Select Committee on Health First Report


The Public Sector Comparator

91. The inadequacy of the Public Sector Comparator (PSC) appears to be one of the few areas that united the majority of our contributors on PFI. To a greater or lesser extent, the PSC in its current form was criticised. UNISON argued that the PSC was not a true comparator as it compared a scheme that would be built with one that would not. It believed that the PSC should be replaced by a properly costed, alternative scheme, which would be financed by public sector capital should that prove the most economic option.[153] Professor Pollock asserted that "the function of the economic appraisal is to disguise the true costs of using private finance. It does this by inflating the cost of the PSC by a value broadly equivalent to increased costs of using private finance. Risk transfer assumptions are the main mechanism for disguising the true costs of using PFI compared with a public sector alternative".[154]

92. The business community also voiced doubts about the PSC. Mr Rose of The Business Services Association told us:

    "If there is one thing that you could do, which I think we would all agree needs to be looked at, it is to recommend that public sector comparators become real comparators. There is not one that I am aware of so far which has really understood what the future provision of a hospital would cost, because ... the figures have to be based, in general, on historic costs, to show how the hospital has been treated in the past. And since we know there is a woeful lack of maintenance in the last 20 to 30 years in the public sector, it is difficult then to put in a full maintenance figure, or else the Trust publicly is admitting it has not maintained the estate properly."[155]

93. Catalyst Healthcare, a leading consortium of businesses involved in several PFI schemes, suggested that PSC assumptions varied wildly and "do not seem always to be a realistic basis on which to make planning decisions about the reform of local health economies".[156]

94. The Secretary of State admitted that the PSC was to some extent an artificial exercise. We put to him the suggestion that, in the great majority of cases, the PFI constituted the only likely source of funding for a new hospital. He acknowledged that there would not be sufficient capital to finance all the hospital building programme at one go via conventional procurement:

    "Although we make the assumption in the public sector comparator that capital is available, as we all know, despite the fact that we are putting more capital into the National Health Service through the Treasury than we have ever done that would not be enough to meet our ambitions around this."[157]

The Secretary of State cited the example of University College Hospital London which he said would probably be the first half a billion pounds hospital in the NHS; in his view, it was "not the case" that this money would otherwise automatically be available from the London Regional Offices Capital Fund.[158] He was, however, adamant that the process offered a genuine test of value for money.[159]

95. It needs to be emphasized that PFI is not new money, it is a new way of managing the flow of tax-payers' money. A key difference between PFI and PSC lies in their cash profiles. A publicly funded project is "front-loaded" with significant levels of funding needed in the construction years. After that expenditure levels tail off rapidly. This contrasts with a PFI scheme which has more even levels of year on year funding. The Government argues that this enables the PFI route to bring forward more schemes at one time than the publicly funded route. Assuming equal VFM as between the PFI and the PSC, the same number of hospitals would be built under either route, but not at the same time. However, Professor Pollock questioned whether conventionally funded projects needed to be front-loaded. She suggested that a public sector model could also use discounted cash flow which would even out its year on year expenditure profile[160] and make the PSC more competitive.[161] We are, however, not convinced that this would be feasible.

96. We questioned the Secretary of State on the Public Sector Comparator and its implications for value for money. While he defended the criteria adopted, he did offer an interesting insight into the arguments over the validity of the value for money exercise:

    "I think in the end we can have a huge load of arguments about the Private Finance Initiative and whether it is good, bad or indifferent, whether it is good value for money, bad value for money, and all these different things, but in the end its compelling attraction as far as the National Health Service is concerned is that we can get more hospitals built more quickly."[162]

This may well be true. Certainly there is added value to the NHS in getting delivery of new hospitals sooner rather than later. It could, however, be argued that if the hospital is not going to be built using conventional funding the Department should be comparing the cost of the PFI with the costs of not proceeding with the hospital at all.

