So where does this leave us?
• Firstly the Andersen model is realistic in its presentation of the non-clinical cost structure;
• Secondly, using the Andersen model but inserting actual interest rates for the private and public sectors, there is a strong presumption that the PFI capital cost (including interest costs) will be at least 60% more expensive than a publicly-financed alternative.
However even this is likely to be an understatement of the 'excess' cost since the Andersen model is based on a life of 25 years whereas most PFI contracts are for much longer periods (at least 30 years). For example if we extend the life of the Andersen model to 39 years (the length of the PFI contract for the Norfolk and Norwich University Hospital), the present value (at 3.5% pa) of the PFI capital cost amounts to £168.9 mn. compared to a present value for the public sector capital cost of £88 mn (see table 4.6 below).
| Table 4.6 The Andersen model, extended to 39 years. |
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| The model is of a hospital with a capital cost of £100 mn in | |||
| year 0 and operating costs of £10 mn pa over 39 years |
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| In this table the year-by-year calculations are not shown. Only | |||
| the summary figures are shown, as follows; |
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| Public |
| Private |
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| Sector |
| Finance |
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| Comparator |
| Initiative |
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| (PSC) |
| (PFI) |
| Annual capital repayment |
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| - interest rate (% pa) | 4.3 |
| 10.0 |
| - annual payment (£mn) | 5.3 |
| 10.25 |
| Present value of annual payments |
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| at a discount rate of 3.5% pa |
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| over 39 years (£ mn) | 88.0 |
| 168.9 |
Now the PFI scheme is 92% more expensive than the Public sector Comparator (PSC) alternative. Now the construction cost of the PFI scheme will have to be 52% of the PSC to compensate for the higher interest cost of the private sector.
This gives a very different picture of the likely value for money arising from the PFI projects from that provided by the original Andersen report. It is the sort of portrait painted by the anti-PFI camp. The anti-PFI argument is that PFI projects, over the lives of their contracts, will cost more, much more than if the same facilities had been conventionally financed by the public sector. As Nick Cohen put it, in the Observer of 28 March, 2004;
"The short-termism of politics encourages imprudence. In the long run, using the PFI is like borrowing on a credit card rather than taking out a bank loan".
Nick Cohen's article drew on the highly-critical Special Report on the PFI by Paul Foot which was published by Private Eye in March/April 2004. In the same way as the interest rates on credit cards are more than double those on bank overdrafts, so the interest cost of PFI capital (at 10% pa) is more than double that of public sector borrowing (at 4.3% pa).
So we end with a presumption that the PFI is going to cost a lot more than the publicly-financed alternative, and yet when we look at many of the with-and-without studies done on PFI, we find that the PFI schemes emerge with some approval. Why is this? This is what we look at in the next two chapters.