Q341 Lord Forsyth of Drumlean: Could I ask you to just help me as I have just been puzzling over this issue of whether there is a secondary risk. The theory is that the extra cost of capital is justified because there is a risk transfer and the example you gave in the construction phase is that clearly there are high risks but after that it is possible there is less risk to refinance and there is a capital gain. I am just puzzling why on earth should the PFI operator obtain that gain because if the purpose of the exercise is to reflect the risk that is being transferred-and you have said that the situation has now improved and there is a 50-50 split-I am trying to work out why anyone would agree to a contract which gave them such a large slice? What is the justification, what am I missing?
Sir Peter Dixon: From which side?
Q342 Lord Forsyth of Drumlean: From the side of the public interest. In embarking on a PFI contract why would you give a free ride which reflects the fact that there is less risk? The whole point of paying more is because someone is taking a great risk. At the stage where the risk is reduced and where in fact you are just securitising government revenues, why on earth should the private provider get a bigger slice?
Sir Peter Dixon: I suppose it is a bit like a banker's bonus, is it not, you get it twice. Intellectually you are absolutely right, there is an argument for saying you priced this risk, you have delivered according to your pricing and according to your specification, fine, off you go, but I do not think that many of the contractors would be keen to do it on that basis because they would say we actually want an additional profit at the end of the day. It is their revenue stream, it is their operation. We cannot then force them to refinance it so all they are doing in fact is bringing forward their profit. It is a discounted cash flow issue in a sense. They can sit there getting £100 a year forever or they can get £50 now and £20 a year forever; it is a question of changing the cash flows. There has got to be an incentive on them to want to do it.
Q343 Lord Forsyth of Drumlean: I can see how they would put that construction on it but I am really going behind that to the theory of this. The theory is that the contractor is taking the risk and therefore is being paid for it.
Sir Peter Dixon: And is being paid for it. The answer is that we have changed it slightly, possibly not enough, and these contracts probably still could do with sharpening up to the benefit of the public sector.
Q344 Lord Forsyth of Drumlean: More than 50% should come back to the trust.
Sir Peter Dixon: I would think so, yes, but I would say that.
Q345 Lord Tugendhat: Sir Peter, you have been chairman of UCH during what Mervyn King calls "the great moderation" and the heyday of PFI has also been during this prolonged period of low inflation. Who knows what will happen in the future but if we were to move into a more inflationary period on the basis of your very considerable experience, both of hospitals and housing, what do you think the impact of that would be on existing PFI projects?
Sir Peter Dixon: It will put us and similar organisations at a greater disadvantage vis-à-vis those organisations which have more traditional funding. The cost of capital issue which was alluded to earlier is an important one. Our cost of capital is undoubtedly higher than that of your institution or Guys and St Thomas'. Our payments are index-linked, inflation-linked, and if inflation were to take off we would have very considerable difficulty. The NHS tariffs are based on an average cost of capital, therefore they work better for those organisations that have a low cost of capital and that is a big problem for the health service going forward.
Q346 Lord Tugendhat: Who knows what will happen but if we are in a situation where, on the one hand, inflation is higher than it has been in recent years and on the other public expenditure remains as constrained as it is likely to be, this is going to make for real difficulties in capital expenditure in the NHS.
Sir Peter Dixon: Yes, undoubtedly, and it is going to make for huge difficulties in terms of revenue funding because so much of our revenue will be going to pay the fixed costs.
Q347 Lord Moonie: Just to clear up a point on that you have quite rightly mentioned that somebody who has been subjected to a large PFI is under an ongoing disadvantage because such a large proportion of their income stream is going to be devoted to paying it off, I thought also that resource accounting and proper accounting for the capital that you deploy was supposed to counterbalance this. Are you saying that it has not and in which case to what extent has it failed to?
Sir Peter Dixon: The accounting issues do not have an impact on the cash flow. We account now-we have brought part of our PFI onto the balance sheet under the latest accounting rules but in terms of cash we have to pay out a cheque every month to our provider. However you dress that up, we will be paying out more cash than somebody who has not got a PFI so the accounting rules do not actually help us, they only have an impact on our P and L, not on our cash flow.
Q348 Lord Best: Can I pick up on your thought that a better way of financing than PFI would be to follow the pattern that you are very familiar with in housing associations, at least for foundation trust hospitals. Does the parallel really work in the sense that this is all about who is left holding the baby when things go wrong? If the lender-if it is a traditional lender-is left holding the baby for a block of flats or even a large estate that has been modernised, there will be options for that creditor to sell apartments on the open market to move into different ways of doing things, perhaps to demolish and reuse a site for a completely different purpose. If you are left holding the baby and it is a hospital, who is kidding who? It is going to go on being a hospital, we are not going to close it down, in the end the risk is always going to be absorbed by the public sector.
Sir Peter Dixon: I am not entirely convinced of that because we are using fewer and fewer beds in acute hospitals every year. We can close some hospital sites down, I am convinced of that, provided the public and politicians will let us-that is a difficulty. If you actually own a piece of real estate, whatever is on it, whether it is an office block or flats or a hospital, at some point you have got a tangible asset and you could transfer some of the services elsewhere. In that sense entirely it is difficult but of course no one has ever had to do that in housing and my belief is that provided you have a properly regulated system in healthcare nobody would have to do it in healthcare either because you would make jolly sure that the organisations were able to pay their bills as they went along. That is what regulation is there for in my book.
Q349 Chairman: Can I ask the last question, Sir Peter? You have mentioned a number of reservations or made comments about the use of PFI in the health sector. Despite that do you see the private sector playing a significant or even perhaps a growing role in the future and if so in which direction?
Sir Peter Dixon: There are areas where it can. I have no problem in procuring services from whoever can best provide them; the thing one has to remember is that private sector providers are there to make profits, there is absolutely nothing wrong with that, but if you are doing that there may be an additional cost. I suspect we need to look at it the other way round and just make sure that the altruism that is available from the voluntary sector, from the third sector generally does not get overlooked. It must not be an excuse for doing things in a sloppy fashion- which it can be-but if you can actually harness that goodwill and the ethos of the public service you can get serious benefits. In the same way you can look to the private sector to bring in things that you cannot always get out of the public sector. We use a number of private sector partnerships, some better than others, but it is up to us to get the right ones and not the wrong ones. I do not think there should be a presumption that one is good and one is bad.
Q350 Chairman: Are there any further points that you would like to make to us that we have not already covered?
Sir Peter Dixon: No, I am happy with that.
Chairman: Sir Peter, thank you very much indeed, you have been very helpful.