97. The question of a realistic Public Sector Comparator (PSC) has to be addressed. Comparing the PFI with the PSC may well prove that the PFI is value for money against an artificial comparison, without proving that it is value for money in absolute terms. We recommend that the Department refines the way in which the PSC is constructed. What needs to be carefully assessed is how great the non-VFM benefits are and to what extent they are directly a result of the financing mechanism. We further recommend that the National Audit Office undertakes immediate urgent studies of several major health schemes to establish the economic aspects of VFM: it is the appropriate expert body and is statutorily independent of Government. Given the enormous expenditure consequence of PFI schemes, and their long-term nature, we would ask the NAO and the Department to work to a tighter time table than they would normally follow in drawing up such assessments and to report their preliminary findings to this Committee as well as the Committee of Public Accounts. And, as it is the case that some of these schemes would not attract conventional funding, then the NHS should be transparent about this and in these schemes the real comparison to be put to the public should be the comparison between the PFI and the costs and benefits of not proceeding with the PFI project.

The NHS as purchasers

98. The PFI process is a relatively new departure for the NHS. Those involved in PFI contracts have had to learn quickly the rudiments of negotiation, with little or no experience upon which to draw. In the absence of such experience, much reliance has been placed on outside legal and financial advisers. Several witness commented that the costs for these advisers were unacceptably high. The Department estimated that roughly £52 million had been spent on advisers on the first 18 major PFI schemes.[163] However, the Secretary of State was at pains to point out that the levels of spending on subsequent waves of PFI projects were significantly lower: "As far as average legal fees and average financial fees are concerned between the first wave of PFI and the second wave of PFI on legal fees we have seen a 41 per cent improvement, 41 per cent cheaper to the National Health Service, on financial fees a 48 per cent improvement, 48 per cent cheaper to the National Health Service".[164]

99. The PFI experience has also been refined with the introduction of standard contracts. Mr Peter Coates, Head of the Department's Private Finance Unit, explained that the standard form of contract drawn up by his unit was now obligatory for all PFI schemes and afforded savings of around £200,000 to £300,000 per transaction:

     "We introduced the standard payment mechanism to stop negotiation around paying for the scheme. There is standard central guidance on what level of output we want, what level of service we want from the contractor and we negotiated a design development protocol agreement with major contractors ... about what information is required by both sides to deliver a fixed price PFI contract."[165]

The CBI commented that the standard contract had greatly improved the time and costs of procurement and had also improved risk transfer.[166]

100. Of the trusts we examined there was an improving trend as the lessons of the first wave were learned by the second wave. Our witnesses from Durham told us that, as theirs was one of the first trusts to undertake a PFI project, it was very much a new initiative and there was nobody within the trust with previous experience of a PFI deal.[167] In addition to this lack of experience, the process itself was in its infancy. The Private Finance Unit in the Department did allocate an officer to the Trust, who would attend some of the negotiations, but Councillor Kevin Earley, Chair of the North Durham NHS Trust, without wishing to criticise the unit, felt that the PFI unit "could have been a bit more of a support unit in the true sense of the word".[168] Mr Mason, who managed the first Durham PFI is now managing a second and he declared himself impressed with the new standard contracts believing them to be "the single most important advance" in PFI procurement.[169]

101. The business community also acknowledged the benefits of dealing with experienced NHS partners. KPMG have extensive knowledge of PFI and its representative, Mr Tim Stone, provided us with their view. He felt that while the NHS now had a number of individuals who were experienced in PFI negotiations, "very, very few of them take the experience they have learned ... and reapply it" on other projects. He could think of only two senior personnel who had been involved in more than one project. This he felt was a waste because where individuals did have the opportunity to take part in another PFI there was a step change in the quality of the process: "The re-use of that expertise is spectacular. It is bliss for us because we then have a lot less grief to go through; it is real value for the public sector".[170]

102. It is at least arguable that the DoH is more vulnerable during negotiations over PFI as a consequence of its practice of allocating contracts to its preferred bidder at an early stage in the process. Once a preferred bidder has been announced competition ceases and any increases in the tender price will not be subject to further competition.[171]

103. For the NHS to purchase capacity by means of the PFI in a consistent and informed fashion it must provide trusts with a relevant pool of experience upon which they can draw. Trusts are often negotiating PFI contracts for the first time with companies who bring far greater experience to bear. There have been some advances. The Department's central PFI unit has made great strides since the earliest PFI projects and the standardisation of contracts and other documentation has clearly been most beneficial. But we would prefer to see greater sharing of central expertise. We recommend that the Department takes responsibility for ensuring that there is a cadre of people with wide-ranging experience and expertise in dealing with PFI available to each trust negotiating a new PFI project.

