House of Commons - Treasury - Written Evidence

Private Finance Initiative - Treasury Contents

Written evidence submitted by the British Medical Association

The British Medical Association (BMA) welcomes the opportunity to respond to the Treasury Committee inquiry into Private Finance Initiative.

The BMA is an independent trade union and voluntary professional association which represents doctors from all branches of medicine all over the UK. It has a total membership of over 144,000. We promote the medical and allied sciences, seek to maintain the honour and interests of the medical profession and promote the achievement of high quality healthcare.

EXECUTIVE SUMMARY

(i) The BMA submission focuses on Private Finance Initiative (PFI) projects in healthcare. Under PFI, the public sector enters into a long term contractual arrangement with private sector companies to design, build, finance and operate an asset such as a hospital. At the end of the contractual period, the buildings then pass to the public sector. The NHS does not make an upfront capital payment but is contractually obligated to pay an annual leasing and maintenance payment to the private sector for the use of the facilities.

(ii) BMA policy has been consistently opposed to the use of PFIs to develop healthcare facilities since its introduction in the early 1990s. The main objections to the use of PFI schemes have been the high cost, associated low value for money, the lack of flexibility that results, and the transfer of public funds into private sector profits. The BMA has significant concerns about their long-term affordability, and their impact on local health economies and service delivery. This is particularly relevant today as huge pressure on public finances sits alongside the Government's current proposals for major structural change and demands for savings from the health service.

(iii) The NHS is being tasked to find efficiency savings of £20 billion by 2014-15, whilst continuing to face the demands of an ageing population and the rising costs of medicines and new technology. Cuts in spending in other areas, such as welfare benefits and social care, will have a knock-on effect on demand in the NHS. However at the same time (during the next spending review period from 2011 to 2014) repayments for NHS PFI projects will reach £4.18 billion, an increase of almost £1 billion from current levels.[1] As a legal contract PFI removes discretion in capital spending[2] and it is likely that hospitals will be forced to make cuts to health care services to make their ongoing PFI repayments.

(iv) The BMA believes that, in the current financial climate and in light of mounting debt repayments, the Government should renegotiate all health PFI contracts in the UK, to counter any particularly unreasonable terms they may contain. This should be part of the policy change brought about for the rest of the public sector by the current economic climate.[3] Furthermore, the PFI method of financing new hospital buildings should be stopped.[4]

(v) The BMA's position was reinforced by a 2011 report from the Public Accounts Committee (PAC), which found no evidence that PFIs offered better value for money than other types of funding for large projects. Like the BMA, the PAC called on Government departments to do more to ensure they get the best out of existing PFI contracts, accusing the Department of Health of failing to use its leverage in the market to secure the best possible deal for taxpayers.[5]

1. What are the strengths and weaknesses of different public procurement methods?

1.1 The BMA is committed to supporting an NHS that is publicly funded through central taxes, publicly provided and publicly accountable, that seeks value for money but puts the care of patients before financial targets, and significantly reduces commercial involvement.[6] The smart use of public procurement of public services would be one step in ensuring that public money was being used to provide quality healthcare to the benefit of patients and the public, and not profits for shareholders.

1.2 It is inevitable that the NHS Estate will need upgrading and ongoing maintenance into the future. However, instead of relying on the unnecessarily costly and short-sighted procurement method of PFI, we would like to see the introduction and delivery of a policy of public ownership of all future NHS hospitals. Further, we call on the Government to bring PFIs into public ownership.

1.3 Underpinning the approach to private sector involvement in public services such as PFI is the assumption that public procurement is slow and expensive, whereas private companies are faster and more efficient than the State. Consequently, it has been argued by PFI supporters that PFI is cheaper than public procurement. However, Government claims that PFI has reduced cost and time overruns have not stood up to scrutiny. Research[7] has found that five reports often cited by the Treasury are each flawed.[8] For example, only one report claimed to compare PFI with conventional procurement.[9] Further research has shown that this work suffered from a sample bias with selected public projects involving a disproportionately large number of very complex schemes which are particularly vulnerable to cost and time overruns.[10] The report also measured time and cost overruns on public procurement projects from an earlier standpoint than PFI projects thus resulting in incompatible comparisons.[11] It can be concluded that the performance of PFI projects in comparison to publicly-procured projects appears overstated and not evidence-based.

2. If PFI debt had been on-balance sheet rather than off-balance sheet would pfi projects have been used as much? How should PFI deals be accounted for?

2.1A powerful motivation for Government's approval of PFI over the years is that it enables the Treasury to borrow money without the debt appearing on the public balance sheet. The BMA has previously called on the Government to "include future debts to PFI companies when calculating the NHS deficit."[12] In principle, the BMA believes that Government finances should be transparent and accountable to tax-payers. The Government should ensure the public has a proper account of the rates of return and profits of PFI contracts and it must reveal the true scale of PFI debt and current and future liabilities. As the Economist has written, the case for PFI "would be more convincing without cooking the books."[13]

2.2 The financial crisis has had a significant impact on launching new PFI projects[14] and the Government should rethink its involvement in such schemes. The traditional source of PFI finance came from the international bond market which has since contracted. The other alternative to raising finance is via a bank loan but the financial crisis has also adversely impacted on the banking industry and the availability of credit. Given recent volatility in global financial markets, banks appear reluctant to lend for long periods of time, which is an essential element of PFI.

