Select Committee on Health Minutes of Evidence

Examination of Witnesses (Questions 400 - 419)



  400. But do you accept, when any hospital is built and it is not built under a public sector scheme, there is not a great big cheque being given at the beginning of that period.
  (Professor Pollock) There is. There is a massive big cheque being written for the 30 years—and more. It is an open-ended cheque.

  401. Do you accept it is not at the beginning?
  (Professor Pollock) I do not quite understand the point you are trying to make. We are writing an open-ended cheque paying four, five or six times more than we should. The true costs are unevaluated. Also that we will have to revisit those contracts, we were going to have to pay more for any small change that is made to schemes. We are writing an open-ended cheque and it is not an efficient and good way of using public funding.

  402. That is your opinion.
  (Professor Pollock) There is plenty of evidence to show that. And this is not anecdotal evidence, this is detailed meticulous evaluation with data.

  403. We are not at the end of any particular 25-year contract, so we cannot tell. The other thing that happens is that some risks are transferred. As Mr Stone was saying, if the roof is leaking, we can save by making the contractor put it right. Coming back to your other issues about affordability versus value for money, two separate issues, are you suggesting that some of those are not done in the process of PFI? Is it affordability looked at when the health authorities had to sign up?
  (Professor Pollock) Yes, indeed, at the outline business case health authorities are actually signing up on the basis of affordability: they are saying what they think they can actually afford. The most notable feature of PFI schemes is the enormous cost escalation. My own trust UCLH went from £160 million to £430 million in the space of about a year and a half. Of course that opens a massive gap when you have got to meet it from your revenue budgets. Originally it was always hoped that trusts would achieve the increased costs which we have seen through land sales, through the capital charges diversion (they did not realise always that they were going to retain capital charges—and also through efficiency savings on retained NHS estates). It became very clear they could not achieve savings—and as you know we have documented—there were four major types of subsidy: one from the centre; the second from regional budgets which were diverted; the third from local services where budgets were diverted (often community services and primary care); but the fourth from the service itself because the affordability has actually, like the capital charging system, driven down the provision of beds and supply. That is very well documented with chief executives themselves acknowledging that.

  404. Have we not seen the same sort of pattern with many public sector schemes as well?
  (Professor Pollock) Since 1991 I have no doubt that the system of capital charging has contributed to the downsizing. The problem is that capital charges were eight or nine per cent of budgets.; you are now looking at rising to 20 per cent on average of budgets. So you are getting a major contraction.

  405. You were making the point that about sometimes spending more on capital delivers a better health service.
  (Professor Pollock) If you think it is better to treat fewer patients. If you would rather serve four people than 10 people. I mean, we are coming now to challenging the notion of universal access and planning for needs. One of the most striking things in many of the business cases that we have looked at is this concept of "turning off trade", where you see massive decreases in case load being predicted with absolutely no evidence or basis for it. Norfolk and Norwich is one, Hereford, Worcester. I can go on citing these to you, where they have actually predicted massive decreases in case load, and that together with performance targets has actually justified the major bed reductions which have accompanied the affordability issues.

Dr Taylor

  406. As one who has worked in new NHS hospitals built in the early 1990s, I would not like people to think that PFI is the only way of building state of the art hospitals. The public sector can achieve it also. Secondly, I would like to go back to one thing Mr Stone said right at the beginning. The NHS decides what they want and then tells you what they want and you provide it. The impression I have—and this is where I want to bring in some of the managers—is that a health authority decides the amount of money they have got and starts from that point of view, rather than actually starting from a decision about need. Is that the experience of our managers here?
  (Ms Herbert) Our PFI, we were certainly told at the outset that we must break even, that we must not spend any more money on this scheme, and in fact the drive was to reduce the revenue outlay once we had moved to a PFI.

