Private Finance Initiative - Treasury Contents

Written evidence submitted by The Foundation Trust Network


1.  The Foundation Trust Network (FTN) is the membership organisation for authorised NHS foundation trusts and those aspiring to achieve foundation trust status. We have over 200 member organisations from the acute healthcare, mental health, ambulance and community services sectors.

2.  The FTN welcomes the opportunity to respond to the call for evidence on the future of PFI. We have recently hosted seminars with members, the DH and representatives of banks to discuss future options for capital investment in the NHS.


3.  Many of the issues identified and discussed below are not in fact unique to PFI but relate to wider issues about access to capital and investment in the NHS.

4.  Much of the public debate has been critical about PFI contracts (including in the NHS). However, it is important the debate acknowledges that without PFI there would have been few alternative sources of capital funding for large projects. Projects financed through PFI have given the NHS a number of vitally important buildings to replace ones which were often in urgent need of repair (usually delivered in time and to cost).

5.  We welcome efforts to get the maximum value out of existing contracts but believe the government must be wary about making radical changes that might discourage future private investors.

6.  The Foundation Trust policy was intended to bring greater commercial skills and awareness into the NHS. However, at the time PFI was introduced several years before, there was insufficient skill and experience at a local level in dealing with both contract negotiation and management. Although the foundation trust movement has started to address this there is still a way to go.

7.  PFI schemes may be one option for future access to capital for the NHS. However, there should be other alternatives from public capital to additional commercial schemes and joint ventures. Historically there has been insufficient support for capital investment and maintenance, PFI was an attempt to correct this but will not be sufficient on its own in the future.

What are the strengths and weaknesses of different means of securing capital investment for public services (including PFI)? What are the options for the future?

8.  In most cases traditional public procurement methods (ie where the public sector funds and organises everything) have been seen as overly bureaucratic, risk averse, time consuming and usually taking longer to complete.

9.  The main strength of traditional public procurement is the fact that the Treasury can provide capital or borrowing at far lower costs (rates of interest) than the private sector. However, the current state of public finances means that such access to capital is significantly reduced.

10.  The private finance initiative when established, sought to bring to the public sector the innovation experience by the private sector in the manner in which it finances and engages in large capital projects. Similarly other forms of commercial lending should also encourage such learning in the public sector. Under the early PFI however the private sector had the edge on contract clauses and contract negotiations. Eg the very early PFI contracts did not allow for any clawback by the public sector when loan rates and bond rates were subsequently re-negotiated after contract completion such that the private sector received all of the benefit.

11.  Some FTN members consider that the LIFT model (Local Improvement Finance Trust) is more inclusive and can establish more collaborative partnership working, learning from mistakes or experience in each tranche of investment or going forward. Whether large hospital projects could have been realised through the LIFT type schemes is a difficult question to answer but if the NHS had looked at all the PFI schemes as a series of investment and project tranches (as per LIFT), a better result may well have occurred. Once the PFI contractor has the contract and builds the building there is less incentive to work with the NHS organisations (as identified in previous National Audit Office reports), whereas the incentive for LIFT providers is that they may not be guaranteed further work in the future.

12.  Future use of PFI contracts (in their current form) may be restricted due to the uncertainty over stable income flows created by the NHS reforms. PFI creates a fixed obligation and income needs to be maintained to meet costs for the length of the long term contract. When PFI contracts were planned, future income looked stable. However, under the proposed reforms to the NHS there will be greater competition between healthcare provider organisations, potentially making income less stable.

13.  Future PFI and non-PFI funded capital projects need to consider whether contracts can be designed to more easily permit organisations to change the way they operate and adapt to a more competitive market. For example high termination costs and a lack of flexibility in being able to adapt buildings for long term service need are a barrier to necessary changes in healthcare delivery eg increasingly moving services into the community and closer to the patient.

14.  Borrowing costs could be kept low if underwritten by the UK Government, however if no such guarantees are in place then lending to individual foundation trusts could be seen as a high risk and therefore costly proposition.

15.  Hospital providers' own balance sheets are unlikely to be of sufficient scale to support a wide-ranging investment programme in the medium term. Additionally the current uncertainty in the system around the failure regime and the status of Public Dividend Capital (PDC) makes it difficult for investors to accurately assess the risk of lending to NHS bodies.

16.  The proposals for loans in the current Health Bill (clause 160 post-Bill Committee stage) could provide a source of public money for working capital and investment capital, using a commercial rules based system; additionally it could be an intermediary and a point of access to commercial lenders via pooling the risk of individual NHS providers. Another potential advantage (which we are keen to explore further) would be a pooling of skills that are not available easily to individual foundation trusts.

17.  This body will however need to be set up with a sufficient level of independence from the Department of Health and operate with clear rules and transparency, in order to maintain foundation trust freedoms and remain free of politically motivated interventions.

18.  Public funding for capital development and maintenance could also be resourced through the NHS tariff. Historically this has never been explicitly addressed and an attempt to do so now would be highly complex and potentially lead to additional burdens on the public purse which would reflect the true underlying need. This will need to be part of decisions by government and the new NHS Commissioning Board on the various priorities for the NHS.

19.  There also needs to be consideration of access to public capital in relation to designated/protected services, which may potentially be provided by independent organisations in the future. This raises level playing field issues for the future nature of NHS providers.

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?

20.  In general it would be preferable if future investment was on balance sheet, however, this may at the time have reduced the number of schemes due to concerns over the potential impact on Departmental Expenditure Limits and public sector net debt. As the use of PFI schemes has matured and IFRS has been introduced this has been shown not to be a key block to PFI. What might need to be allowed for is an NHS reporting regime which allows for "technical deficits" as a result of the excessive costs of PFI deals incurred by individual organisations over and above that which would normally be expected.

How far can risk really be transferred from the public to the private sector and what kinds of risk are appropriate?

21.  In general we are sceptical about the degree that risk can be transferred from the public sector to the private sector. Risk is only transferred at a price and the private sector has responsibilities to future dividends and profits that mean they are likely to accurately demand higher premiums for higher risk. The incentive for shareholders and managers of private firms is if anything to overprice the risk to ensure their future performance.

22.  The aim should be to seek to risk share with the private sector in future in a way that mitigates the cost of capital rather than to transfer all risk, which will inevitably come at a high a price and not provide value for money.

April 2011

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Prepared 10 August 2011