Written evidence submitted by Greg Dropkin
and Sam Semoff on behalf of Keep Our NHS Public (Merseyside)|
The Value for Money assessment of PFI schemes and
the democratic accountability of the process are criticised with
reference to the recently approved Outline Business Case for redevelopment
of the Royal Liverpool and Broadgreen University Hospitals. The
role of PFI debt in forcing NHS "Efficiency Savings"
is highlighted. The claim that Care in the Community will reduce
the required bed capacity in the current economic climate is questioned.
1. Difficulties in meeting PFI payments have
plagued NHS Trusts. Some current examples are cited in a press
release (1 April 2011) from the campaign group "Health Emergency"
, media reports from the BBC [2, 3, 4], Telegraph ,
and Liverpool Daily Post .
2. We would like to highlight four other issues
regarding the impact of PFI on the NHS.
(A) Value for Money.
(B) Democratic accountability.
(C) PFI debt and "Efficiency Savings".
(D) Care in the community.
3. (A) The use of PFI is routinely justified
on the grounds of "Value for Money". Yet the evidence
from studies of actual PFI schemes is at best equivocal as to
any overall advantage of PFI, see Hellowell , Pollock .
4. Treasury Guidance on Value for Money includes
a Quantitative Assessment procedure which includes at least one
questionable assumption: "Optimism Bias" is applied
to conventional procurement but not to PFI, giving an inbuilt
advantage to PFI in the comparison. Yet the Treasury has acknowledged
that on-time and on-budget performance can be secured through
conventional procurement, so long as the design and build services
are procured through a fixed-price, "turn-key" contract.
5. In practice, the actual application of the
Quantitative Assessment is open to abuse. In the recently approved
Outline Business Case for the PFI scheme to redevelop the Royal
Liverpool Hospital, there was strong evidence that the scheme
would not provide Value for Money, and internal documents from
the Dept of Health acknowledged this in December 2009.[7, 9] The
scheme was subsequently revised but was subject to legal challenge,
after final approval, as it still involved several questionable
assumptions and violations of Treasury policy. The withdrawal
of Legal Aid prevented the evidence from being tested in the High
Court. During public debate in the local media, political proponents
of the scheme acknowledged that Value for Money had not been proven.
For example, Liverpool City Council leader Joe Anderson told BBC
Radio Merseyside on 17 Nov 2010 "I know it doesn't provide
Value for Money now or in the future, but it's the only game in
6. Critical errors in the Value for Money assessment
of the scheme as approved included:
(1) Justification of chosen parameter values
for the Liverpool scheme by reference to just one other recent
scheme (North Bristol) when Treasury guidance required taking
account of experience in all relevant PFI schemes. Several directly
relevant recent schemes were omitted from consideration when selecting
parameters for Liverpool.
(2) A very low value for the Internal Rate of
Return was said to apply at North Bristol, but a higher IRR value
for North Bristol was quoted by senior officials in two internal
Dept of Health documents, one of which was the final submission
to the NHS Director of Finance, David Flory, dated 4 March 2010,
after the North Bristol scheme had closed.
(3) A value for the credit spread adopted from
North Bristol contradicted the value supplied under a Freedom
of Information request to North Bristol.
(4) An exceptionally high value of "optimism
bias" implied an exceptionally high transfer of risk to the
PFI, contradicting the exceptionally low value of IRR assumed
for the Liverpool scheme.
7. Had any of the errors been corrected, the
scheme would have failed the Treasury's VfM assessment. Even with
these errors, the scheme's VfM assessment found only an 0.03%
advantage for PFI over conventional procurement. In any case,
uncertainty in the parameter valueswhich are only predictionsmeant
there was no significant advantage in PFI over conventional procurement.
8. Proposed PFI schemes invariably show positive
VfM in order to obtain approval. Whilst the VfM assessment includes
a Qualitative questionnaire, in fact there has never been a case
where an OBC for a PFI scheme has been approved where the Quantitative
analysis shows a negative VfM. 
