Private Finance Initiative - Treasury Contents

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" [1], media reports from the BBC [2, 3, 4], Telegraph [5], and Liverpool Daily Post [6].

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 [7], Pollock [8].

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.[7]

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 town".

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 values—which are only predictions—meant 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]

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.[10]

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 [11] 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 period—from 2011 to 2014—will 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, 13, 14]

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, saner alternative.


[1]  press release by Health Emergency 1 April 2011, attached.






[7]  Witness Statement by Mark Hellowell, in Sam Semoff v Secretary of State for Health. Case No: CO/7509/2010. Available on request.


[9]  Reply by Leigh Day & Co., in Sam Semoff v Secretary of State for Health. CO/7509/2010. Available on request.








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 Trust finances.

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 deficits.

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 billion.

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 year—regardless 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 sacrificed—in 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 anyone—even GPs—supports, 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 owns."

April 2011

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© Parliamentary copyright 2011
Prepared 10 August 2011