Written evidence submitted by The Foundation
Trust Network
INTRODUCTION
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.
EXECUTIVE SUMMARY
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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