PFI contracts

104. Drawing up and agreeing a contract involving large amounts of finance and covering a 30 year period is a complex process for those involved. It is an even more complex process for those not directly involved, but with an interest in the outcome. Many of the memoranda we received from Community Health Councils and action groups complained about the style, production and availability of these business cases. Certainly, from the examples that we have seen, the PFI contracts and their supporting documentation are voluminous and unwieldy. To cite just two examples, the Full Business Case for the North Durham PFI occupies 145 pages, and boasts three and a half inches of accompanying documentation while the Full Business Case for Coventry Walsgrave Hospital runs to some 17,000 pages.[172] CHCs and similar organisations play an important role in the public scrutiny of NHS expenditure, and are at a distinct disadvantage when it comes to assessing a project and its component parts.

105. Mr Coates for the Department acknowledged the problem of getting to grips with the business cases and explained that the Department had experimented with providing summaries: "We did try this process once at Norfolk and Norwich where we produced a summary of the contract rather than the contract itself with in layman's terms what each clause meant and we were unfortunately accused of being secretive because we did not release the contract, we released just a summary. Whatever you do you seem to upset somebody".[173] When pressed, he conceded that publishing both the summary and the full contract together could be the way forward.

106. Many organisations have also been critical of the lack of accessibility of documentation supporting PFI projects. The Democratic Health Network highlighted the tensions between the public sector and the private partner. It felt that considerations of "commercial confidentiality" were likely to interfere in the "openness and transparency" that should characterise decision making in the public sector.[174] This has been the experience of several organisations involved with PFI projects at a local level. Oxfordshire PFI Alert group, a collection of health and community organisations, was formed to monitor its local PFI project. It felt that its task had been impeded by a lack of access to information. In particular, the group was scathing about the public consultation stage of the PFI which it felt demonstrated "almost a complete lack of financial analysis and reporting".[175] The Group said that it had encountered great difficulty in tracking down the Outline Business Case for the transfer of services from the Radcliffe Infirmary to the John Radcliffe Hospital site: "public consultation seems to have been lost in a fog of referring back for revision of plans, financial consultations and patient statistics".[176] South Manchester Community Health Council was also critical of the lack of openness of the PFI project in its area and the approach taken by South Manchester NHS Trust. The CHC argued that a lack of information seriously hindered its task and that significant changes to the PFI schemes had been made without any consultation. Too often it had come up against the barrier of commercial confidentiality. The CHC believed there was no justification on the grounds of commercial confidentiality for concealing the costs of PFI schemes. It also wanted to see public discussion on the strategic impact of a scheme on the wider health economy.[177]

107. Tensions between transparency and commercial confidentiality are an operational hazard, but this should not be seen as unresolvable. The Highways Agency is an experienced purchaser of PFI projects and its standard rules now operate with a presumption in favour of openness which now applies in respect of PFI contracts.

108. For the debate on PFI to move forward far greater transparency is needed. Lengthy and impenetrable documents do little to inspire confidence in the process. This is an obstacle to objective scrutiny. We recommend that it should be a requirement of the PFI proposal that simplified summary documentation, including a financial summary, should be produced in a standard format and in a form intelligible to lay readers for all stages of the PFI procedure and the PSC.

109. PFI documentation should be made more accessible. While there clearly exists a tension between the imperatives of commercial confidentiality on the one hand and openness in the decision making process on the other, we believe that the Government has to give the lead here and insist that, in privately financed but publicly funded projects with such long-term revenue consequences, the balance should be tilted firmly in favour of greater openness.

