Private Finance Initiative - Treasury Contents

Written evidence submitted by Professor Allyson Pollock, Queen Mary, University of London


1.1  The following submission summarises previously published findings that are relevant to the scope of the present inquiry and to the conclusions reached by the National Audit Office (NAO) in its last report on the private finance initiative (PFI).[97] I address two of the Committee's questions, namely, what are the strengths and weaknesses of different public procurement methods, and how far can risk really be transferred from the public to the private sector?

1.2  I make two main claims. The first is that, notwithstanding a growing body of scholarly research over the last 14 years, neither the government nor the NAO has undertaken a properly designed systematic evaluation of PFI. Secondly, I argue that sufficient case study evidence is available to justify an explicit focus by the committee on the high costs of risk transfer and the effects of affordability problems on resource allocation and service planning.


2.1  I and my colleagues have researched and published extensively on PFI since 1997. Our findings show successive governments' failure to collect data for systematic policy evaluation and monitoring[98] and also the detrimental effect of PFI's relatively high cash costs on NHS resource allocation and planning.[99]

2.2  We have also drawn attention to the consistent failure of the NAO and successive governments to evaluate risk transfer appraisal methods and risk transfer claims underpinning the policy or to evaluate rates of return charged by the private sector for assuming risks.[100]

2.3.  In this connection, I note that in April 2011 the NAO said of the availability of data for policy evaluation: "There is no clear data to conclude whether the use of PFI has led to demonstrably better or worse value for money than other forms of procurement."[101] It said of risk transfer data and returns: "There is insufficient data on the returns made by equity investors for the risks they are bearing."

2.4.  In fact, these data are available in full business cases, but generally shielded from parliamentary scrutiny by "commercial in confidence" rules. I cannot understand why the NAO has failed to obtain the data and contracts, not least when there is a growing body of scholarship in this area. I note, however, that the NAO has played a prominent role in promoting PFI abroad and suggest that the Treasury Committee extend its inquiry to include potential conflict of interest between NAO income generation and financial scrutiny.

3.  What are the strengths and weaknesses of different public procurement methods?

3.1  Planning and resource allocation

3.1.1  In evidence to the House of Lords Economic Affairs Committee, Pollock, Hellowell, Price, and Liebe (2009) identified the main problems of PFI in the health sector as: off-balance sheet accounting, biased value for money ('economic') appraisal, high financing costs, erroneous time and cost overrun data, and distortion of resource allocation as a result of affordability problems with meeting annual PFDI charges.

3.1.2  Hellowell and Pollock (2010) critically examined the main fiscal and economic rationales for PFI and the impact of the policy on the long-term financial viability of NHS trusts. The study concluded that the PFI funding of capital investment is highly problematic and can have a negative impact on the finances of health systems because it distorts resource allocation mechanisms at national and local level.

3.2  In 1999, Pollock, Dunnigan, Gaffney, Price and Shaoul showed the impairment of planning data associated with PFI. This research found that PFI hospitals were planned on the basis of financial, not clinical, needs and that the data used in support of private finance initiative planning did not conform to the Department of Health's standards and definitions. It was also found that PFI hospitals entailed major reductions in the clinical workforce, and service capacity—in direct contradiction of government policy.

3.3  Affordability

3.3.1  Our first findings on the adverse effects on services of PFI affordability problems were published in 1997 and subsequently in a series of case studies. Dunnigan and Pollock (2003) undertook a systematic assessment of the impact of PFI on hospital capacity in Scotland.

3.3.2  Pollock, Price and Liebe (2011) showed that the NHS is facing serious revenue pressures if it is to meet the target of £15-20bn efficiency savings by 2013-14. A major source of revenue pressure for trust budgets in England is the annual PFI charge, which is ring-fenced and indexed to inflation. Although PFI charges pre-empt between 0.4% and 18.6% of annual hospital trust income, PFI contractors are insulated from efficiency targets. This, coupled with serious deficiencies in contract monitoring, compliance, and contract enforcement at departmental level, means that there are real concerns over the value for money of the policy. Lack of control over PFI costs has serious implications for quality and levels of NHS care.

4.  How far can risk really be transferred from the public to the private sector?

4.1  Pollock and Price (2008) drew attention to failures by the NAO to audit risk transfer and rates of return. The study found that of the 622 PFI deals signed by October 2007, the NAO has examined the relationship between risk transfer and risk premiums in only three. They concluded that the government's justification for the policy was largely unevaluated and unscrutinised by Parliament, raising wider issues of public accountability for public expenditure.

4.2  In 2007 Pollock, Price and Player highlighted substantial flaws in Treasury claims about risk transfer under PFI. UK government procurement policy rests on Treasury claims that the PFI has reduced cost and time overruns. The five studies cited by the Treasury in support of this claim were reviewed and it was found that only one purports to compare PFI with traditional procurement. The results of this single study are uninterpretable because of selection bias, small sample size (only 11 out of 451 PFI projects are included), and fundamental flaws in the analysis. There was therefore no evidence to support the Treasury cost and time overrun claims of improved efficiency in PFI. We concluded that Treasury appraisal guidance, the Green Book that compares PFI with other methods of procurement, was not evidence based but biased to favour PFI.

4.3.  In 1999, Gaffney, Pollock, Price and Shaoul showed that the use of land sales and capital charges to fund investment meant that local affordability, not national priorities, determined investment; that the high costs of private sector financing increased affordability problems at national and local level; and that the increased costs of the private finance initiative were being met from hospital closure programmes, reductions in services and capacity, subsidies from the Treasury, NHS block capital allocations, and trusts' operational budgets.

4.4.  In 2002 and in various papers since, I have drawn attention to weaknesses and bias in economic appraisal methodology.

June 2011

97   National Audit Office. Lessons from PFI and other projects. London: The Stationery Office, 2011. Back

98   See references 6 and 9. Back

99   See references 1, 12, 16, 17-21, 23-26, 29-35, 38-42. Back

100   See references 3, 4, 6, 9, 13, 14, 15, 22, 28. Back

101   National Audit Office. Lessons from PFI and other projects. London: The Stationery Office, 2011, p 6. Back

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Prepared 10 August 2011