As we have seen, administrative fragmentation, political resistance to higher taxes and Labour's adoption of the 'Third Way' were three factors leading to the promotion of PFI by the Labour Government. Thus the enthusiasm for PFI projects in the health sector stemmed from a desire to keep Government borrowing down so as to help the Labour Government achieve the second of Gordon Brown's fiscal rules. But alongside this macro-economic argument, there has been the micro-economic belief that the PFI projects should, and would provide value for money.
As Pam Edwards et al 2004 have put it;
"Originally justified in terms of providing the finance for investment that the public sector could not afford (the macroeconomic argument), it is now increasingly justified in terms of delivering value for money (VFM) in the form of lower discounted financial costs over the life of the project compared with the cost of conventional procurement as measured by a public sector comparator (PSC). This is the microeconomic argument" (page 17)
A Department of Health circular of December 1999 stated that; "PFI procurements should be made on value for money grounds and not to achieve an off-balance sheet audit opinion" (Department of Health December 13, 1999, para 1.3); and a more recent one reiterated that; "The PFI is only a procurement tool - not an end in itself - and will only be used in cases where it offers value for money to the taxpayer and the NHS" (Department of Health, February 2004)
It needs to be emphasised that in the case of the health sector, the value for money (VFM) test is not a test which compares the costs and benefits of a project12. The health benefits provided by a new hospital are not compared with the health benefits provided by a range of possible alternatives (such as smaller hospitals, day-care centres, etc). The VFM test is a cost-effectiveness test which simply compares the PFI cost of achieving a given set of objectives (providing a certain number of hospital beds in a particular location) with a publicly-financed alternative. The only thing that is changed in this comparison is the source of financing - though as we will see this is likely to make a large difference to the cost.
The procedure for deciding on large NHS investments has been increasingly centrally coordinated since May 1997. The procedure is briefly described in box 3.1 below.
Box 3.1 The three stages in deciding on large capital investments in the NHS The first stage in the analysis is the Strategic Outline Case (SOC). This is designed to enable the Capital Prioritisation Advisory Group (CPAG) of the NHS to consider the national priority of the scheme on the basis of health service need. These SOCs are channelled through the regional bodies (see Smith 1999, 32). All schemes prioritised then require approval on the basis of an Outline Business Case (OBC). The OBC includes an examination of the costs and risks associated with meeting the objectives. Smith states that a financial appraisal is carried out at this second stage to demonstrate the affordability of the investment. The third stage is the Full Business Case (FBC), the aim of which "is to identify the preferred method for funding the project and the preferred partner for meeting the trust's requirements" (Smith 1999, 34). Approval of the FBC is required from the NHS Executive before the scheme progresses to financial close. The NHS Executive's guidance on the release of project documents points out that the initial key documents should be released to the public 'largely intact' (Gosling (ed) 2004, 87, 91 and more generally chapter 5) after the contracts have been signed (Pollock et al 2004,191). The interpretation of 'largely intact' has varied. For example, the copies of the OBC and FBC for the Norfolk and Norwich University Hospital which are available to the public (eg in the Norwich public library) are far from intact with crucial sections left blank and stamped 'Commercial in Confidence'. As a result, as we shall see in later sections, this confidentiality has made this research much more difficult than it might have been. |
Thus the VFM comparison is limited to what Jon Sussex has called productive efficiency and is not concerned with allocative efficiency (mixes of care) (Sussex 2003, 63). As a result, Sussex says, "several authors have argued that the PFI distorts investment priorities in the NHS by concentrating resources on large new acute hospitals" (Sussex 2003, 63) and the basic problem of integrating all the diverse elements of health care (preventive as well as curative) remains.
The VFM test is, then (in theory if not in practice) a simple one - namely would the PFI provide the hospital at a lower cost than if conventionally financed by the public sector? This has been the question asked by the National Audit Office (NAO) in its examination of PFI projects in the health as in other sectors. Generally the NAO's conclusions have been favourable to the PFI but the NAO's approach has been widely criticised for its estimates of the alternative construction cost if conventionally financed by the public sector. This alternative is called the Public Sector Comparator (PSC).
I come back to the criticisms later (in chapters 5 and 6) but here, in the rest of this sub-section, I want to look at the arguments for and against the use of PFI.
12 . In 2003, the Department of Health reported itself as undertaking further research on the feasibility and practicability of undertaking Cost Benefit Analysis for NHS investment (Department of Health February 3, 2003, para 10)