APPENDIX 4
Memorandum by T G Fellows (PS 26)
1. INTRODUCTION
1.1 I am making this submission as a private
individual with several years of practical experience relevant
to the role of the private sector in the NHS and to the Private
Finance Initiative in particular.
1.2 Working in a public corporation I was
responsible for negotiating and managing contracts with companies
in the private sector, mostly for the design and delivery of specified
and often novel products in the fields of civil, mechanical and
electrical engineering. Risks had to be handled and innovation
encouraged, as in hospital building contracts.
1.3 Following retirement, I served for seven
years as a Secretary of State appointee on the Oxfordshire Community
Health Council, for half that time as its Chairman. I attended
and participated in Health Authority and Trust Board meetings
as well as the Project Board of a major current PFI scheme.
1.4 I was also involved, on behalf of the
CHC, in organising a conference on PFI held in Oxford in September
2000. The invited keynote speaker was Andrew Smith, Chief Secretary
to the Treasury and MP for Oxford East, and the meeting was chaired
by Sir Christopher Paine, President of the BMA.
1.5 The conference report, a detailed response
from the Treasury defending PFI, and a brief commentary on the
response are enclosed[1].
(They are also available on: www.oxford-tuc.org.uk/hospitals.)
2. RECOMMENDATIONS
2.1 PFI and PPP schemes should be discontinued—for
the reasons given in the next section.
2.2 The Government should bring to a usable
stage the improvements they are making to the traditional procurement
route. (Treasury response to the Oxford conference, para 23) Let
us call this improved method "Direct Purchase" or DP.
(See section 4)
2.3 All new major capital projects in the
NHS should be put out to tender on a Direct Purchase basis. If
PFI is continued, it should be in open competition with DP—with
the outcomes published. (It follows that the Public Sector Comparator
would be scrapped.)
3. PFI ANALYSIS—BASIS
FOR RECOMMENDATIONS
3.1 Finance
3.1.1 Is the reason for persisting with
PFI the original gee-whiz idea of keeping PFI-created assets off
balance sheet and out of the PSBR—an idea which was thought
to have been laid to rest? But this would be a prime case of an
accountancy tail wagging a common-sense dog. Or, in order to claim
credit for "additional" investment in the NHS, is it
thought expedient to offer the private sector the extra financial
inducements of PFI? (To "be incentivised through positive
means": Treasury response, para 5) But any short term electoral
advantage will be bought at the expense of those local communities
and Trusts which will bear the brunt in the long term should the
benefits of PFI prove illusory.
3.1.2 No fundamental distinction can be
made between "private" (PFI) and "public"
(DP) capital as both borrow from the private sector, although
the cost of borrowing is lower for the latter. Taxpayers meet
the cost of repayment with interest in both cases, as well as
profit in PFI schemes with an equity element.
3.2 Value for Money
3.2.1 Judgement in this area depends, at
present, on an assessment of actual PFI bids against the Public
Sector Comparator (PSC), an artificial construct intended to represent
the likely cost, using traditional methods, of providing similar
buildings, maintenance and services. It includes risk premiums
based, in part, on historical cost over-run data. The value of
the PSC, against which they must compete, is revealed to PFI bidders
from the outset. (Treasury response, paras 16/17).
3.2.2 However conscientiously the PSC is
calculated, it cannot claim the accuracy of actual competitive
bids under traditional (or DP) rules. For example, innovative
ideas for design or construction on the part of contractors will
not be taken into account.
3.2.3 The artificiality of the value for
money assessment is compounded by the generally understood non-availability
of public capital for schemes judged by the Department of Health
to be "PFI-able". Trusts unavoidably come under pressure
to demonstrate better value for the PFI route in order to ensure
the go-ahead for a needed new hospital or other major facility.
It may be significant that it is the PSC risk premium which has
often tilted the balance in favour of PFI. (Gaffney et al, BMJ
10.7.99).
3.3 Risk Transfer
3.3.1 The fixed price element in PFI brings
the familiar benefits of greater budgeting certainty and easier
cost control. We found, during my employment, that the use of
fixed price contracts, wherever possible, also meant that we did
not have to build up in-house capability to the level needed to
supervise the potentially cheaper cost-plus alternative. There
were no illusions about otherwise benefiting from "risk transfer"
to the private sector; the survival of companies is proof of their
competence to cover risks of cost or time over-runs adequately
in their bids.
3.4 Ownership and Services
3.4.1 Under PFI, for 30 years or so, asset
ownership and the provision of certain transferred services will
be in the hands of the private sector. The problems of indirect
management of staff with changed loyalties will follow. Concern
may also grow, in spite of the Treasury's rebuttal, about the
influence which could be exercised on Government as ever increasing
proportions of the newest NHS hospitals and other facilities come
to belong to private companies—foreign as well as British
since GATS ensures that there can be virtually no control over
the downstream transfer of ownership.
3.5 Building Quality and Maintenance
3.5.1 It is argued that 30-year undertakings
to maintain the buildings will result in high quality specification
and construction so as to ensure low subsequent maintenance costs.
But cash flow considerations suggest precisely the contrary course,
particularly as maintenance undertakings may have to be legally
enforced by the Trust concerned, against who knows what owner,
using money which, it would be pointed out, should properly be
applied to patient care.
3.6 Ethics
3.6.1 The concept of partnership between
public and private sectors in PFI and PPP schemes leads to problems
not encountered in the more usual complementary relationship in
which the differing objectives of the two are recognised.
3.6.2 As a result, profit maximisation may
take precedence over service to patients and duty to staff in,
for example, choosing the location of new hospitals, in their
design, capacity and construction, and in the services to be transferred.
The built-in bias in value for money analyses is referred to in
section 3.2.3.
4. DIRECT PURCHASE
4.1 "The availability of public capital
is not at issue." (Treasury response, para 6) Nevertheless
consideration might be given to raising locally some of the capital
needed for, say, a new district general or specialist hospital
so as to generate the interest, support and sense of involvement
seen in Oxfordshire and elsewhere in the case of community hospitals.
4.2 Fixed price contracting should be the
normal practice in order to gain the benefits, including any risk
transfer, enumerated in section 3.3.1. On occasion, especially
if innovation is required, the uncertainties can be so large that
they cannot be sufficiently evaluated within the limits of expenditure
companies will commit in the course of preparing their bids. Bidders
will be concerned about under-estimating the risks and purchasers
about excessive risk premiums. A solution is to award preliminary,
brief, fixed price, fixed term contracts to a selected short list
of companies to enable them to arrive at firm designs, prices
and completion dates for the subsequent construction stage.
4.3 Ownership would be with the NHS from
the start. This should make it both more feasible and more economical
for changes to be made to the structure, the services and the
use of the facility to suit the inevitable developments in medicine
over time.
4.4 Conventional guarantees for buildings
and equipment could be demanded and subsequent maintenance contracts
placed with whichever organisation is most suitable at the time.
Build quality standards would be specified and verified by the
Trust.
5. CONCLUSION
5.1. In short, it seems to me that, in the
case of PFI:
— Value for money analyses are untrustworthy.
— Risk transfer is common to all fixed
price schemes.
— Ownership outcomes are not predictable
or rectifiable.
— Building quality claims are implausible.
— Ethical problems are inherent.
1 Not printed. Back
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