Written evidence submitted by Professor
Allyson Pollock, Queen Mary, University of London
1. INTRODUCTION
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. BACKGROUND
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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