with it. We have the whole idea of a strategic outline case, which is much more focused now on the health economy, as opposed to just the trust in isolation. So we are moving forward in the right way; but I still think we need to move forward. And we produced a document called `Sold on Health' quite recently, which started talking about, to think much more in terms of, I will not say national planning but a much wider strategic overview across the country in terms of what is needed in terms of capital and infrastructure. And we have a document called the Departmental Investment Strategy, which, as it develops, I think, will take a much grander overview across the totality of the country and how the various health economies interrelate to each other, as well as the mode of care between them as well. So we do need this document, and, what `Sold on Health' says, it should then be linked with regional frameworks, which again support the national strategy. And then what we want to think about is to think in terms of every single health economy having its own estate survey, its own estate strategy, and at the moment 75 per cent of trusts do have their own estate strategy. But I want to think much more about a broader, nationalistic approach to planning, and I think that will respond to a lot of the concerns around some of the processes, and you named one, which is a very fair comment, I think. That will be relevant in the future, I think.

  166. It still remains possible for any capital bid to be considered for Exchequer funding as well as PFI. Are there certain restrictions in particular areas?
  (Mr Reeves) As far as we are concerned, we think purely in terms of the value for money and the risk transfer of that particular scheme, and in terms of value for money, if it can be demonstrated that the operational savings from a PFI scheme more than exceed the additional cost of borrowing then that represents value for money, and a PFI scheme will be preferred to the Exchequer scheme. The second area, as I say, is risk transfer, and we believe that is very important in terms of transferring as much risk as possible to the private sector. And those are the two criteria which would determine whether we have an Exchequer-funded scheme, such as Berkshire and Battle, we have a lot of precedents of schemes that failed the PFI test, as opposed to, on the other hand, a number of schemes that passed the PFI test and are moving forward, and there are a lot of them.

  167. Is the test done at a regional level or at national level?
  (Mr Reeves) The guidance is provided at national level, but it is undertaken very much through the medium of the regional offices.

  168. So the region that might say to somebody preparing a SOC Bid that "You can only do PFI"?
  (Mr Coates) That is right, it is the region.

  169. It is the region?
  (Mr Reeves) But no-one in the region will be dictatorial and say, "You shall do PFI", or "You shall not," it depends on the circumstances in every single individual case.

  Chairman: I understand.

John Austin

  170. Could I just come back. In reply to the question about compensation for the reduction in beds, you pointed to the increase in the number of intermediate care beds; were you referring to additional beds in the private nursing and residential homes, or were you referring solely to NHS-funded beds?
  (Mr Coates) These are NHS beds.
  (Mr Reeves) In terms of the particular review undertaken by Mr Coates's people, that was purely in terms of NHS intermediate care beds. My general comment about the additional monies in the spending review relate to the combined NHS and social services costs.

  171. Can I, just finally, take you to, for members of the Committee it is page 156-157, for you it is Table 4.8.11, and maybe some of these will need to be followed up by correspondence of written questions. But I wonder if you could explain the pre- and post-PFI costs in the Table, and ask why the PDC dividends being paid after PFI have increased so dramatically, and I would point you to, in particular, Calderdale and Dartford? I would point you to my own one in Greenwich except it is not yet open, but those are two schemes which are up and running. Why is the cost of capital so high, and what has been the impact of this increase in capital cost on the clinical services budgets? Perhaps you could explain why these costs continue and why they rise so dramatically?
  (Mr Coates) I will take this question. We were surprised by these figures as well when we were asked the question, and we went back to source data, and we have concluded that the major part of the depreciation and return on capital charges is, in fact, equipment, and not buildings. And so the fact that the hospital moves to a new site and a new infrastructure is not impacted on the amount of depreciation it has to pay on its equipment. In addition, when hospitals are opened from new, they have a much higher level of new equipment, and that increases the level of depreciation charges you see, and PDC charges you see. But in terms of funding of those, I think perhaps Mr Reeves will answer that.
  (Mr Reeves) In terms of the funding, we have had a change in the financial regime anyway, in the old days we had two forms of what we called trust debt remuneration, where when a trust borrows it has to repay interest in dividend; the interest is interest-bearing debt, IBD, the dividends is PDC, public dividend capital. The Government decided a couple of years ago that we should move away from interest-bearing debt because it had a sort of quasi-commercialism about it, and now all debt of trusts is public dividend capital. And that, I think, will explain why there is a scheme to change in terms of the balance-sheet funding of these trusts. It is the move away from what I think the Secretary of State described as a quasi-commercial and artificial form of accounting.

