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25.09.17

Lessons learnt from PFI in the NHS

Source: NHE Sep/Oct 2017

Vivek Kotecha, research officer at the Centre for Health and the Public Interest (CHPI), dissects recent analysis of NHS Private Finance Initiative (PFI) schemes to ensure the health service doesn’t repeat the same mistakes.

It’s been 18 years since the first NHS PFI hospital became operational, and now there are 127 PFI-funded hospitals and social care facilities. PFI has attracted a lot of criticism for being overly expensive and restrictive, yet a new round of building is beginning using a revamped PFI scheme called Private Finance 2 (PF2). With this in mind, what lessons can be learnt from the existing PFI schemes? 

What is PFI? 

PFI is a scheme through which private companies typically fund, build and manage large public sector capital projects. Once constructed, the NHS or local authority pays annual repayments, known as a ‘unitary charge’, for an average of 31 years to the private company. 

As at March 2016 the capital value of PFI facilities built or in construction in the NHS and social care was £13bn. Over the course of these contracts the unitary charges for these facilities will total £82bn, with this nominal figure including services provided (e.g. portering, cleaning, building maintenance) as well as repaying the cost of building, and interest on loans taken out. 

When first conceived, PFI was expected to deliver some benefits over the traditional model of public borrowing, construction and management. In place of government borrowing, the costs were paid upfront by private companies and then repaid over the life of the contract (usually over 30+ years). This spreads the cost over the lifetime of the asset and allowed the NHS to build extra facilities that it could not otherwise afford at the time. 

During construction it was hoped that delays to completion would be less frequent, and it shared out the risks of construction with the private sector. Finally, the private company would often be responsible for maintaining the asset during the contract and would hand it over in an agreed quality standard at the end of the PFI contract. 

What issues have been encountered with PFI? 

The main issue with PFI has been the costliness of using it to build much-needed NHS infrastructure. Private companies typically had to borrow the money for construction at higher interest rates than the government, which increased the NHS payments due. The Treasury Committee in 2011 found that “the cost of capital for a typical PFI contract is currently over 8% – double the long-term government gilt rate of approximately 4%”. 

As well as the higher cost of bank loans, the equity investors in the PFI schemes also require compensation for their financial investment. Analysis from 2013 found that in 77 health PFI contracts these investors were receiving expected returns on their investment greatly in excess of the ‘fair’ return. This excessive return is an additional cost paid for by the NHS. Indeed, the early sales of these equity stakes to new investors have typically generated annual returns of 15-30% for investors. 

These factors have had an impact on the profit made by the PFI schemes. A recent report by CHPI found that 107 of the PFI companies have made pre-tax profits of £831m over the past six years, equal to 8% of the total NHS payments. If kept within the NHS this would have reduced the hospital deficit over that period by almost a quarter. 

Over the next five years, we estimate that almost £1bn will be paid as pre-tax profit. That’s money not available for patient care and equal to 22% of the additional money promised to the NHS in 2015. 

While some profits will be expected if private companies are involved, there appears to be excessive levels of profit-making in many of the PFI contracts. University College Hospital (pictured) was one of the most profitable PFI schemes, with pre-tax profit representing over 26% of NHS payments. The pre-tax profit of £190.4m made over 2005-2015 is enough to build a whole new hospital in 102 of the 125 PFI schemes examined. 

Lessons to be learnt and next steps 

When PFI was first conceived investors and lenders were wary of the risks, and so higher compensation was required for them to take part. Indeed, eight of the 13 NHS PFI contracts where pre-tax profit was over 20% of NHS payments were amongst the earliest PFI contracts signed. 

As more PFI hospitals have been built it has become apparent that the risks after construction is completed are minimal, and do not seem to justify the higher levels of compensation provided. With the NHS going through its most austere decade of funding growth, it is vital that we minimise the unnecessary leakage of any patient care funds. 

So what are our options for current PFI schemes and the NHS’s future infrastructure needs? In our recent CHPI report we recommended a number of ideas for the government to consider, but recognise that there is no easy solution. 

For some PFIs, a buyout of the contract (i.e. ending it early) is possible. But an analysis of the first NHS PFI buyout by Mark Hellowell in 2015 found that buying out requires compensating the PFI investors and borrowing the money needed from elsewhere, greatly reducing the benefits of doing so. For many hospitals, this sadly would not be a profitable or feasible move. 

Capping profits of PFI companies, a windfall tax, or rebate has some political support from MPs, but research is needed into whether this will push up the cost of new PFI projects, PF2, (as investors demand greater compensation against such moves) in such a way that it cancels out any gain. 

There is limited room for renegotiating existing contracts and whilst the services provided are often subject to review every 5-7 years, any savings made are minimal compared to the overall size of repayments. 

University College Hospital 9 May 2016 c. Philafrenzy edit

© Philafrenzy

A more achievable next step 

In response to CHPI’s report, the Department of Health (DH) stated that PFI repayments only make up under 3% of its annual budget. This is true, but PFI has a disproportionate effect on individual hospitals, such as Barts Health NHS Trust – which paid £145m in PFI repayments in 2015-16 and had a deficit for that year of £135m. 

Centralising the payment of PFI to a department level, and charging a more reasonable repayment to hospitals with PFIs, would take advantage of the relatively small burden that PFI imposes on the DH budget whilst relieving some of the large burden it places on local hospitals. For now, this could be the best way forward for existing PFI contracts. 

For future NHS infrastructure needs, so long as PFI is considered ‘the only game in town’ there will be a higher price paid by the NHS as a result. Access to government borrowing or funding needs to be seriously considered so that 18 years from now we are not looking back on a period of repeating the same mistakes.

Estates & Facilities Management

FOR MORE INFORMATION

W: www.chpi.org.uk

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