The impact of PFI on the local health economy

110. When a PFI project is complete an annual charge is paid by the trust. This charge is ring-fenced expenditure and has prompted concerns in a number of our witnesses over its impact on revenue budgets. UNISON noted that "the payment stream is effectively ring-fenced as it cannot contractually be changed by the NHS without incurring penalties". A commissioner under financial pressure would be obliged to look to their non-PFI expenditure for any savings which needed to be made.[178] Some of those trusts we have spoken to were confident that PFI projects were not a constricting burden on their finances. Mr Moss from UNISON drew our attention to a letter written by the Chief Executive of the County Durham and Darlington Health Authority which, in his view, constituted a plea for additional funding for the local health economy as a consequence of the impact of two local PFI schemes.[179] Mr Flook, Finance Director for the County Durham and Darlington Health Authority, said the letter was in fact only "a bid to the Regional Office for recognition of past under-funding and for the allocation of additional resources".[180] Nevertheless, monies paid out to support PFI will be a first call on commissioners and this will limit their future flexibility in times of budgetary constraint.

111. Professor Mayston questioned the potential long-term ramifications of this inflexibility. He felt the need for future flexibility was underlined by both the multi-dimensional nature of demand across different forms of treatment and the technological uncertainty that currently exists over the nature and extent of future cost-effective forms of health care treatment. For this reason he questioned the desirability of the NHS tying itself into 30-year contracts which might constrain its flexibility to respond to future changes and might "risk expensive disputes and litigation if the PFI contract does not easily accommodate such future changes".[181] One such risk was that a PFI hospital could be rendered obsolete before the end of its expected life-span. Though the risk of obsolescence is common to both conventionally financed projects and PFI projects, the level of risk differs between the two. Under a conventionally financed project the risk is limited to the monies invested in the physical asset. A PFI project carries a different risk of the service charge: it should be re-emphasised that PFI provides a service not just an asset.[182] Even if a PFI hospital were to be mothballed, there would remain the liability of the service charge for the duration of the contract.

112. It could be argued that PFI has the potential to inhibit long-term flexibility in the light of new technologies and changing patterns of care. The Government must ensure that PFI contracts are sufficiently flexible to be able to respond to changes in demand without major penalties to the NHS. Therefore we recommend that the Department should assess the future structure and requirement for health assets and that all future contracts- whether PFI or conventionally funded- should be examined in this light.

Staff transfers

113. Intrinsic to PFI schemes is the maintenance of the fabric of the hospital by the private sector partner and also the operation of hotel services. This involves private contractors taking over the non-clinical responsibilities, and the transfer of non-clinical staff to the contractor. Where staff are transferred, following a PFI project, the consortia must ensure that Transfer of Undertakings (Protection of Employment) (TUPE) applies and pension schemes have to be broadly comparable to the existing scheme.[183]

114. While trades unions welcomed TUPE protection for transferred staff, most of those submitting evidence remained opposed to staff transfers. UNISON's view of private sector involvement was unequivocal: "The experience of private sector provision of support services in the NHS has been one of failure. Private sector provision has not improved the quality of services, it has broken up the NHS team and created a two-tier workforce and it creates obstacles to the provision of integrated services".[184] To support its argument, it pointed to the Government's own audit of cleaning standards of April 2001 in which 20 of the 23 hospitals that failed the audit were from the private sector.[185] Mr Stephen Weeks, National Officer for UNISON, was also concerned that new staff taken on by the private sector would not be offered similar conditions of service, resulting in the creation of a 'two tier workforce'. He further argued that pay and conditions would deteriorate with private sector contractors unable to offer enhanced terms and conditions for fear of being undercut by competitors.[186] A rather different position was taken by Amicus-AEEU, whose member survey of those transferred to private contractors suggested high levels of satisfaction and a strong sense of protection in their employment.[187]

115. Although Registered Nurses are not transferred under PFI schemes, the RCN raised concerns about the increase in the proportion of non-registered nurses at PFI hospitals. In its recent survey, only one of the six largest schemes had reported growth in the number of registered nursing staff employed by the trust, and in one trust the number of non-registered exceeded that of registered nurses.[188] However, we have not received any evidence to compare this with other new schemes or existing trusts.

