Memorandum by the Association of Community
Health Councils for England and Wales (PS 2)
THE IMPACT OF THE PRIVATE FINANCE INITIATIVE
ON THE NHS IN ENGLAND
1. The Association of Community Health Councils
for England and Wales (ACHCEW) was set up in 1977, under provisions
of the NHS (Reorganisation) Act 1977, to provide a forum for member
CHCs; to provide information and advisory services to CHCs; and
to represent the public interest in the NHS at a national level.
2. In principle, access to Private Finance
could be a useful addition to the repertoire of the NHS in England
and thus in the interests of patients, carers and the public.
In practice, both the manner of its introduction and the way in
which it has operated have created avoidable problems.
3. It is too early to reach a definitive,
sweeping judgement about the Private Finance Initiative in the
NHS in England for several reasons:
(a) no major scheme was signed off before
the spring of 1997 so actual experience of the running of PFI
hospitals is limited;
(b) there has been a long learning process
involving the refinement of contractual terms;
(c) official attitudes to the allocation
of risk between the NHS and the private sector have changed significantly
(d) the policy context in terms of projections
of hospital beds has changed radically;
(e) the costs and value for money of PFI
schemes have been the subject of extensive polemic;
(f) there is apparent uncertainty as to whether
conventional procurement conventionally financed constitutes a
genuine alternative or merely an artificial benchmark against
which schemes are judged.
4. ACHCEW passed the following motion at
its 1999 AGM:
"This AGM notes that hospitals built under
the Private Finance Initiative (PFI) have extra capital costs
which can only be met largely at the expense of clinical budgets
and service capacity. Under the PFI, new hospitals have:
(a) many fewer bedson average 28 per
(b) high throughput ratiosover 90
patients per bed per year, up from 54.
(c) hundreds of staff redundancies1,000
for every 200 million investment.
(d) proportionately fewer trained nurses.
(e) subsidies worth millions of pounds, at
the expense of publicly owned hospitals and community service
In view of national evidence that acute bed closures
and staffing shortages have gone too far, this AGM considers the
NHS cannot afford the Private Finance Initiative. It, therefore,
calls upon the Government to abandon it as a principal means of
Although the accumulation of evidence and experience
since then has added to its knowledge of the PFI, it has not been
such as to justify any modification in that view.
5. No major scheme could be signed off before
the spring of 1997 because the legal status of liabilities of
NHS Trusts was unclear. Legislation then gave the Secretary of
State power to guarantee such liabilities. Refinement of contractual
terms has resulted in avoidance of windfall profits through refinancing
deals and speculative deals in surplus land; this has meant allocating
more risk to the NHS than in the earliest deals. Many of the original
deals were associated with substantial reductions in bed numbers;
this ceased to be the case from the spring 2000 when a requirement
was brought in to test them against the findings of the National
Beds Inquiry. Although in principle value for money should be
demonstrated, both opponents and proponents have used questionable
techniques to reach their conclusions. Opponents have been known
to exclude the costs of providing some services included in schemes
from their estimates of the public sectors, while it is far from
clear that in the more recent schemes the reduced proportion of
risk carried by the private sector has been taken into account
(this is highly pertinent since "Building Better Partnerships"
shows that the value of transferred risksinevitably an
arbitrary figureexceeds the difference between the scheme
and the public sector comparator!). There is also confusion as
to whether public capital would be available if a PFI scheme failed
to meet the value for money test or whether the project would
be cancelled or at least delayed.
6. However, it is fair to say that the later
waves of PFI schemes represent a considerable improvement on the
first wave. It is also possible that some projects within them
may represent genuine value for money as against the public sector
alternative (this is likely since there appears to be wide variations
between the existing Regional Offices of the NHS Executive in
terms of openness and quality of processwith London towards
the high end of the range and the West Midlands near the low end).
However, it is not practicable to identify any of them with any
7. The improvements in the later waves have
reflected both refinement and restriction of the original concept
of PFI. In this context it is difficult to see the logic of extending
the scope of PFI to the provision of clinical services.
8. Originally, PFI was put forward as a
means of obtaining capital for new schemes more quickly. This
may have been true initially. However, the process of procurement
and negotiation appears to be longer than for conventional contracts.
Furthermore, some of the improvements incorporated in the later
waves have been achieved at the cost of lengthy delays during
the period before signature (one current example is the effective
suspension of negotiations in all but three schemes not signed
off before the middle of June 2001 pending development of an arrangement
based on retention of employment of Ancillary staff). In addition,
the timing of "financial close" (the point where funding
is agreed) can be delayed for substantial periods by market conditions
(eg the state of financial markets near the end of 1999).
9. Despite the drawbacks set out, the weight
of evidence is not enough to justify complete abandonment of the
PFI by the NHS in England. For it to have a fair chance to make
a contribution which adds value, both better scrutiny of the procurement
process and the creation of a credible competitive threat from
the conventionally-financed and conventionally procured option
are needed. In that way, Private Finance could serve the interests
of patients and the public rather than the other way round.
32 IPPR (July 2001) "Building Better Partnerships:
Commission on Public Private Partnerships", pp 91. Back