  407. So you started from the amount of money you had got to spend.
  (Ms Herbert) We started from an amount of money and then we worked the case backwards from the case of need, so that the two tied up. But may I just say that I do think there is an issue about the expectation that we are going to get new hospitals and they are actually not going to cost us any more than the old ones. I am not quite sure that that is a sensible starting point.

  408. No, many people have told us that whether you get it on the public sector or PFI it is going to cost more. But you would start from the cash available.
  (Ms Herbert) Yes. I do not think that would have been different had it been a Treasury funded scheme versus a PFI because we had not made that decision at that stage.
  (Mr Deegan) There is a slightly different position in Central Manchester. I think the whole context has changed from the early 1990s. If we go back about 18 months or so, when the Government published the NHS plan, it really heralded the need for significant investment in the health service. So the approach we are taking in Central Manchester, working with primary care trusts and our clinical staff, is to specify exactly what facilities we need to meet all the targets that have been set out for us for the next 10 years and in effect work backwards. So a slightly different approach.
  (Mr Gritten) From the public sector point of view, the original business case in Reading in 1997 looked to ensure that the whole deal was self-financing. It was looking to be a £1 million saving for the investment and to make sure that the activity levels that were being predicted would be met in 2004. When we reviewed the business case last year, we have been able to offer a saving on our prices in four years time of £0.5 million, an extra 84 beds, in order to make sure that we can deliver a scheme that is well within affordability.

Dr Naysmith

  409. I just wanted to clear up the question about how much capital is employed at the very start of the scheme or in the first couple of years of the scheme, comparing a conventionally financed scheme versus one that is PFI. Are we actually saying that something that is paid off over 30 years or 60 years it might be more in the long run, but what I am asking is this crucial question: what is the difference to the Treasury at the start of the proceedings versus the two different schemes? Maybe Mr Stone would comment and then Professor Pollock will come in.
  (Mr Stone) We need to separate what I might rudely call artificial accounting distinctions from long-run—

  410. I notice that you clearly said you were a banker and not an accountant to start with.
  (Mr Stone) Indeed. The real issue here is about long-run use of resources. Whether they are designated because of some accounting standard capital revenue, I frankly do not care. I do care and I think the whole process is driven by saying: we have a finite amount of resources available, let us get the scheme which delivers the best.

  411. That is not really my question because Professor Pollock's position is perfectly understandable: it is not worth paying the extra for the longer term. What we want to know is whether at the beginning the costs are comparable or by how much the advantage is of having it all funded through PFI.
  (Mr Stone) Right. The PFI process does not produce money out of fresh air. This is not a gift. This is not a grant from some charitable trust. First of all we are not writing a cheque for 30 years because we are buying services, and if those services are not delivered we do not pay for them. That is a fundamental difference. Secondly, in terms of the long-run costs, however they be described, there is a huge amount of effort goes into as honest a comparison as is possible of the two, of the different alternatives, different bids, different approaches. The one which is picked in the end is the one that delivers the services for the best long-run cost, however allocated. It is critical here to recognise, as I have said, that we are looking at comparisons of different schemes over a long period of time and we have to use the best judgment which is available, just as we do in conventionally procured schemes. This process has started to improve the quality of data, so our perceptions of reality are a bit better than they were—they were historically dreadful and most of the economic analyses you look at from, I suppose, the mid 1990s and before, the further you go back, the fuzzier the data gets in terms of quality and the analyses at the time. The process is undoubtedly about delivering these long-run costs and the evidence we have is that the process is getting better. It is delivering value for money and it is reducing long-run costs.

  412. That is not really what I am asking. If you were the Treasury sitting there at the beginning of the whole process, which costs more?
  (Mr Stone) From the Treasury's point of view, the PFI process costs less.

  413. Significantly less?
  (Mr Stone) Sufficiently significantly less that they are clearly happy to release control. Traditionally, the Treasury sits there year on year and controls the budget year on year, but by signing up to one of these deals they are saying, "We believe that letting go of control for the next 30 years on this deal is worth it in terms of the improved long-run use of resources to the nation." That is the Treasury judgment. It is not an off-balance sheet fudge, it is a clear decision in their own mind between releasing instantaneous control in favour of long-run value. That is very clearly done.