116. The trusts also voiced some doubts over the practicalities of staff transfer. When we took evidence in Durham, Councillor Earley argued that staff transfer created "a lot of uncertainty on a very individual, person by person basis" and that his preference would be for all staff to remain in the public sector.[189] Mr Phillip Turner, Director of Operations for Non-Clinical Support Services, Bradford Hospitals NHS Trust, explained the potential conflicts:

    "I think you do lose control of the services, in a number of ways ... The debates that I am having with nursing at the moment, is that they want the soft FM [Facilities Management] people to be part of the ward team, they are not bothered about having the budgets, but they actually want them to be part of the team ... they said that in their experiences they have not felt that when they have had contractors on the ward they have actually felt they belong to the Trust, they work for somebody else, and they have found that difficult."[190]

117. When we visited Durham, the ward sisters explained that they now worked within a structure called 'Patient Focus Care'. This brought together both NHS staff and contract staff on the wards under the management and leadership of the ward matron. The matron had the authority to organise all the contract staff as if they were NHS staff.[191] This had had positive effects and re-established a team approach. This was not the experience in Carlisle where the private sector partner retained the day-to-day management of its staff.

118. The Government is clear that it considers staffing matters to be important. The 2001 Labour manifesto contained the commitment that: "PFI should not be delivered at the expense of the pay and conditions of the staff employed in these schemes. We will seek ways in which, within the framework of PFI management, support staff could remain part of the NHS team".[192] As part of this commitment, the Department is now operating three pilot schemes at Stoke Mandeville, Roehampton and Havering in which 'soft' facility staff retain all their NHS employment terms, but are managed by the private sector (the "Retention of Employment Model").[193]

119. Notwithstanding their opposition to staff transfer, the unions were willing to work with the Retention of Employment Model (REM). However, both the GMB and the NHS Confederation were concerned that progress on the pilots schemes had stalled.[194] They argued that this was because of a reluctance by the private sector to give up direct control of staff terms and conditions.[195] Certainly our witnesses from the private sector gave the REM a cool reception. The Business Services Association (BSA) believed that the model presented numerous potential difficulties. Amongst many employment issues, the BSA argued that the Retention of Employment model would itself create a "them and us" culture between the trust's employees and those employed by the private contractor, which would become more pronounced as secondees were offered posts on promotion for which they had to become employees of the private contractor.[196] In terms of risk, the BSA was concerned that the private contractor would not be comfortable managing the risk of penalties for non-availability of services when the contractor did not employ staff directly. The BSA suggested this might entail additional risk costs in the contract. Similarly, any penalty regimes would be hampered by the need to establish whose staff were responsible for any problems caused.[197] The CBI believed that the REM was "deeply problematic" and that "workers would lose out on promotion and blame each other where problems did arise".[198] KPMG was of a similar view stating that there has been "considerable private sector concern about the pilot projects where the workforce remain in the public sector".[199]

120. There is no dispute that staff transfer has proved a highly contentious issue, and there are genuine concerns about the creation of multi-tier workforces working with different pay and conditions. If staff transfers are an inevitable part of the PFI process then greater thought needs to be given to ensuring that NHS and private sector staff have a clear understanding of their roles and duties. We were impressed with the Patient Focus Care model in Durham and believe that the Retention of Employment Model offers the greatest potential for a well integrated workforce. We recommend that the Department redoubles its efforts on the Retention of Employment Model and look forward to seeing the results of the pilot schemes.

