4.4 The Andersen report - how realistic is the model?

How realistic is the Andersen model? The simple answer is; 'fairly realistic' once the corrections are made for the assumptions about relative interest rates.

The Andersen model comes out pretty well if we look at the percentage of the 'Availability Charge'19 to construction cost for PFI schemes. In Table 4.3, the annual PFI capital repayment is 11.0% of the construction cost. This compares with a median Availability charge for six PFI hospitals given in Table 2 of Gaffney et al 1999 of between 12 and 13 per cent. It is probable that the difference of between one and two percentage points is accounted for by maintenance costs and inflation being included in the 'Gaffney' Availability charge whereas the 11.0% figure here is the real capital repayment charge.

So far, so good. However, in addition, the ratio of capital to operating costs in the Andersen model is pretty close to experience. Table 4.5 below shows the percentage of capital cost to total (present value) costs (excluding clinical services) for the PSC (public service comparator) for the Norfolk and Norwich Hospital. This is 39 per cent - and compares with the 40 per cent given by the Andersen model for the PSC (as in Tables 4.3 and 4.4).

In this context it should be noted that the Department of Health was misleading when, in February 2004, in combating arguments against the PFI, it stated that;

"It is true that the Government can borrow more cheaply than the private sector, but determining value for money is not simply about comparing interest rates. Any additional costs of borrowing are more than offset by the private sector; taking on the construction cost and time overruns; using their ability to innovate; making more efficient use of resources.In any case, capital expenditure forms on average just 22% of the total cost of PFI schemes; the balance is the long term cost of providing support services" (Department of Health, February 2004, answer 4, my emphasis).

The 22% figure in this paragraph is deceptive. For a start it seems to come from the Andersen report (Andersen et al 2000, 57) where the average is not only derived from a mix of projects (not just those in health) but is also not an average of percentages from projects. The latter is (as Andersen said) "a method which avoids the larger projects distorting the average" - Andersen 2000, 57). For the full list of projects in the Andersen report, the average was 35%, well above the 22% cited by the Department of Health.

Furthermore when we look at the figures for the health sector alone, we need to be careful, since we need to exclude from the total of costs, the clinical services which are not sub-contracted to the private sector in the PFI contracts. Clinical services remain under the control of the NHS Trusts. In table 4.5, which shows the figures for the PSC for the Norfolk and Norwich University Hospital, the clinical component of the operating costs is very high. If these are included, capital costs make up only 11% of the total for the PSC compared with 39% once the clinical costs are excluded.

19 . The Unitary charge paid to the private sector in return for providing, maintaining and servicing the facilities typically has two elements;

• The annual Availability charge paid in return for the provision and use of the buildings;

• The Service charge payable for the Facilities Management Services (FMS) including cleaning, catering, and building maintenance.

(see Department of Health January 2003, para 6.2 and Hellowell and Pollock 2007, 9)