9. (B) The Liverpool story also illustrates the
lack of democratic accountability in the process of approval for
PFI schemes. During the initial consultation in 2008, the public
was not told that PFI would be used to finance the scheme. The
High Court then forced a second "engagement exercise"
with the public now informed of PFI. However, the Outline Business
Case was not disclosed and there was no means to question any
of its assumptions. The scheme's approval was announced in the
press by the then Sec of State for Health in late March 2010,
though in fact the scheme was only given final approval in mid
April. The Outline Business Case was eventually published after
the General Election.
10. Thus throughout the entire period of two
public consultations, and even after final approval from the then
Sec of State, the public did not know exactly what the scheme
entailed, whether it would provide Value for Money or be Affordable.
Instead, the scheme was reviewed internally by the Dept of Health
and the Treasury. Without a legal challenge, the failings identified
by senior officials at the Dept of Health would have remained
hidden from the public.
11. There is a further lack of public accountability
during the period following approval of the OBC. Changes in the
wider economic context, eg interest rate rises, may adversely
affect the VfM and/or Affordability of a PFI scheme after the
OBC has been approved, without any mechanism for the public to
re-open the decision.
12. In any case, the contractual negotiations
leading to the Full Business Case are commercially confidential,
as is the FBC.
13. A futher lack of accountability can occur
at Local Authority level. Council committees, including Oversight
& Scrutiny, may fail to undertake or commission any independent
analysis of the Outline Business Case and instead rely on Trust
officers to brief them on the PFI scheme.
14. The lack of public accountability is very
serious given the scale of public funds involved in PFI hospital
building schemes, with debt repayments typically running over
30 years. The public must be able to weigh up whether, in view
of the long-term debt burden imposed by PFI and repaid from local
NHS budgets, the costs of obtaining a new hospital by this route
outweigh any advantages.
15. (C) In August 2009, the Daily Telegraph
 reported that the massive "Efficiency Savings"
which had been announced that summer by the NHS Chief Executive
Sir David Nicholson were themselves the consequence of mounting
PFI debt. At the time the savings were to be £15 billion,
they turned out to be £20 billion.
"Repayments during the next spending review
periodfrom 2011 to 2014will reach £4.18 billion,
almost £1 billion more than current levels, according to
the documents, sent from the Department of Health to the Treasury.
"The steep increases come as the NHS prepares
for its annual budget to be frozen, meaning cuts in real terms
as PFI and other costs rise.
"As a result, hospitals have been ordered by
Sir David Nicholson, the NHS chief executive, to make 'efficiency
savings' of at least £15 billion over the same period."
In other words, NHS cuts in real terms are being
caused by PFI.
16. (D) PFI schemes to redevelop or build new
NHS hospitals routinely involve a reduction in bed capacity in
order to achieve Affordability, though the slimmer design is often
explained by reference to "new medical techniques" and
an "Out of Hospital strategy", ie Care in the Community.
However, bed shortages have been a problem at PFI hospitals. [12,
17. In the current circumstances, it must be
open to question whether Care in the Community will actually reduce
the demand for hospital care sufficiently to justify reduction
in bed numbers. The current circumstances include recession, unemployment,
inflation, cuts in Welfare, all of which will increase poverty
and therefore increase demand for healthcare both in and out of
hospital. Furthermore Care in the Community depends on cooperation
between the NHS and local authorities, whose budgets are also
being cut. Care in the Community budgets are not ringfenced, and
so it is questionable whether such Care will be delivered as planned.
Should the Health & Social Care Bill become law, the PCTs
currently responsible for developing Community Care will be abolished
and the GPs will have new responsibilities arising from the reorganisation.
18. Thus, separate from any concern over Value
for Money, there should now be questions as to whether the smaller
hospitals provided under PFI will be adequate to meet demand in
the coming period.
