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.
(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.
As a legal contract PFI removes discretion in capital spending
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.
Furthermore, the PFI method of financing new hospital buildings
should be stopped.
(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.
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.
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
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
has found that five reports often cited by the Treasury are each
For example, only one report claimed to compare PFI with conventional
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.
The report also measured time and cost overruns on public procurement
projects from an earlier standpoint than PFI projects thus resulting
in incompatible comparisons.
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."
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."
2.2 The financial crisis has had a significant
impact on launching new PFI projects
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
and subsequently we have seen a proliferation of PFI projects.
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.
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.
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
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 coststo ensure projects
are running to time and budget.
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."
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
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.
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.
1 Donnelly L and Ball J "Hospital to cut services
to pay for £60bn private finance deal". Telegraph,
8 August 2009. Available at
Greener I. Healthcare in the UK: Understanding continuity and
change. 2009. Back
Consultants conference. BMA, 2011. Back
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PFI in Housing and Hospitals. Public Accounts Committee,
For more information regarding the Look After Our NHS campaign
visit www.lookafterournhs.org.uk Back
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These are: Modernising Construction (2001) and PFI Construction
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Two Study (1999), Agile Construction Initiative; Treasury internal
research project report (2002); Review of Large Public Procurement
in the UK (2002), Mott MacDonald. Back
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Economic Affairs (2009) Op cit. Back
Edwards P, Shaoul J, Stafford A, Arblaster L Evaluating the
operation of PFI in roads and hospitals research report no84.
The Association of Chartered Certified Accountants, 2004.
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"Queen Alexandra Hospital expects to make more cuts".
BBC, 10 March 2011. Available at