Design issues

121. One of the benefits sometimes attributed to PFI is that of innovation in design. Mr Stone of KPMG told us that the PFI released "an army of skills" in the private sector, when contractors were given a brief which demanded a particular end-product, rather than one which demanded control over every last detail.[200] However, the evidence here is mixed. UNISON was unimpressed with the standard of design in the PFI projects it had studied, complaining of faults which it attributed to cost cutting and sheer bad design.[201] The Commission for Architecture and the Built Environment (CABE) also questioned the delivery of better design. Its design review committee and enabling panel has advised its clients working on PFI projects and therefore has close experience of them. It concluded that to date "many PFI hospitals have failed to deliver the step-change in the quality of the built environment-in terms of functionality, overall appearance and comfort-that is clearly desired by the Government".[202] CABE also referred to evidence from the King's Fund, the IPPR and the Office of Health Economics which supported their view.[203]

122. This may be due, in part, to the speed with which PFI projects are concluded. Several witnesses argued that there was not sufficient time allowed for design. Furthermore, we have seen examples of where the design team and the trust have not been sufficiently close. This also can create problems. In Carlisle we were told that, during the design process, clinical staff were shown small scale models which looked impressive, but disguised the fact that spaces between beds were smaller than anticipated. They suggested that the use of full scale mock-ups of wards would have prevented these problems.

123. Closer input into the design process by trust staff would be beneficial. We recommend that staff should have a greater input in the design phase, even to the extent of requiring that there should be a full mock up of a ward in advance of building work taking place. We also recommend clinical expertise is actively involved in the PFI team in order that functional and clinically operational relationships are understood and incorporated in the design of the project.

124. Given that PFI is relatively new, that the money tests are often marginal and that those tests have created much uncertainty, we recommend that more capital monies are made available for major conventionally procured schemes so that PFI schemes could then be properly monitored against a significant number of conventionally procured schemes and the lessons from both learnt for the future.

153   Ev 47. Back

154   Ev 359. Back

155   Q373. Back

156   Ev 117. Back

157   Q82. Back

158   The IPPR assert that if PFI had been abolished at the time of the Comprehensive Spending Review and the same capital spending had been undertaken through normal public spending channels, the sustainable investment rule would easily have been satisfied , and by definition so would the golden rule (the golden rule states that over an economic cycle a government must only borrow to invest). [Building Better Partnerships p.82.] We recognise that any public spend ultimately will have an impact on economic indicators. Back

159   QQ82-84. Back

160   Ev 359. Back

161   Ev 361. Back

162   Q1070. Back

163   Ev 7. Back

164   Q99. Back

165   Q101. Back

166   Ev 302. Back

167   Q112. Back

168   Q117. Back

169   Q115. Back

170   Q392. Back

171   However, proposed changes to the European Commission's rules for public procurement (COM (2000)275 final) may mean that public sector managers will no longer be able to select a preferred bidder to negotiate contract details on an exclusive basis. Industry is concerned that this will significantly raise the cost of tenders and deter contractors from working on public sector deals.  Back

172   PFI in the NHS: A Dossier, GMB, 2001. Back

173   Q1081. Back

174   Ev 335. Back

175   Ev 333; Oxfordshire PFI Alert Group comprises local branches of the BMA, the RCN, the NHS Consultants' Association, the CHC, health trades unions and the Oxfordshire Pensioners' Action Group. Back

176   Ev 333. Back

177   Ev 294. Back

178   Ev 48. Back

179   Q153. Back

180   Q204; Ev 75. Back

181   Ev 319. Back

182   See para 54. Back

183   Ev 4. Back

184   Ev 84. Back

185   Ev 86-87. Back

186   Ev 52. Back

187   Ev 369. Back

188   Ev 58. Back

189   Q117. Back

190   Q230. Back

191   Q124. Back

192   Ev 4. Back

193   Ev 4. Back

194   Ev 244; Ev 352. Back

195   Ev 352. Back

196   Ev 81. Back

197   Ev 84. Back

198   Ev 304. Back

199   Ev 119. Back

200   Q390. Back

201   Q171. Back

202   Ev 312. Back

203   Ev 312. Back

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