2.3 It could be argued that it would not have made a great deal of difference in how often PFI projects were used if debt had been off-balance sheet, as governments' preference for PFI means it has been viewed as "the only game in town" for the last decade. In theory, projects are value tested against what the project would cost under public finance. If this process concludes that private finance does not represent value for money, a public procurement method is supposed to be chosen. In a context where PFI is the only funding available and many NHS hospitals are in need of capital works, managers have faced "perverse" incentives to "manipulate" their assessments[15] and subsequently we have seen a proliferation of PFI projects.[16]

2.4 Additionally, PFI projects still involve substantial public sector investment by the Government just as public procurement would. While PFI alters the timing of payments to creditors by having private companies meet the upfront capital cost of the infrastructure, it does not reduce or eliminate payments.[17] The Government still has to make repayments over the life of the PFI contract. Rather than a way of increasing investment, PFI projects are an expensive and short-sighted means of refurbishing and building new hospitals.

3. How far can risk really be transferred from the public to the private sector?

3.1 Since governments are unlikely to default on their repayments and become bankrupt, they are able to borrow money at more attractive rates than private companies.[18] Consequently, as PFI deals involve the private sector borrowing at higher rates, the cost of financing a new hospital is greater. Nonetheless, supporters argue that PFIs are value for money because risk and associated costs (which would have been shouldered by the public sector) are transferred to the private sector. The BMA is not convinced that there is significant risk transfer to the private sector and consequently, this argument is fundamentally flawed.

3.2 The structure of PFI makes it difficult to evaluate risk. The private sector companies involved in PFI projects establish a separate company often known as a Special Purpose Vehicle (SPV) which then contracts with the public sector. The SPV transfers risk to its constituent parts (for example the construction company or the facilities management provider), making it unclear where the risk and ultimate responsibility lies.

3.3 Arguments as to the importance of risk transfer are further undercut by research which found that hospital trusts were paying a "risk premium"—conservatively estimated at 30% of the total construction costs—to ensure projects are running to time and budget.[19] So while it is true that the private sector absorbs the cost of overruns etc, additional charges are written into the contracts to account for this.

3.4 PFI has failed to shift the risk of project failure onto the private sector. If a project runs into serious trouble, the Government has to take action to secure its viability because "the political consequences of letting most PFI contracts go to the wall are usually too great."[20] Hospital projects are simply too important to be allowed to fail. This has been demonstrated recently with the Government setting up a new unit within Treasury to provide capital funding to PFI schemes frustrated by the lack of credit available in the current financial climate.

3.5 There are also significant risks for the public sector relating to the long-term affordability and inflexibility of PFI loans. PFI contracts legally bind NHS Trusts into making substantial payments over 25 to 30 years in a difficult financial period. This presents risks to local health economies and result in reduced services for patients. It has already been reported that the PFI scheme at the Queen Alexandra Hospital in Cosham, which has already closed wards and cut 700 jobs as a result of being in a "challenging" financial position, is costing the hospital £43m per year.[21]

3.6 The inflexibility of PFI also limits the ability of NHS trusts to strategically plan for the future as they are contractually bound to pay for a building and a pattern of service provision which could later prove inappropriate and unfit for purpose. It is interesting that this is occurring at the same time that the Government is encouraging service redesign and is attempting to move more health care services from secondary care into the community and primary care sector. The relationship between these changes and hospitals that have been built or are planned under PFI is unclear. What we do know is that the duration and inflexibility of PFI contracts limits the available options for future strategic planning which could put the delivery of patient services at risk.

April 2011

1 Donnelly L and Ball J "Hospital to cut services to pay for £60bn private finance deal". Telegraph, 8 August 2009. Available at
http://www.telegraph.co.uk/health/healthnews/5995025/Hospitals-to-cut-services-to-pay-for-pay-60bn-private-finance-deal.html Back

2 Greener I. Healthcare in the UK: Understanding continuity and change. 2009. Back

3 Consultants conference. BMA, 2011. Back

4 Annual Representative Meeting. BMA, 2006. Back

5 PFI in Housing and Hospitals. Public Accounts Committee, 2011. Back

6 For more information regarding the Look After Our NHS campaign visit www.lookafterournhs.org.uk Back

7 Pollock A, Price D, and Player, S "An Examination of the UK Treasury's Evidence Base for Cost and Time Overrun Data in UK Value-for-Money Policy and Appraisal", Public Money and Management, 2007; 27 (2):127-134. Back

8 These are: Modernising Construction (2001) and PFI Construction Performance (2003), National Audit Office; Benchmarking Stage Two Study (1999), Agile Construction Initiative; Treasury internal research project report (2002); Review of Large Public Procurement in the UK (2002), Mott MacDonald. Back

9 Review of Large Public Procurement in the UK. Mott MacDonald,2002. Back

10 Public Money and Management (2007) Op cit. Back

11 Ibid. Back