19. If the Select Committee wishes to safeguard
the NHS, it should recommend the complete replacement of PFI funding
for hospital building and redevelopment by Public Finance, a cheaper,
 press release by Health Emergency 1 April
 Witness Statement by Mark Hellowell, in Sam
Semoff v Secretary of State for Health. Case No: CO/7509/2010.
Available on request.
 Reply by Leigh Day & Co., in Sam Semoff
v Secretary of State for Health. CO/7509/2010. Available on request.
NHS HOSPITAL TRUSTS
OF PFI SCHEMES
Friday 1 April 2011
More and more NHS hospitals built at high cost with
private finance in the last decade (under the controversial Private
Finance Initiative) are already closing beds and axing clinical
and other staff in a desperate bid to balance the books as NHS
budgets face the biggest-ever squeeze.
And now cuts and closures of services are being combined
with asset-stripping sales of land and property to bail out floundering
The financially-strapped South London Healthcare
Trust, which includes two financially-disastrous PFI hospital
schemes (Bromley's Princess Royal University Hospital and the
Queen Elizabeth Hospital in Woolwich) has announced plans to flog
off "spare" land assets on several sites. This will
virtually dismember what remains of the Queen Mary's hospital
in Sidcup, where A&E and maternity services have already been
axed, despite pre-election promises that they would be kept open
- killing any last faint hopes of restoring the lost services.
In West London, the struggling West Middlesex Hospital
Trust is planning to axe hundreds of nursing and admin jobs, and
close more of the beds in the PFI-funded hospital, seeking to
cut spending by 12% in two years.
In North East London, the £239 million Queen's
Hospital in Romford, part of Barking Havering & Redbridge
Hospitals Trust, is running with a whole floor unused, while the
Trust is still seeking ways to close most of the 18-year old King
George's Hospital in Ilford in order to stem its continued yearly
Upwards of 100 beds in the most costly PFI development
in the country, the £1 billion Bart's & London Hospital
(where each bed is costing £1 million to build, and £5
million over the lifetime of the contract) are also to be closed
- before they are even built, leaving the Trust saddled with the
escalating bill for building capacity it cannot afford to run.
In Portsmouth, too, a brand new £256 million
1,200 bed Queen Alexandra Hospital has announced 700 job losses
and the closure of 100 costly beds in a battle to balance the
books. The "unitary charge" PFI bill, which rises each
year, is £43 million this year, making the total cost of
the hospital and support services under PFI a staggering £1.6
Many other PFI hospitals are facing financial problems
but have yet to announce cuts. But perhaps the financial nonsense
of PFI is clearly underlined by the plight of the West Middlesex
Hospital, which has already paid out £89 million to the consortium
which built the £60 million hospital, but faces another 20
years or more of payments totalling more than £420 million
before the £515 million contract is complete.
Commenting on the latest revelations, Health Emergency's
Information Director Dr John Lister said:
"PFI means that hospitals face rising bills
each yearregardless of their income: and it also means
that private sector profits are protected by legally binding contracts
taking an increased share of declining Trust budgets, while clinical
services, patient care and the jobs of NHS staff are sacrificedin
an impossible battle to balance the books as the NHS faces real-terms
cuts for the first time in a decade.
"Isn't it significant that Andrew Lansley's
massive and controversial Health and Social Care Bill is seeking
to break up almost every structure in our NHS, claiming to make
the system more efficient, but leaving PFI intact, and instead
opening even more ways for the private sector to rip off the taxpayer
and undermine public services?
"The Tories appeared opportunistically critical
of their own PFI policy when Labour was implementing it, but are
now happy to see this growing haemorrhage of cash from the NHS.
"If ministers really wanted value for money
in the NHS, they would scrap Lansley's crazy Bill which hardly
anyoneeven GPssupports, and which will cost £3
billion or more to implement, and focus instead on nationalising
the PFI hospitals, many of which will be paying through the nose
for a generation to come to banks that the taxpayer already effectively