  414. Can you quote some figures for one scheme?
  (Mr Stone) Rather than quote numbers which are NAO-type numbers, because we believe the numbers are pessimistic, our intuition from the work we have done, the data we have seen, the analyses which they have been subjected to, is that the VFM in the NAO report was around 5 per cent, but we think it is nearer 10 to 15. The Treasury's view is that these things are understated and that is our understanding as well. So their strongly-held perception is that these schemes do deliver much better value for the taxpayer as a whole in the long-term at the very outset, otherwise they would not let it go.

Julia Drown

  415. Sure, but Doug Naysmith was asking about those first two years, say, out of the 35 years. Surely there is no question in Treasury terms, you would have to agree, that to the Treasury in year one and year two the cost of the PFI has to be massively less on a major hospital?
  (Mr Stone) Yes, but that is not the way decisions are taken.

  Julia Drown: No, but that is what he was asking.

Dr Naysmith

  416. I am interested in what Professor Pollock would say on that because she has studied this.
  (Mr Stone) Sure, but that is not the basis for the judgment.
  (Professor Pollock) There are two types of cost. There is the cash cost, and we do not even know the true cash cost because we do not know the true volume and value of land sales and all the different grants and sweeteners which are put in. For example, many PFI schemes chuck out the equipment because of the affordability problem and the NHS then gets left with the equipment budget. The second issue is that these may be cash costs which may be of short-term benefit to the Treasury but you have to—

  417. But they add flexibility to the whole system.
  (Professor Pollock) How do they add flexibility?

  418. Because you have money you have not spent which you can spend on something else.
  (Professor Pollock) Where is the evidence that it is being spent anywhere else? There was a £26 billion surplus, where was that being spent? The other thing is the public cost, the distortion in the provision of public services. We know the costs to the public are enormous in the down-sizing of their services and the increasing fragmentation and the real affordability problems that hospitals are now facing; massive public costs.


  419. Can I bring Mr Davis in? Where do you stand? Presumably you are supportive of Mr Stone?
  (Mr Davis) I think I would say I am now becoming a veteran PFI practitioner, and I have listened to this theoretical debate with great interest because we are beginning at last to identify the real cost of running public services and it is not being accounted for. If you start with rubbish, you end up with rubbish. If you take the public sector comparator it does not take into account the true cost of funding NHS superannuation schemes, for example. I am told on good authority there is an unfunded liability of somewhere around £75 billion in employee pensions in the NHS, and that crystallises when it is transferred to the private sector. The backlog maintenance in excess of £3 billion is a measure of how unsafe these facilities are, so the NHS has not been a very good custodian of its public assets. The depreciation policy is to depreciate these specialist technical buildings over 60 years, when in real life they have a much shorter life than that and the private sector in its bid probably has to depreciate over 30 years. It is a point which has been touched on already, new technology has a cost to it but it also needs to be replaced on a regular cycle. There is no way the PSCs are taking this into account. So if you start with an under-cooked PSC, you end up with an affordability problem. What I would like to see is that Government policy as the benchmark against which the public sector comparator is costed. That is about improving the quality of the environment, introducing new technology, better standards of facility, better standards of care, better terms and conditions for the ancillary staff. I was rather struck by the similar views we had to Unison when they gave evidence last week. We agree, PFI is changing behaviour and we think it is the right way to do it. We think the PSC is a necessary tool but there are some macro-problems with it in that it does not take into account the real cost of providing public services, at local level it is subject to very wide interpretations and possibly heroic assumptions about the efficiency gains, some of which we have touched on. So affordability is a concept, not a reality. If there is to be modernisation of the NHS, real affordability tests have to be brought in which will meet Government policy.

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