Category Archives: PFI

We need to be critical of the original and Mark 2 Private Finance Initiatives, especially in individual cases for the reasons which have been rehearsed where projected demand has not come through and commercial arrangements were not agreed in the interests of the NHS. Executive Directors still in post (not many) feel this way.

There is  experience of a large Trust which now has an affordable PFI – 2 brand new hospitals replacing 19th century and a terrible 1950s building for which there was not an available state capital solution.   It was changed at the last minute to increase bed numbers in order to satisfy political requirements that the net position in beds should be no lower than those being closed.  The circumstances where PFI could work are where the NHS could get the benefits of earlier “ownership” in terms of opportunities which arise during the period of the PFI. PFIs are normally built on time because it costs money to change plans – there are   penalties every time  plans are changed and are therefore kept them to a minimum.    State-funded capital schemes have a long history of going over cost and being late.

The risk private funders were taking was whether the revenue would flow to pay for their release of capital and the judgement they made to compare  with what else they could do with it.   Some Trusts made money when ownership of the PFI changed hands which was used to fund NHS services.

In general, we have seen:

– the largest hospital, GP practice (using LIFT) and schools building programme for 30 years under the last Labour government, which will make a massive difference for 30+ years

– this may be difficult to cope with, but building PFIs in crowded hospital markets has driven changes which normally take 20 years to achieve – given the love we all have for local bricks and mortar and the delay promoted by political opposition from all parties. In other words, unaffordable PFI has driven closures to make them affordable (this is also true of state capital funded schemes which mean there is no spare cash to sort out neighbouring NHS facilities).

–  we need to treat “Exchequer” capital properly, not just as a lump sum with a one-off value. Given we have a deficit, state capital needs to be borrowed (with a cost) and has an opportunity cost (ie what else could be done with it for a higher economic return).

– most PFIs include a “service” element, at the extreme this includes support services, estate management, and keeping facilities in good nick (with the ultimate benefit that the capital is the property of the NHS at the end of the period).

For me, the best value option (if we can’t have state capital – at the expense of revenue funding) is for joint ventures, where the NHS shares ownership and brings in private capital on equal terms. One of the big problems with original PFI was that a special economic vehicle was set up without NHS (Trust) participation which created a blockage between the NHS user and the building management. The opportunity to influence building management and to re-tender before the end of term (which could include in-house solutions) for the service element has been restricted.

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In principle, there is nothing wrong with the Government using its credit worthiness to borrow money in a different way from normal general borrowing and to ally the sums raised to a particular capital asset and  / or the means of getting that asset built. (A form of mortgage from the builder – who in turn has to acquire the loan etc).
However, most of our Private Finance Initiative schemes in the NHS have gone further than this.
1. The economic case for many has been deliberately manipulated to show that traditional government procurement isn’t better value (I know this from first hand experience). This is partly because Government pretends that Private Finance Initiative is off balance sheet and traditional spend is on. This is a fiction.
2. Private Finance Initiative schemes only work financially if both the builder and the lender make a profit, have the option of selling on their stake soon after completion, and can tie in others (such as catering and cleaning firms) who in turn make a profit o that part. This isn’t achieved by magical “whiz” ideas (if it was we could just pay the whiz kids to tell us stupid managers how to do it); it’s done by reducing the cost of labour (lower ages and benefits, temporary contracts,transient labour, minimum staffing levels etc).
3.This only works where you build new. So, better, cheaper, refurbishment options are rejected for costly  30 year deals – at a time when the care services are fast moving and have a ten year horizon – and these build in a rigidity to the supply side that is then managed by culling perfectly good, but expendable traditional services.
The Private Finance Initiative is there to serve the needs of big business and big finance. If it is the answer, would someone please tell me what the  question is?
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There is a widespread consensus about the challenges which face our care system.  There is a growing consensus that we need to focus more on avoidance and prevention, on behaviour and culture and on things like integrated whole person care and on community development – less on organisations and structures – no more reorganisations.

Yet there is a persistent background noise that claims that PFI, private provision, and the cost of the market are what is wrong and that full public provision is the solution.

Some PFI contracts offer very poor value for money showing the “experts” that advised the Trusts and DH were not as expert as those who advised the public sector providers.  But there are PFIs that have worked well enough in health and elsewhere; and the legacy of old and decrepit NHS buildings has been reduced.  The costs are hugely exaggerated usually by comparing the cost of the build with the whole life cost of leasing and maintaining the same building – but the (undiscounted) whole life cost of a house purchased by a mortgage is far greater than the build cost.  So what?  The issue is does the actual cost offer value for money, if you accept that there would have been no new building without the PFI?

The use of PFI does add cost as the cost of borrowing is higher, the cost of delivering the FM services is usually higher and some flexibility to control estate costs is lost.  But the increased cost of this route as opposed to a publicly funded traditional route and in house FM is only a fraction of the figures often quoted.

And whilst an unwise PFI is the main cause of financial distress for 2 and maybe 3 Trusts: that is all.  Arguably the same trusts (or more properly the same localities) would be in trouble if they had the same buildings but without the PFI overheads.  Plenty of trusts without PFIs are also in trouble.

Most agree there are major issues around whether or not competition, commissioning and the internal market is actually worth the cost of the system. The system cost will increase as we edge to a British Rail type system with hundreds of providers and commissioners all joined through legally enforceable contracts, invoicing and huge transaction volumes.

The claim that the “market” adds 14% to the transaction cost is a figure often quoted but with no traceable source.  There is a cost in having a managed system with a purchased/provider split but again this is hugely exaggerated.  Unless you go back 40 years to an unmanaged system there has to be a lot of data collection about costs and outcomes; there has to be some measurement of value for money and there has to be some management of provision through some form of service level agreement of some kind – unless providers just decide what they should do and what quality to deliver.  And we appear to agree we need independent regulation of some kind of quality and also organisational governance or “fitness”. So a lot of the costs that come from managing the “market” would still be there without the market, under different labels.  So maybe 1% additional cost but nothing like 14%.  Someone could work it out.

It is a fact that since its inception the NHS has relied on private provision – even leaving aside the heated debate which starts as soon as anyone points out GPs are private providers to the NHS.  There is sadly no shortage of scandals in both public and private sector and also excellence in both.

Sadly the H&SC Act will force competition and fragmentation.  However, the consensus is that we need an integrated NHS or even a Care Service with the parts joined through collaboration and cooperation not a fragmented market with connections through contracts and with competition for every service.  In a managed NHS services could be planned or commissioned within the NHS without legally binding contracts (as currently between PCTs and NHS Trusts), freeing commissioners to make decisions that cannot be unpicked by competition law.

But this leaves open the possibility that for some services there could be an open tendering process and that for some services the private sector may be contracted as provider.  In an integrated NHS this would happen only where the NHS itself was unable or unwilling to provide the service required to the necessary standard and offer value for money.

Anyway, a wholly publicly provided NHS (if its even possible) would require cultural and organisational change of a scale way beyond anything seen so far and would take many years to complete even with a reasonable degree of goodwill.

There may be sound ideological reasons to advocate a fully publicly provided care system but it too would face many of the same issues the managed system will have to confront – and its those issues we ought to be talking about.

Irwin Brown

 

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