  172. So you are saying they are just figures on paper, and not having any real impact on the budgets of the trust concerned?
  (Mr Reeves) What I am saying is, at the end of the day, we have changed the financial regime so that when a trust makes a 6 per cent rate of return, the amount of debt it repays equates to that figure. Now that is a change that we made in the autumn of 1996, which, in my view, is far better than the approaches adopted when trusts were brought into being in April 1991; we have increased financial control and cost discipline. So certainly the change in the trust financial regime round that has, without a doubt, affected budgets.

  173. And will that impact on clinical services?
  (Mr Reeves) The last change I talked about, which the Secretary of State brought in recently, I do not think has really changed, it has obviously changed the focus in terms of the ethos of how a trust works commercially, but it has not changed the actual balance-sheet approach or the budgets that follow.

  174. And it will not have an impact on clinical services?
  (Mr Reeves) Not as far as I am aware, no.

Dr Brand

  175. Mr Chairman, we have talked about the capital acquisitions through PFI, and obviously there is a strong argument for at times using PFI. I am bound to say that, with a hospital that fell to bits. But we have not mentioned the revenue consequence of having to lock yourself into a service contract for some of the other things that are associated with it. And the first schemes that we heard about had 60-year clauses, with a 30-year break clause for the contract, and I really thought that was really sterilising your planning in a very big way. Can we ask what Mark 3, 4 and 5 PFI schemes now do, in the way of service contracts?
  (Mr Coates) We use a standard form of contract for major NHS/PFI projects, that stipulates how the contract shall deal with the end of the contract period, you might say. The approach of the new contract, in fact, is similar to a concession, and it says that the private sector has a right to operate the hospital in terms of services, and suchlike, for a period of time, normally 30 years, 35 years. After that period in time, the NHS can either take the asset back into its ownership and operate those services if it so wishes itself, or it can relet the contract to the private sector generally and ask the lowest bidder to provide all the services that were provided formerly by the private sector.

  176. Yes, but, 35 years' time, that is a worry of my son and my grandchildren. What happens when you need to reconfigure, as we have already found we need to reconfigure, because the National Beds Inquiry, and everything else, have shown that we have not got the configuration right, and you need to change actually what you do in your PFI hospital?
  (Mr Coates) There is no indication that changing PFI hospitals is any more difficult than amending or changing a publicly-funded hospital.

  177. Sorry, can I pick you up slightly. My hospital trust, when it was fashionable, went into a contract with the Chalice Group, or the Capita Group, I think, for all its services, including portering, and that sort of thing; it has been a total disaster, and they have sacked them, quite rightly, but they could only do so because the five-year contract period was up. With a PFI scheme, you have got, you are saying, a 35-year contract period; how can you sack someone who does not perform?
  (Mr Coates) The 35-year contract is with the special purpose vehicle that has the concession; in its turn, it lets sub-contracts below that, to provide the services, and they are typically on a market-tested basis, and every five years they are retested to make sure they are value for money in producing the service required.

  178. So, value for money to whom?
  (Mr Coates) To the trust.

  179. No, because the contract, surely, is with the PFI provider, and not with the trust?
  (Mr Coates) The PFI provider is obliged to provide services in an economic way to the trust, and after a period of time, be it five years or six years, they have to retender those services in the open market to prove they are providing a service that is still value for money, comparable to the open market price for those services.

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